How to Ask for Funding

There are lots of really bad ways to ask for capital for your business and a few good ones. In this section of our Funding series, we are going to focus on the good ways to ask for capital that will spark interest from investors!

August 16th, 2022   |    By: The Startups Team

Continuing in Phase Three of a four-part Funding Series:

Phase One - Structuring a Fundraise

Phase Two - Investor Selection

Phase Three - The Pitch

Phase Four - Investor Outreach

Welcome to part 7 of “The Pitch” — where we look at the funding ask section of our pitch deck or plan and how to get potential investors excited about our business idea.

Let’s dive in!

The real purpose of our pitch deck.

Most business plans and pitch decks are a long preamble to one question - will you fund me?

Ah, the age-old question. 🙋 It's like asking someone to get married, only in this case you're both really hoping to have a glorious breakup in the end (a sale). 

There are lots of really bad ways to ask for capital for your business and a few good ones. In the interest of time, let's just focus on the good ones that will spark interest in the investment opportunity!

Three Pillars of the Funding Ask

Every funding ask comes down to three basic questions:

  1. How much do you need? 

  2. What do you need it for? 

  3. How much impact will that have on the value of the business?  

Most people know how to answer "how much do I need," a few people can answer "what will I use it for" and hardly anyone ever explains "and this is how the value of my business will increase." 

Let's skip to the end — here's a great example of what a perfect funding ask looks like on a funds slide:

"We need $1 million to primarily drive customer acquisition and product development which should lead to $3 million in annual sales which would make us worth about $20 million."

A bit wordy, yes. But it tells an important story. Let's dig into the story. 

How Much Money do you Need?

It's never hard to articulate the fact that you need money — because you (like most startup businesses) probably don't have any. The question becomes — "How much should I ask for?" 

Enough to clear the next Milestone

There are a few ways to size the funding ask appropriately. As a general rule, you should ask for enough capital to get you to your next major milestone where you can either have a viable ask for more capital in the next round (you've done something wonderful) or you're generating enough money that you don't need capital (also, you probably did something wonderful). 

The most typical milestones to size a funding ask are:
  • Breakeven — your revenue will pay for your operating expenses

  • Meaningful Trajectory — the growth of your business is exploding in a meaningful way

  • Product Launch — the product or service has hit a major milestone that will allow you to make money

  • Proven Assumptions — people will buy your product or service, conversion rates are strong, the product is viable

Once you've set the milestone, you then begin working backward to figure out how much capital it will take to get there. 

Another important consideration is to make sure who you're asking for capital is appropriate for the size of ask. While there are plenty of exceptions to this rule, a good starting place is this: 

  • Less than $50k — Friends, Family, Incubators, and Debt/Loans for small businesses

  • $50k - $1m — Angel Investors

  • $1m or More — Venture Capital

Asking most Angel Investors for $5m is about as useless as asking Venture Capitalists for $50k. Each investor type typically has a check size they are comfortable with and looks for deals that fit that check size and will have preferences that make them different than other investors. If you're not sure, ask. Investors are used to being asked what deal sizes work best for them. 

What You'll Use it For 

Now that you've got a golden dollar figure in mind, let's dig into how you're going to spend all that money. The "Use of Funds" as it's formally known, should provide enough detail about how you plan on using that capital so investors can feel good about their capital. 

Some entrepreneurs start off a little too basic with their use of funds:

"We plan on spending money on marketing to get more customers to buy our products." 

Well, you've just described the use of funds for every company in history! Sorry.  It's OK to have a brief summary in bullet points (backed up by lots of financial data) but you'll want to be specific about your explanation so investors can "see it" in their minds. 

Here's a more detailed version of the same answer:

"We will spend 50% of our funding on customer acquisition across Facebook, Google and Sponsored Content targeted to 25-year-old females who show strong interest in organic cosmetics."

As an investor, I can envision that spend just from reading your funds slide. I know where you're spending, how much you're spending, and how you're going to target your spend. I may have a hundred questions about the details of how you use Facebook versus Google advertising, but now I at least know you plan on using those mechanisms. I also now know how you're going to do customer segmentation, so I can think about whether that segment feels either too broad or too narrow.

In some cases, you may need to modify that a bit more, including what you expect the results to be. If you were spending money to build a product, you'd want to explain what features that spend will enable you to provide and how that might help you.

Think about the Use of Funds more in terms of the outcome it will create than the input of capital. If the output of investor money feels worthwhile, the investment of capital is justified.

How Will This Increase Value 

The output of the investment (the product is done, customers are acquired) should then drive some notable increase in the value of the company in key areas. 

To be clear, there's no magical decoder ring that allows you to always figure out how the output of your work translates into a whole dollar figure to value the company. Don't take "value" to just mean dollars. Sometimes you can figure out where more value will have been created even if dollars aren't part of the equation just yet, including just getting to the next stage of investment capital.

