Building Brass: The 5 Basics of Fundraising
“Let’s get back to basics.” It’s something Jay and I say to ourselves all the time. When things seem overwhelming, daunting or unmanageable, we think about the basics – the essentials we need to get the job done – and everything seems clearer. You’ll see it in our product, marketing and even in our business practices. We always break things down to brass tacks (pun intended :).
When we started the fundraising process, we asked ourselves: what are the basic things we need to get started? We spoke to friends who had been through the process, listened to podcasts and read countless blogs. We determined there were 5 basic things we needed to do before we could meet with a potential investor. They were:
- Create a use of proceeds
- Create a projected revenue model
- Create a pitch deck
- Determine our valuation
- Make an organizational plan
Today we’ll explore each of these individually. Because we’re still learning the ropes, we’ve included some of our favorite resources that have helped us along the way.
Use of Proceeds
A use of proceeds is a document that outlines how you’ll use the money you raise. To create a use of proceeds, you should first understand how much money you need. We’ll dedicate more time to this question in a future post. For now, know there are a few different theories for how much to raise. The most important thing to remember is that you’ll likely be giving up equity (or shares of your business) for this money. If you want to know more now, check out this post from a Boston Venture Capital firm, Next View Ventures.
Once you determine how much money to raise, you’ll put together a use of proceeds to show what specifically you’ll use the money for. At Brass we’re looking to raise between $500K – $800K. At a high level, we’ll use our proceeds towards inventory, marketing and one new hire. We’re not going to get into the nitty gritty of our use of proceeds here. More importantly, we want to share the lessons we learned in creating our use of proceeds:
- Be able to explain in detail how you’ll spend the money you raise. Think about specifics. If we’re putting $300K of that $500K towards inventory, we want to breakdown the number of units we’re going to buy, when we’re going to purchase them, the product categories etc. Consider it an opportunity to show investors that you’re thoughtful, have a plan andhave done your homework.
- Understand what the money is going to produce. Investors want to know their money is going to be used to make more money. Be sure to model and project how much money you’ll make with the money you’ve raised.
For more information on creating a use of proceeds, check out this video from entrepreneur and investor Jenny Lefcourt.
One question investors are sure to ask is how much money you expect to make. This is because they’re ultimately interested in knowing the return on their investment. You’ll need to give your potential investors a look into the future finances of the company. To do this, we created a 3 year model that projected out our estimated revenue and costs. This is called a P&L or a Profit & Loss statement. If you’re unfamiliar with P&L’s, start with the basics.
Again, we won’t get into the weeds with our own P&L. Instead we’ll talk about our biggest takeaways from going through the process:
- Creating a P&L is a chance to plan and evaluate future decisions. When you start thinking in detail about the money you’re going to make and spend, you’ll start to see different options and opportunities. For example, in creating our P&L, Jay and I were presented with the question of using an order fulfillment center or continuing to fill orders ourselves. It was an opportunity to us to talk about a potential issue, and get on the same page before there was pressure to make a quick decision. Also, note the P&L is different than the use of proceeds because the P&L includes other costs outside of the investment money.
- Create a best, worst and middle case scenario. It will show investors that you’ve considered all possible outcomes, and that you understand and have evaluated potential risks and points of failure.
And one more tip: be smart about your excel sheets. Set up formulas so you can easily make changes and updates. You don’t want to have to adjust multiple cells to make one update to your model.
A pitch deck is a brief presentation that describes what your business is, what sets it apart and where it’s going. Often times you’ll send your pitch deck to potential investors as a way of introducing yourself and your company. It can also serve as a guide for the conversation when you’re meeting with an investor in person.
We know that VCs spend an average of 3 minutes and 44 seconds on each deck. Therefore it’s important to present the information thoughtfully and clearly. There are many ways you can do a pitch deck, but here is what’s considered the most important content to include:
- Company purpose
- Why now
- Market size
- Business Model
At Brass, our pitch deck also served to show our traction and create a narrative for our brand. We received tips on how to do this from listening to the Pitch Deck podcast. We also advise you show your deck to trusted advisers, sift through feedback, and be prepared to create version after version until you have something you like.
In order to move forward with a seed round, you’ll need to value your company. A valuation simply allows investors to know how much equity they’re getting for their money. For example if you have someone investing $100,000 for 10% of the company, the company must be worth $1,000,000. Actually calculating a valuation can be much more complex. We found this Venture Hacks article to be very helpful, and brings clarity to a process that is complicated. We haven’t completed our valuation yet, so we don’t have takeaways just yet, but we’ll share more in future posts.
The last one might be most important, and that’s a plan. Fundraising is a process that requires a lot of communication and organization. You can prevent headaches, by taking a step back from the process and putting together a plan. Here’s what we did:
- Established a Point Person: As we’re a team of two, we decided one person would lead the fundraising efforts while the other focused on the operations of the business. This allowed us to streamline communication through one person. Not only does it help you stay organized and prevent miscommunication, it proves that we’re professional, and we’re taking this process seriously.
- Created a Spreadsheet of Contacts: You’ll going to send lots of emails and have many phone calls and in person meetings. It’s helpful to create a simple spreadsheet to keep track of your contacts name and information, how you met him/her and the status of your conversation.
We hope our breakdown has helped make an otherwise daunting process a bit easier to manage. We’d love to hear your thoughts, comments and questions.
ABOUT THE AUTHOR: KATIE DOYLE
I’m a co-founder of Brass. Brass is a new online women’s clothing brand. We’re cutting out the middle(wo)man to create high quality clothing at an affordable price. We’ve learned so much in the year we’ve been in business; I’d love to share more about what it means to run a growing startup in Boston.