What startup should consider when fundraise from investors

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Founded in 1972, Sequoia Capital has established itself as one of the leading venture capital firms globally. Over the years, it has made numerous successful investments in technology companies that have become industry giants.

One of Sequoia's most notable investments was its early backing of companies like Apple, Google, PayPal, and Airbnb. These investments have yielded significant returns and contributed to Sequoia's reputation as a top-tier venture capital firm with Assets Under Management of $85B as per Dec. 31, 2023.

An investor in the life of an early-stage startup is a person or an organization that provides capital to the early-stage business in exchange for equity or debt. There exist various avenues through which startups can secure investment, each catering to different needs and preferences.

Types of investors/financing instruments commonly found in the startup ecosystem:

·Bootstrapping, also known as self-funding:starting and growing a business using personal savings and revenue generated by the business itself. This approach allows startups to maintain control and avoid diluting equity.

·Family and friends: individuals who personally know the entrepreneur and are willing to invest in their venture. This type of investment is often characterized by personal relationships and trust.

·Angel investors: affluent individuals who invest their own capital into startups in exchange for equity. They play a crucial role in providing early-stage funding and mentorship to entrepreneurs.

·Venture capital (VC):firms are professional investment entities that provide capital to startups in exchange for equity. They typically invest larger sums of money and often take an active role in guiding the company's growth.

·Family offices: manage the wealth of affluent families and may invest in startups as part of their portfolio. These entities offer strategic investment opportunities and often have a long-term investment horizon.

·Crowdfunding platforms:allow a large number of individuals to invest small amounts of money in startups. This democratized approach to fundraising has enabled many entrepreneurs to access capital from a diverse pool of investors.

·Debt financing: firms provide loans or other debt instruments to startups, allowing them to access capital while avoiding equity dilution. This type of financing is suitable for startups with predictable cash flows or tangible assets.

The right investor can bring a wealth of resources and expertise to the table, which can have a significant impact on the success of the startup. Therefore, it's crucial for startups to carefully consider and evaluate the characteristics of potential investors. The same way investors do their due diligence on startups, startups should do the same with potential investors. One way to validate the quality of an investor is to reach out to their portfolio companies, co-investors, and even their limited partners to gather insights.

Some of the common characteristics of a possibly good investor:

·Portfolio results:It is very important to look thoroughly at the investor's existing portfolio results as well as their feedback about the investor support.

·Financial Capacity:you need to understand how ready is the investor you're talking to. Sometimes, investors are so eager to join a certain round while they are financially not ready. The startup needs to bother to check on this.

·Alignment of interests: The investor should have a clear understanding of the startup's goals and vision, and align their own interests with those of the startup.

·Domain expertise:The investor should have a deep understanding of the industry in which the startup operates, and the ability to provide valuable insights and advice.

·Strategic Connections:The investor should have a strong network of contacts and relationships that can benefit the startup. It could be in different shapes such as mentors, service providers, or co-investors.

·Active involvement:The investor should be actively involved in the startup and provide support and guidance in areas such as strategy, operations, and fundraising.

·Financial Acumen:The investor should have a strong financial background and be able to provide financial advice and guidance.

·Patience:The investor should be patient and understand that startups typically require a long-term investment horizon.

When it comes to catching the eye of investors, it's about more than just a polished pitch deck or a team with impressive credentials. Investors look for startups that demonstrate a deep understanding of the market, a solid business strategy, and the capability to execute effectively.

Seven factors that can enhance a startups appeal to investors:

·Clear Positive Impact within Investor's Scope:Investors are increasingly focused on backing ventures that align with their values and impact objectives. Startups that can showcase a positive impact within the investor's impact scope are more likely to attract interest and support.

·Strong Founder or Founding Team:Investors place significant emphasis on the strength and capability of the founding team. A team with a track record of success, relevant expertise, and complementary skills is seen as a valuable asset by investors.

·Defensibility Stance with Monopolistic Potential:Startups that possess a defensible position in the market, with the potential to achieve near-monopolistic status, are particularly attractive to investors. This defensibility can come from various sources, such as proprietary technology, unique intellectual property, or strong network effects.

·Market Ready for Disruption:Investors seek startups operating in markets that are ripe for disruption. Industries facing inefficiencies, outdated practices, or significant unmet needs present opportunities for innovative solutions to thrive and attract investor interest.

·Strong Unit Economics:Sustainable and scalable unit economics are essential for demonstrating the long-term viability and profitability of a startup. Investors look for startups that can efficiently acquire customers, generate revenue, and achieve positive margins.

·Clear Cross-Border Revenue Streams:Startups that have diversified revenue streams spanning across borders demonstrate resilience and potential for growth. Investors value startups with clear strategies for tapping into international markets and capitalizing on global opportunities.

·Clear Potential Exit Path:Investors are interested in startups with a clear path to exit, whether through acquisition, initial public offering (IPO), or other liquidity events. A well-defined exit strategy provides investors with confidence in the potential for future returns on their investment.

Original article can be found here written by Eng. Walid Khalil