Fundraising Strategies for Entrepreneurial Ventures

This month, we are featuring our first guest writer. Jarret Hamstreet, the co-founder of Post.Bid.Ship., and I were invited to share with the graduates of The University of Arizona McGuire Center for Entrepreneurship our experience transitioning from graduate school to entrepreneurship. After receiving the invitation to speak, Jarret started writing down the most important lessons he learned while raising capital for Post.Bid.Ship. Thanks Jarret for sharing your knowledge with McGuire graduates and

Fundraising Strategies for Entrepreneurial Ventures
By Jarret Hamstreet, COO of Post.Bid.Ship.
McGuire Center for Entrepreneurship, April 28, 2011

Preparing to Raise Investment Capital

When I am pitching potential investors, I like to bring to the table a proposed deal. In investment terms, this is called a “Term Sheet.”  A Term Sheet is basically a memo that outlines the terms at which the investor will invest. Term Sheets include details like your company’s current value (pre-money valuation), how much capital you are seeking, and how and when the investor will receive a return on their investment.

To draft your Term Sheet, I highly recommend that you hire an attorney who is experienced in start-up financing. An experienced attorney will help you understand whether your proposed terms are reasonable and can offer strategic advice as you begin negotiating with investors. Your goal is to develop a proposal that is reasonable enough for investors to take a closer look at your deal, but favorable enough to you to give you some room to negotiate.

Be sure you understand every term in the term sheet. Don’t be afraid to ask your attorney questions, to do your own independent research, or even to get a “second opinion” from another attorney. Once you and your investors agree on the final terms, your attorney will use the Term Sheet to formulate your legally binding investment documents.

Tips for Closing an Investment

1. Set a “deadline” and communicate it to prospective investors

Show the investor your business timeline and tell them “to stay on track, we need to raise $X by Y date.” If they are seriously interested in investing, they won’t want you to get off schedule. At the very least, it helps motivate people to say ‘no’ so you can move on and not count on them. The date can be a moving target – we closed our first investment round for Post.Bid.Ship. four weeks after the initial “deadline” – but the deadline caused some people to say ‘yes’ and some to say ‘no’ knowing that we had a deadline to meet.

2. Create a sense of urgency

If you can identify an opportunity that will be lost if funding is not received by Y date, or something that will become costlier if you have to buy it later, you may be able to motivate some investors to write a check now. I know most entrepreneurs don’t want to look “desperate,” but the reality is, timing matters and if you don’t communicate the company’s opportunity cost, your prospective investors may not know there is a cost to waiting.

3. Follow up

Many entrepreneurs pitch the investor, make “the ask,” and then wait for the investor to make a decision. I routinely reach out to prospective investors who are still in their “decision making phase.” I contact them about once a week, usually alternating between a phone call one week and an email the next. I’ve had good success calling up investors and saying “I’m calling to follow up on your interest in investing in Post.Bid.Ship. What information can I provide you to help you make the decision to become an investor in our company?” If they still haven’t decided after the call, I close with “I look forward to earning your investment.”

4. Ask existing investors to call prospective investors on your behalf

Share your “prospect list” with your existing investors. Ask them to identify those that they know and ask if they are willing to call those that they know on your behalf. A current investor makes the best appeal to a prospective investor since they have already determined your company is worth the risk.