10 Ways First-Time Entrepreneurs Can Better Their Startup's Chances At Fundraising
Over the past few years, we’ve seen an incredible growth and development of the startup ecosystem in our region. There are more startups, more founders, and more industries covered than ever before. I see around 700 to 1,000 startups a year. So, I’ve come up with a few tips for the first-time founders who are looking for funding right now in the MENA region.
1. You have an idea? Great! It’s worthless
A lot of founders think that their idea is what makes them unique and offers enough value for investors to fund them. That’s not the case. Ideas are really worthless. Google wasn’t the first search engine, Facebook wasn’t the first social network- they entered markets that already had incumbents. Their ideas weren’t unique. It was their execution that led to their success. Don’t pitch investors ideas- pitch your execution of that idea.
2. Build a solid founding team
We see a lot of former consultants and bankers turn to entrepreneurship. It’s become a sexy thing to do. Although they can put together a nice pitch deck, what you need in a founding team is someone that can lead the business, someone that can lead the marketing, and someone that can lead the technical side of the startup. If you have two out of three that’s fine, but a single founder with no marketing or technical talent isn’t going to get far without a strong, motivated team around them.
3. Have divorce papers written up
Although I advocate for a founding team, one of the most common causes of a startup’s failure is an internal fight and breakup of the founding team. A startup is a high-stress environment. If you and your co-founders are not aligned, things will escalate quickly and kill the startup, no matter how much money you raised or traction you’ve seen. Make sure all founders are on a vesting schedule for their shares, draft a process to resolve disagreements, and have everyone commit to it. Finally, draft a document to anticipate a potential disagreement between the founder(s), and spell out a fair resolution in case of a split.
4. Don’t give up too much equity
Too many founders still sell too much of their equity early on. I would recommend not selling more than 20-30% of shares in your startup at any financing round. If you get to a Series A round of funding and you only own 20% of your startup at that stage, it will be very hard for you to raise further rounds of capital. VC investors always want to ensure that you have enough of an incentive to see the startup through further rounds of financing to the eventual exit.
5. Winning prizes and competitions doesn’t mean you’re successful
I’ve seen a lot of founders, once they’ve won a competition or a prize in their local ecosystem, fall into this trap of believing they’ve already succeeded. You haven’t. While prizes might be nice for press or your ego, you haven’t succeeded until you have a profitable business or have had a significant exit. Don’t rest on your laurels- the battle is just beginning.
6. The Goldilocks rule: Don’t raise too much.
Don’t raise too little. Most startups that we look at in the region at the seed stage are between US$1-3 million in valuation. These are startups with significant traction, likely have strong revenues and demonstrated execution and growth. If you’re still not seeing significant traction and are going out to talk to investors trying to raise a $1 million round, you’re probably wasting your time. On the other hand, if you’re too worried about dilution and don’t raise enough funding to get you to the next stage, you’re shooting yourself in the foot. My advice for seed stage startups would be to raise between $200,000-600,000, depending on your market, to get you to the right metrics to raise a Series A within the next 12-18 months.
7. Fundraising is a marathon
If you think you’ll be done fundraising in a month, think again. Although there are rare cases when this might happen, the majority of fundraising in the MENA region takes at least six months to close from the first meeting. Don’t leave fundraising until you have a month of runway left. Fundraising is a full-time job. Make sure you understand that; it needs to be the core focus of at least one of the founders to fundraise, while the other founders focus on continuing to grow the business.
8. Do your research before approaching investors
The worst thing you can do is pitch an investor that has no interest in your sector, stage or geography. They’ll either think you’re an idiot- or lazy. You don’t want that to happen- first impressions count, and the ecosystem is a small place. I have mentioned in a lot of places that I only look at investments in the MENA region, at the seed stage, after an established product-market fit. These are clear guidelines: if you just have an idea, or are not in the MENA region, or not from the MENA region, I will not be interested. Nonetheless, you’d be surprised how many idea stage startups from other geographies send me emails. Also, don’t send cold emails- try to get an introduction. We’ve invested in almost every geography, and have relationships with many ecosystem players- there should be someone willing to introduce you to us.
9. Focus on growth
Startups are not SMEs. You need to show growth and you should be aiming for at least 20% monthly growth in the key metrics you are tracking. Investors and VCs are looking to generate significant multiples on their investment in you. Let’s take $100,000 in annual revenues as an example. If you’re growing 5% every month, by the end of the year you’ll have about $180,000 in annual revenues. If you’re growing at 20% every month, that number becomes nearly $892,000. That’s a significant difference. Your whole startup should be focused and set up for growth.
10. Track metrics obsessively
Lastly, and most importantly, you need to track your metrics obsessively. If I ask you what was your growth rate last month, your Customer Acquisition Cost (CAC), Lifetime Value (LTV), you should have these all at the top of your head. You need to build a full marketing funnel, have data and stats on every aspect of your marketing and business. How can you grow unless you track your numbers? Set this up right, and make it a priority from the start.