Example 

"With $250k into product development, we will have the most sophisticated ab cruncher on the market. We will have made the first 5-minute-ab workout a reality."

This is an example of "implicit value." We're not saying that we know exactly what the company is worth. We're saying that our milestone is having a unique product position in a very large market (which we would have defined earlier in our problem and target market size sections). 

From there you can have a conversation about what the value of that market position could be. What's important is that the milestone begets a very specific value point. 

Here's a really bad example

"With $250k we will have made major product improvements and will have a powerful opportunity to grow market share."

This is also true but fairly useless on a funds slide in an investor pitch deck. The value created is vague at best. You just told me money is going into some amorphous vortex that will spit out an equally amorphous outcome. Not cool.

Your goal here is to convince investors that the Use of Funds will give them ownership of an asset that has meaningful value. Meaningful value can be things like market position, first-mover advantage, patent protection, customer acquisition trajectory, or product evolution. Ideally, you can create value across a handful of these vectors at once.

Be More Right Than Wrong

If you can put the 3 pillars of funding together you'll have a great foundation for your ask. However, it's important to stress that you probably don't have a lot of definitive answers on this. 

 There's rarely a chance that you'll know how every penny is going to be spent or what every outcome will be. That's OK. You're not necessarily trying to be ultra granular here — you're trying to be more right than wrong in your pitch deck delivery.

 It's all of the ballpark assumptions such as:
  •  You don't know that you'll spend exactly 31.5% on marketing.  But you know it will probably be more than 25% and less than 40%. 

  •  You don't know that you'll be able to manufacture the product for $215, but you know it couldn't cost more than $350 and you know that getting it lower than $200 is unlikely.

  •  You don't know that the product will sell 5,000 units in the first quarter, but you know that it will be a small amount given the fact that you're just entering the market.

Be prepared to explain it to Potential Investors

In each case, you'll want to be able to explain how you got the assumptions, even if they are just assumptions. Investors know you're guessing — they just want to know how you're guessing, so be prepared to explain your thought process. 

Seasoned Founders who have pitched to many investors can tell you that potential investors are more interested in how a startup Founder thinks than whether their business plan can predict the future. So let this section reflect how you think about funding and outcomes.

Financials

Ah, the dreaded financials! Ask any Founder (who wasn't an accountant in a previous life) what their least favorite part of a business plan is, and they will almost always talk about the financials.

Part of the reason is that they don't know how to approach the financials in a way to make the numbers not only easier for investors to understand, but easier for the Founders to present.

There are tons of forecasting and P&L tools out there that take inputs and turn them into forecasts. Your problem isn't access to tools and templates, it's knowing what values to use and how to articulate them.

So let's start with how you make the assumptions that drive your model. 

Focus on Assumptions

Your financials aren't just a bunch of spreadsheets that tell people whether you will make money or lose money.  They are the tool to help you determine what assumptions you need to target in order to make the business viable and an important part of your pitch deck.

Most business success comes down to validating a handful of really critical assumptions. Those assumptions are typically:

  • Sale Price per Product

  • Cost of Goods Sold (manufacture, delivery)

  • Cost to Acquire a Customer

  • Staff Costs

Typically most financial models are driven by just a few key assumptions. What you want to do is isolate those assumptions and make them really stand out. Focusing on the most critical elements is also important as we've got really limited real estate in our pitch deck.

Picking which assumptions to highlight is simple — focus on the assumptions that have the greatest impact on the success or failure of the business model or market opportunity. Those may not necessarily be the biggest costs. Your biggest cost may be staffing, but you'll only be adding staff if you can acquire customers profitably at a price point you need to sell at. 

Prior to presenting your glorious spreadsheets, reserve a single page to create some narrative around which assumptions matter and how you're thinking about them, and all the resources they rely on. As it happens, Founders rarely do this well and leave the venture capitalist simply guess what's driving the model. A great pitch deck opens the doors for further discussion and being prepared for them is how we get potential investors interested in our investment opportunity. 

Imagine you had 3 critical assumptions that drove your business model financials. You might use a description like this on the introduction page or slide:

Example

"Our business is driven by 3 critical assumptions — customer acquisition costs, sale price per unit, and the number of times the sale recurs per month. If our assumptions are fairly accurate on these factors, the rest of the business grows accordingly."

Wow, that's a huge help to me as an investor. Instead of trying to magically determine what factors I should dig into, you've told me where your head is at saving me boatloads of time. 

With that introduction, you'd then devote a small paragraph to how you derived your values for your assumptions. 

Example 

"We are assuming customer subscriptions for our product will recur 3 months per sale. That means that our sale price of $20 will be the initial sale plus 3 more charges, totally a $80 yield per customer. Our estimate is based on the fact that two similar services have shown roughly the same customer retention for what we feel is an inferior product."

In short order, you just told me as an investor, what's driving your assumption and how you determined the value. We also demonstrated that in this case, it's not a total guess. 

