Finance For Fundraising 101

Fast Guide for first-Time Entrepreneurs Looking to Raise Their 1st Round of Investment

A few weeks ago a I received a call from a friend. He had seen I was working at a seed-stage investment fund and wanted some advice on fundraising. He told me:

  • “Enzo, I have this great idea I’ve been working on with some friends and need to raise some funds to launch our company. I’d like your help modeling our free cash flows.”

I said: “Hold on” and asked:

  • “Do you have customers?” — No.
  • “Do you have an MVP?” — No.
  • “Then why are we having this conversation?” — We need the funds; and isn’t a financial model what investors ask for?

They were even willing to pay for it!So I decided to write down the little piece of advice I gave to my cousin as a first-time founder. The question has 2 sections:

Photo by NeONBRAND on Unsplash

1. When should I raise funds?

This is all about timing and needs. Identifying when is the appropriate time to raise the funds your startup needs to get to the next stage is key.

In my cousin’s case, his startup idea was still being incubated. It probably wasn’t the best time since he had almost no traction. An investor would’ve suggested more bootstrapping and applying for grants from public or private institutions.

Bad timing could mean running out of cash (if it’s too late) or having trouble raising funds (if it’s too early) in the form of a low valuation or many no’s from investors requiring further traction. 

As a general rule of thumb, raise funds when you have an MVP, some early traction (users or buyers) and a robust diagnosis of what are your startup’s scalability challenges. Then, raise funds and use them wisely to address those challenges.

For example, Geoff Ralston, Y Combinator’s new president, says “you should raise your 1st round when you can make a persuasive case that your startup will become a billion dollar company”. Startup investors would not bet on you unless they see a possible outsized return. Building that case requires having strong arguments like an innovative MVP and traction.

If your well thought answer to 1) was “Now”, then proceed:

Photo by Helloquence on Unsplash

2. Do potential investors really ask for a financial model?

This is all about the investor’s profile. As a seed-stage startup you could approach your Friends and Family, an Angel Investor or an Accelerator. Each of them has a different background, education and experience investing in startups. Thus they will probably ask for different things.

Professional investors

Angels and Accelerators usually understand that the decision process behind investing in a startup is quite different from the one for a mature company. The last one usually has enough historical data to back a fundamental analysis (aka Financial Model), in comparison to the first one. Venture Capital funds also understand this.  Thus they might not ask for a financial model, but will definitely ask for: 

  • Revenue in the last 3, 6 or 12 months (rapid growth month over month is persuasive)
  • Unit Economics like CAC and CLTV (you can Google both terms, but here’s a fast guide)
  • Use of Funds and Milestones, where you show how money will be spend monthly vs the key tasks you expect to achieve

Since startups have little traction, the assessment of qualitative aspects like the team, the problem and the solution tend to weigh more in the decision.

Casual investors

Unless you’re lucky enough to have angels or venture capitalists among your Friends and Family  —  in which case you wouldn’t be reading this  — , the loved-ones who would bet money on you will probably have little experience investing in startups. If any. 

In this case, a financial model could have 2 effects:

  1. Illustrate your growth plans and use of funds: If the target investor has some degree of expertise in traditional finance.
  2. Show you thought well about your business idea: If the target investor has little business background.

Bear in mind that since these investors tend to be less used to risky investments, confidence and belief in you rather than in your idea is key to a successful fundraising. So even if you were 1st place in college and had a great job, some crystal clear financial projections will make you sound more credible.

Take Away: Focus + Simplicity

As a first-time entrepreneur on the first 6 to 12 months, you should focus on figuring out what’s most important for a strong startup thesis: an MVP, some recurrent customers, and how to scale. (I love this article on founders’ focus)

Don’t spend your precious time and money worrying about fundraising requirements like a financial model for a first round. You don’t need to hire a financial advisor nor a CFO. Be simple. 

A one-page spreadsheet with simple and well formatted monthly projections like revenue, cost of sales, selling and administrative expenses is more than enough. If your solution, business model and market are good enough, then the spreadsheet will reflect just that and the investor will believe the numbers. No financial engineering required.

