What makes an investment strategy?

Start by asking yourself what kind of company you want to build – a startup or a small/midsize business? The difference here lies in funding sources: startups usually rely on Angel or Venture Capital investment. Small business operations, on the other hand, may depend on loans and grants.

Let's take a closer look at startups.

Investment round

How much money do you need to raise? If you have a financial model, you'll answer this question easily. If you don't have a financial model — it's about time to develop it. The model includes all the planned revenue streams and expenses, and this calculation will provide you with information on what cash deficiency is.

Another essential thing to consider is your product development stage and the fundamental purpose of the round: pre-seed, seed, Round A, etc.

Valuation

Each round of investment has standard ranges and methodologies that help estimate a startup valuation at each stage. These methods vary depending on whether you have some revenue or not. You can easily find descriptions and examples: Berkus Method, Scorecard Valuation Method, Venture Capital (VC) Method, Risk Factor Summation Method, Asset-Based Valuation method (aka Book Value Valuation), Cost-to-Duplicate, Discounted Cash Flow Model (DCF), Comparables Method, Valuation by Multiples Method, etc. I recommend using several approaches to have a stronger case.

Form of investment

There are two main forms of investment — direct equity and convertible note. If it is direct equity, investors receive shares in the company for an agreed price. The main concern and challenge here is the startup valuation. It's not easy to decide on the accurate valuation of companies in a pre-revenue phase. Moreover, it can be hard to find an investor familiar with non-equity funding instruments and ready to offer you a deal. It is why the convertible loan might be a better option.

Terms of investment

When you know your startup's valuation and current cap table, the next step is to develop a proposal for the investor. It can be a % of equity, a discount rate, and valuation cap, etc.

Target investors

I recommend you prepare a long list of all potential investors for the stage and a shortlist of dream investors you want to have onboard. Then — structure this database, look for warm connections and contacts who could give you an introduction. It will increase your chances of coming in contact with the investors.

The process of fundraising can be time-consuming and challenging. There are many variables and uncertainties. Having a well-prepared investment strategy will help you sort your priorities and be more confident. It is the vantage point for you to be in when negotiating your investment round.