Thursday, May 14th 2020 (12 months ago)
The pandemic we are currently enduring has created an environment unknown to the modern world. Public equity markets are volatile. Investors are increasingly risk averse, which makes fundraising for businesses even more challenging. With such high-risk equity markets, why would investors take on the gamble of a startup?
For investors to keep investing in today’s economic climate, they want to maximize their return against a mitigated risk. This is an attempt to optimize their Sharpe Ratio, which is a financial formula that compares the return of an investment to its risk. In an ideal scenario, the higher the Sharpe Ratio, the better the investment.
How do you, as a founder, leverage a challenging investor environment and differentiate yourself against competitors for funding? Try these two strategies below.
1. Financial Models
Financial models are always crucial, but, right now, they are pivotal to showcase your projected business outcomes. Investors are relying on you to provide stress-tested scenarios of their investment. This should include a forecasted Income Statement, Balance Sheet, and a Statement of Cash Flows. Financial transparency through clearly modeled visuals and projections is more important than ever with investors wary of taking on the ambiguous risk of a start-up.
A successful financial model will not only show investors exactly how their money will be spent, but also communicates a growth plan and where your marketing dollars will grow. Objectively, this proves to investors that you have planned effectively for an unstable market while it simultaneously instills confidence in your team and your partnership. Here’s the bottom line: fundraising is about engaging with your investor and building a foundation of trust. Trust begins and grows with total transparency and robust communication.
2. Monthly Updates
Email lists consistently perform better on engagement and clickthrough rate than nearly any other marketing platform you are probably using as a start-up. This is a hugely underutilized and highly impactful engagement tool in our start-up community. The effectiveness of emails translates to fundraising as well. Email your prospective investors a monthly update. Openly sharing progress, even areas of struggle, keeps investors engaged and promotes their trust. We recommend using tools like Paperstreet, which provides templates that outline specific sections, showcasing best practices for investor updates.
Our theme repeats itself: transparent communication is key to building a partnership. Your financial model showcases financial transparency. Monthly emails communicate operational transparency. In times of economic uncertainly, these two tools are imperative to differentiating your brand and outlining your future growth against a sea of competitors in a suddenly leery investor market. Assets that appeared stable just a few months ago have now become increasingly volatile. Building partnerships with your investors is more important than ever.