Every entrepreneur will come across this question from investors when raising funds. This is the correct way to answer it.

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Why are you fundraising? If you are a startup, the answer seems obvious: you need money. Flippant answer aside, you need to retain your star employees, acquire customers, pay for cloud services/hosting/whatever, oh, and also pay your founders so they can all live on and continue to run the company.



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That said, if you’ve ever fundraised before, you’ll know that investors aren’t exactly clamoring to invest in your business if you tell them you’re fundraising so you can pay yourself, your employees, and run your business.

So what are you supposed to say? Maybe, “To grow 5000%?” That’s better, but it’s not particularly believable, regardless of what number you throw up. At this point, you may be thinking that the answer is obvious. Clearly, you need to describe What you will grow 5000%. But no, that’s wrong… or at least not quite right.

Related: 6 Tips for Raising Your First Round of Funding

The goal is to climb the next round.

If you’re a true startup looking for meteoric growth, you’ll always have a next round, even if that next round is an acquisition or an IPO. That’s the nature of the risk treadmill: Taking equity financing will continue to increase the overall value of the company more than not taking it. If that’s not the case, it’s out, it’s not a “real” startup, and it’s probably a “normal”/lifestyle business (which is fine, but you have less need to worry about fundraising ), or the company dies.

Needing a next round is essentially defining for a startup. There is enough significant growth ahead that investing now almost always makes sense. While that may be true in general, it doesn’t answer the question every entrepreneur will encounter during fundraising: “Why now?”

The point of that question is not simply a ploy to gain more information or delay the round. Ultimately, it explains why an investor should invest money this round. Similar to “I’m going to grow 5000%”, the answer of “because I’ll be worth a lot more in the future” is not the wrong answer, it’s just not specific enough.

what will you do with the money East round?

Now that we’ve gotten past that:

  1. You will grow (5000% or less).

  2. You’ll be worth much more next round.

  3. His goal in fundraising is simply to get to the next round, not to “never fundraise again” (implying that his growth will reach its limit very soon).

This is the roadmap for what are I’m supposed to say But more than that, this also informs how you should scale your business and what to prioritize. What you really need to answer investors is: What metrics will you achieve by using the money now to raise the next round?

Related: How My Company Won Over Venture Capitalists and Where It Really Got Us

Why is this the right way to respond and plan your business?

This is concrete, realistic (because a startup needs to keep raising money), and gives investors an idea of ​​what they’re buying. “A company rocket ship!” is a naive answer. The best investors want to know what metrics will be achieved, i.e. what appreciation will I get on my capital/money if I invest now? What valuation appreciation is the investor really buying with this chunk of money? You can’t answer that question unless you determine what you’re going to do to get to the next round.

That informs how big the round needs to be (how much money is required to hit the metrics) and also provides a baseline to assess whether or not the price is reasonable (how much the company will be worth if the team actually executes and achieves these metrics) and finally, an idea of ​​whether or not it’s realistic (do I think you’ll really be able to hit these metrics, with this amount of money, and in the amount of time you have until the next round?).

Of course, these answers are not only useful for investors. They also become critically valuable to your as founder. It informs how you should execute and what metrics you should prioritize. There is always very little money and very little time in a startup. If a question of prioritization arises later, you’ll know what matters most: the metrics that most affect the valuation of your next round and your ability to get there.

Related: 3 Secret Growth Metrics That Matter Most to Investors

This will help clarify your thinking.

As an entrepreneur and venture capitalist, I find that too many founders think poorly about fundraising. First-time founders are especially puzzled about what they are supposed to say or show to get investors interested. And when they are in meetings, they get endless questions.

It has made certain founders think that fundraising is all about presentation skills and charisma. In truth, that’s definitely part of it. However, it is not all. And if it gets past the early stages of its launch, the weight will be increasingly toward the “rational” framework described here of “what is the investor buying in this round?”

There is no reason to keep asking questions and getting frustrated. Align your presentation with the answer to this question, how much money you’re asking for by when, and your execution plan to achieve metrics to reduce conflict with your investors, fundraising frustration, and short-circuit a lot of back-and-forth. . Happy fundraising.

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