1. What you will learn
This lesson opens Reader I by giving you a funding-readiness diagnostic. You will define a ninety-day outcome, score six areas from story to legal hygiene, and find the one gap to close first. It stresses that readiness improves your odds but never guarantees funding.
2. The idea explained
Raising outside equity is a project with a beginning, a middle and an end, and it goes best when the company is prepared before the first investor is approached. A readiness diagnostic is a short, honest scoring of the parts of the company that investors examine, so that you can see which are strong, which are weak and which are simply unknown. It is not a prediction of success. Investors decline good businesses for reasons unrelated to preparation, and most new ventures do not succeed. But preparation determines whether a promising conversation continues or stalls on avoidable problems.
Six areas cover most of what investors examine. Story and problem: can you state, in plain words, whom you serve, what problem you solve and why you? Traction and proof: is there evidence, in customers, revenue, repeat purchases or pilots, that people want what you offer? Numbers: do you know your revenue, costs, cash, burn, runway, unit economics and the assumptions in your plans, and do they reconcile to your records? Team: is there a committed team with the skills the plan needs, and are the founders' shares, roles and vesting settled? Structure and papers: is ownership clear, are contracts signed, is intellectual property owned by the company, and are filings up to date? Ask and plan: do you know how much you need, what it buys, what it changes and what you will do with or without it? Score each from one to five with a fact beside it.
Set the outcome first. An outcome is a change you can observe in ninety days, with a number: for example, close all paper gaps on a list of eight; answer the ten hard questions with numbers; have a reconciled twelve-month set of financials; complete five friendly rehearsals. Outcomes tied to preparation are within your control. An outcome such as raise a round by a date is not, and setting it invites shortcuts and misstatements.
Look for the constraint. The lowest score is often the place to start, but not always. A company with strong traction and a shaky cap table should fix the cap table, because it can sink a deal at the last moment. A company with clean papers and no proof should invest in customers, not in polishing a deck. Naming one focus for thirty days is more valuable than spreading effort across all six. Remember, too, that some companies are better served by loans, retained profit or customer money than by equity, and the diagnostic may show that.
Apply it
3. How to apply it in your own business
Write your ninety-day outcome at the top of a page, with a starting value, a target and a date. Below it, list the six areas and score each from one to five with one fact and its source. For story: whether three listeners can state your business after two minutes. For traction: customers, repeat rate and revenue trend. For numbers: whether your books, bank and filings reconcile, and whether you can state burn and runway. For team: the shareholders' agreement status and vesting. For papers: the count of unsigned or missing documents. For the ask: whether you have a written use of funds tied to milestones.
Where a fact is missing, score two and write unknown. Ask a co-founder, a mentor or your accountant to score the same six areas independently. Differences of two points or more reveal blind spots. Ask a lawyer to review the papers score with you; they will often know what an investor's lawyer would ask first.
Choose the focus area and write three causes with a cheap test for each. If the numbers are the constraint, causes might be unreconciled books, no monthly close and no unit-economics sheet; tests might be a reconciliation with your accountant, a month-end close routine and a one-page unit-economics sheet. Decide what to pause. Rescore in ninety days. Keep the page dated and share it with a mentor or lawyer. Do not contact investors until the focus gap is closed.
Worked example
4. Worked example
Consider Nandan, who runs a small edtech company in Chennai with two co-founders and seven employees. His outcome: within ninety days, close 8 of 8 paper gaps and answer all ten hard questions with numbers, before speaking to any investor.
His scores: story 4, because three of three listeners state it correctly; traction 3, with 1,200 paying users and a renewal rate he can estimate but not prove; numbers 2, because books and bank differ; team 3, with co-founder vesting not documented; papers 2, with unsigned contracts and unassigned designs; ask 2, because use of funds is a sentence, not a plan. The total is 4 plus 3 plus 2 plus 3 plus 2 plus 2, which is 16 out of 30, or about 53 per cent.
He asks his accountant to score independently. She gives numbers 1, because the reconciliation difference is larger than Nandan thought. The difference of one point reveals a problem. His constraint is numbers, since almost everything else depends on it. He writes causes: no month-end close, mixed personal and company expenses, unrecorded cash receipts. Tests: run a close for the last three months, list all personal items paid from company accounts and match cash receipts to invoices.
He estimates the cost of fixing: accountant time of 12 hours at 1,500 rupees, which is 18,000 rupees. He compares it with a funding target of 1.2 crore rupees; the fix costs 18,000 divided by 12,000,000, or 0.15 per cent of the target. He records that readiness raises his chances but does not guarantee anything, and that a lawyer will negotiate any term sheet. All figures are invented.
5. Common mistakes and how to fix them
The first mistake is setting the outcome as raising a round. Fix it by choosing preparation outcomes within your control. The second mistake is scoring by feel. Fix it by writing one fact and its source beside each score.
The third mistake is polishing a deck when the papers are broken. Fix it by fixing the lowest-scoring area first. The fourth mistake is assuming equity is the only route. Fix it by asking whether loans, profit or customers could do the job.
Key takeaways
6. Board summary
Readiness improves odds; it never guarantees funding. Score story, traction, numbers, team, papers and the ask, each with a fact. Choose preparation outcomes within your control. Fix the constraint first; ask an outsider to score too. Consider whether equity is the right tool at all.
Check your understanding
7. Practice and self-check
- Name the six diagnostic areas. Answer: story and problem, traction and proof, numbers, team, structure and papers, and the ask and plan.
- Nandan's scores are 4, 3, 2, 3, 2, 2. Total? Answer: 16 out of 30.
- That is about what per cent? Answer: about 53 per cent.
- Why did the accountant's score of 1 matter? Answer: the reconciliation difference was larger than he thought.
- Cost of 12 hours at 1,500 rupees? Answer: 18,000 rupees.
- That is what share of a 1.2 crore target? Answer: 0.15 per cent.
- Why choose a preparation outcome, not a raise? Answer: preparation is within your control; raising is not.
- What if the papers are broken but the deck is polished? Answer: fix the papers first.
- Who negotiates any term sheet? Answer: a lawyer, with the founders.
- Does readiness guarantee funding? Answer: no.