The Difference Between Estimating and Guessing

Many people will tell you that the financials are really "just a guess." What they mean is that there are many factors that you can't predict, so you're left guessing at what the values may be.

That's true to a degree, but saying it's "just a guess" isn't a license to provide bullshit assumptions! What potential investors want are estimates, not guesses. Estimates are forecasts built on a series of assumptions where you're trying to incorporate as many known parameters as possible.

Example

"We don't know what the final cost will be to manufacture our product, but we know similar products aren't less than $200 and wouldn't likely exceed $350 even at a small scale run."

Now that's a wide range, but it's at least founded in some basic parameters such as what you know similar products are manufactured for. In your own example, we'd recommend being even more detailed.

An example of a horrible approach would be:

"We think the product can be manufactured for less than $350."

In that case, you're not giving any indication of how much less or how you arrived at $350, to begin with. Once again, isolating and explaining your assumptions is critical. 

Offer Different Scenarios

Startups have a tendency in their financials to provide a single view of their outcomes. The probability of every one of your assumptions being spot on from the outset is almost zero, so why would you present a model that doesn't consider any other path?

We do it out of laziness in some cases and fear that investors will think we weren't accurate enough for just one answer in others. Both are bad approaches.

A better approach, and frankly this will set your mind at ease when preparing your estimates, is to offer a few alternate scenarios, typically based on your key assumptions.

Example

"In Scenario A we are assuming that the Cost to Acquire a customer is only $15, which would provide us with much more room to withstand pricing changes in the market." 

"In Scenario B we are assuming that the average Sale Price is $20, which is about $5 higher than our lowest price, however the extra $5 would give us ample room to acquire more customers."

In your own narrative, you'd probably add to that a bit to explain why each scenario might play out that way. But you're also showing investors that you're prepared for different outcomes in the competitive landscape, which is reassuring and shows that if your assumption isn't spot on, it doesn't break the model wholesale.

This actually provides you with a lot of support when you present your model so that if an investor doesn't quite agree with one scenario she may find another scenario that she feels comfortable with, which accelerates the conversation substantially versus getting hung up on one point (never fun).

Make the Conversation About Assumptions

At some point, you're going to get called on to either present your model (as a pitch deck) or walk through the numbers you put in your business plan. In either case, you're going to have a conversation about the financials. 

What you want to avoid is talking about the entire financial model, you're not going to walk a an angel investor through your entire balance sheet at this stage, or your projected law firm retainer in year 3. You don't want to be fielding investor questions about whether or "Making $100 million per year in Year 5 is reasonable" and how that fits into your exit strategy.

You want the conversation to be isolated to one thing — how you arrived at the key assumptions in your pitch deck.

The reason is that you can prepare for that conversation and lean heavily on the fact that if your assumptions are valid, the rest of the model works. If your assumptions hold up, yes, you really can make $100 million in year 5 in the current market. Your financial projections should have obvious links to your key milestones.

This is where isolating those assumptions as their own narrative page (the intro before the spreadsheets) can really help tell a compelling story. It tells investors "the rest is just math, but you should be asking me how I came to these assumptions specifically." 

Even if you're wrong about your assumptions (hint: most entrepreneurs are), so long as you show that you're a thoughtful Founder that really focuses on getting deliberate answers, that's what investors care about the most, and will provide investors the confidence they need to invest.

Summary

So we've gotten through the funding section and you are on your way to Key Pitch Assets, but before you go, let's wrap up what we've learned in this section so we can apply a few tips to our pitch deck template:

We now know that every funding ask comes down to three basic questions:

  1. How much do you need? 

Ask for enough capital to get you to your next major milestone where you can either have a realistic ask for more capital in the future round, or you're generating enough revenue that you don't need capital. These milestones can look like breaking even, meaningful trajectory, a product launch, proven assumptions, etc.

  1. What do you need it for? 

The key component is to include enough detail about how you plan on using that capital so a prospective investor can feel good about investing in your startup. Think about this in terms of the outcome it will create. If the output of investors' money feels worthwhile, the investment capital is justified.

  1. How much impact will that have on the value of the business?  

The previously mentioned "Use of Funds" should drive some significant increase in the value of the startup. Displaying the big opportunity with key points of your startup's story.

Meaningful value can be things like market position, first-mover competitive advantages, patent protection, customer acquisition trajectory, a unique sales process/sales channels or product evolution. If it makes sense for your company, you can create big data value across a handful of these at the same time, adding to your overall value proposition.

Financials

Once you have your 3 questions mapped out in your deck, it's time to include everyone's favorite: the financial slides. Typically, most financial models are driven by just a few key assumptions. Make sure to isolate those assumptions, focusing on the most critical elements. And remember to estimate: don't "just guess!"

Continue to Part 8 - Key Pitch Assets 


About the Author

The Startups Team

Startups is the world's largest startup platform, helping over 1 million startup companies find customers, funding, mentors, and world-class education.

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