Enzo Cavalie is an investment professional at Winnipeg Capital Startup Fund. He’s passionate about solving fundamental problems in Latin America. An insider’s view, stories and advice are his tools.

Salario Fundador: Aprende a Calcularlo

1ra Ronda de Inversión: ¿Qué Variables Considerar al Momento de Calcular tu Salario como Fundador?

Gracias a Doménica Obando por la pregunta que inspiro este artículo. Dome y @Andi acaban de entrar a UTEC Ventures. ¡Éxitos en lo que viene!

Imaginemos la siguiente situación:

Llevas 12 meses trabajando part-time en tu startup, tienes un MVP* y unos cuantos usuarios pagando. Quieres levantar tu primera ronda de inversión por $100 mil que te permita: 1) dedicarte full-time, 2) invertir en marketing digital, y 3) desarrollar más tu producto. 

Propones un uso de fondos, donde tu salario es de $2 mil por mes (casi un 25% de los fondos en 1 año). Sin embargo, no estás seguro sobre el número y te preguntas…

¿Cuál es el monto razonable de los fondos que debería destinarse a mi salario?

No es una pregunta fácil de responder porque no hay una respuesta exacta, sin embargo un potencial inversionista podría usarla para medir tu motivación y compromiso como fundador.

Usualmente un Inversionista Ángel, una Aceleradora o un Fondo Semilla no le dedicara mucho tiempo a esta pregunta. Sin embargo, he visto casos en que un startup buscaba levantar demasiado dinero y, al revisar el uso de fondos presupuestado, encontré gastos innecesariamente grandes como el salario de los fundadores.

Por eso, propongo una guía con 3 variables a tomar en cuenta al momento de calcular el salario “razonable”: 1) Costo de vida, 2) Convicción y 3) Disciplina Financiera.

Por un lado, al inversionista no le interesa…

Un salario muy bajo, porque

1.Costo de vida: el salario “razonable” debe satisfacer tus necesidades básicas, de modo que puedas liderar tu compañía con suficiente energía física y mental, sobre todo en los momentos más difíciles. 

Entonces, el monto es relativo a tu costo de vida dependiendo de si tienes hijos, estás soltero o vives con tus padres.

Por otro lado, al inversionista no le interesa…

Un salario muy alto, porque

2. Convicción: si bien $2 mil puede ser un número mesurado para alguien con tu experiencia (incluso, puede haber sido tu último salario**), debes entender que el gran potencial de ganancia en un startup viene de un exit (venta de tu compañía) y no del salario. Entonces, el inversionista se preguntará: 

¿Cuál es su verdadero costo de oportunidad (el riesgo que me asegura que hará todo lo posible por sacar adelante su empresa) si es que ganará lo mismo que en su último trabajo?

Por ejemplo, Nathan Lustig, fundador de Magma Partners (Fondo de VC en Chile), no invierte en startups donde los fundadores tienen salarios igual o por encima de lo que ganarían en un empleo corporativo. 

3. Disciplina Financiera: el inversionista necesita saber que serás responsable y eficiente en el manejo del capital. A final de cuentas, los fondos invertidos son tanto tuyos, de él, como de toda la compañía. 

¿Es posible que tu presupuesto de levantamiento de fondos sea excesivo para una primera ronda de inversión? ¿Podrías lograr los mismos objetivos proyectados por US$ 10 o 20 mil menos?

¿Una respuesta más rápida? 

Pregúntale a otros fundadores de tu ecosistema startup local, que hayan levantado una ronda de inversión, cuánto están ganando aproximadamente. Por ejemplo, con base en mi experiencia en Perú, el salario de un fundador en su primera ronda de inversión está en entre US$ 500 a 1,000**.

Ese debería ser tu benchmark; tu salario no puede estar muy por encima o por debajo. Luego, considerando las diferencias entre tú y esos fundadores, calcula el monto razonable. Lo último que queremos es a un potencial inversionista pensando en tu salario, en lugar de cuán buena oportunidad es invertir en tu startup.

*Producto Mínimo Viable, por sus siglas en inglés.

**Estos números aplican para Perú, Colombia, Ecuador, y países de América Latina con costos de vida similares.