You are an entrepreneur. You are a builder at heart. You want to build products, you want to build teams, you want to build companies. You have often heard other successful entrepreneurs share stories about their journey, and speak fondly about what they built, how amazing their employees were, and how their customers loved their product. Have you heard of entrepreneurs getting nostalgic about their fundraising efforts? Us neither.
As unenjoyable as it might be, fundraising is a skill worth mastering. Being effective at raising capital for your startup is really a bit of a super-power. If you are good at it, you can create yet another advantage over your competitors. Hopefully some of the thoughts outlined below can give you a bit of a start.
The first question, for most entrepreneurs, is of course whether you need to bring on investors at all. There are several examples of well known companies that scaled without relying on any kind of external capital - some notable ones are GoPro, Basecamp, GitHub, Tuft & Needle, MailChimp, Zoho, Mojang, Shutterstock etc. So you must certainly first consider whether you can bootstrap your company on your own, rely on revenues from customers or funds from strategic partners, take advantage of crowdfunding,or apply for government or research or other grants.
Assuming that some funding is desirable, in the early stages of a company, you can look at angel investors or consider applying to various incubators and accelerator programs. Most of our focus here is when you decide to pursue funding from an institutional investor - venture capital firms.
You’ve probably heard the advice that the best time to raise money is when you don’t need it. There is some element of truth to this. Look for capital when you still have the freedom to walk away from any conversation that doesn’t do you justice. You don’t want a deadline hanging on your head. It comes at a disproportionately high cost. A quick rule of thumb is to start on it 9-12 months before you need it.
Investors get excited when you are raising capital to dramatically drive up the velocity of your already growing business. You need to show them what wheels are cranking and how you could crank these up even more, if you had additional capital.
As entrepreneurs, here’s a checklist of sorts to see if you are ready to fundraise:
The ability to support the above points with clarity of thought and diligent planning, backed by strong market insights and great hiring, goes a long way in your fundraising efforts.
Fundraising is a process, and managing it well can significantly improve outcomes.
The first key component is the pitch itself - how to best share your story and ambition. At its core, the pitch is about answering three key questions:
The specifics can vary a bit depending on the stage of the company. In an early stage, the three questions are addressed by focusing on market data, trends on the landscape, and the founding team’s capabilities. As companies mature, the focus shifts to quantitative metrics of the company, projections based on the first-hand data, and the extended leadership team that is in place.
It’s useful to think about three pieces of content right from the start:
As companies get more mature, you should expect to pull together a more comprehensive data room to share with investors that are keen on detailed diligence. This could include support documents for IP, comprehensive cost and revenue data, market research reports, customer contracts, governance and HR documents, etc.
Another important piece of preparation is the creation of the comfort zone for your prospective investors. Once you’ve caught the serious attention of an investor, you want to create strong proxies for trust and comfort. This comes through well-known customers that give strong references, respectable advisors that have signed on, industry veterans that have good things to say, and even existing investors that are familiar.
One last thing to work on is the amount of capital that you might be looking for. This is often a tricky thing. One word of caution - don’t be overly aggressive. It’s always harder to back down from a large number, and a lot easier to climb up from a smaller one. Also, you can think in terms of a range of amounts, where additional capital allows you to unlock clearly articulated opportunities. For instance, you might have a basic plan for $6M that shows how an additional $2M allows you to invest in building a partner ecosystem, and another $2M would let you pursue the European and Asian markets.
If you haven’t made investor pitches before, now might be a good time to do a couple of friendly practice runs, either with entrepreneur friends or with your existing investors.
Often, it is tempting to just grab a coffee with an investor for an informal conversation, especially if an investor reaches out to you. No matter how informal the setting, that investor is going to form an opinion about you and your business before the last sip of that coffee. So if you are not prepared, postpone the coffee.
While we are talking about fundraising, it is good to always be prepared with a short pitch that conveys that state of your venture, with a good dose of data and a good dose of passion.
Now that you are ready, it’s time to start sharing your story with investors. Much like what you did with your product, it is important to map out the investor landscape first. Depending on the location and stage of the company, identify your universe of potential investors. Make sure you eliminate those that have a competing investment already. Based on investment areas and other feedback, narrow down your target list to around maybe 25 investors. Do your best to identify not just the investment firm but the investment manager within the firm that you’d like to work with.
It is usually helpful to take a phased approach to your conversations. Here is one suggestion. Prioritize your prospects into three groups. The first group should have some friendly investors (maybe some that have tracked your progress, spoken to you before), and a good mix of ‘stretch’ and ‘likely’ investors. Don’t only aim for the big names and brands. The second group could be mostly strong investors, and the third group is your less preferred partners. The basic idea is that if your conversations in the first group are going quite well, you want to open up the second group quickly, and if they are not, you want to reach out to the third group promptly. This helps maximize your chances of locking down an investor in a reasonable time frame.
For each investor you reach out to, you want to find a compelling introduction. Look for industry veterans, other entrepreneurs, and even customers that might help introduce you to investors. Their word inherently carries some extra credibility for your startup. You can also tap into your advisors and mentors, and your current investors to help make the right connections.
When you are meeting with an investor, remember that your goal is to convey just enough to intrigue the investor into wanting to dig deeper. Resist the temptation to convey every possible wonderful thing about your startup in that very first meeting. Stick to your basic story elements about your market, your product, your team. Try to answer questions but if they get too digressing, push them for a later discussion and get your core story in.
If you have co-founders and other leaders in the conversation, let the team speak for itself and let them own their content. Let the CTO answer questions about IP and the sales leader talk about the go-to-market strategy. As CEO, you want to convey that you have surrounded yourself with capable people you can trust. Investors are not looking for the lone hot-shot CEO - they’re more interested in seeing a strong team.
Set a tone of honesty in your conversation. Don’t try to bluff your way through. Don’t exaggerate. It’s perfectly ok to say “I don’t know. Let me get back to you on that”.
Always remember that an investment is a transaction of equals. Investors need you just as much as you need them. Don’t be subservient. Don’t say ‘yes’ to everything. You can and should ask questions yourself. Remember that you will likely be choosing what investor to work with. Ask them what they think about your space, what makes them optimistic, what causes concern? Ask how they can help in building your business. Ask to talk to other entrepreneurs they might have recently worked with. Ask about their decision process. Don’t be shy.
As you go through multiple conversations with an interested investor, try to get a sense of the founder-investor fit. Is this an investor that you can imagine working with collaboratively? Does this investor challenge you respectfully in ways that make you think, as opposed to simply being agreeable all the time? Is this someone you can share bad news with?
Once you’ve spoken to a handful of investors, you’re now trying to push for decisions. Avoid creating any fake urgency. Get a sense of the investors that are leaning in the most, and nudge them towards a decision. At some point, hopefully one of the investors proposes an offer to invest. This helps drive other investors in contention to conclude their diligence and either propose an investment or pass. While it is tempting to push this into a bidding war, it is still advisable to choose the investor and firm that you preferred the most as long as they had a competitive offer.
When an investor does come back with a rejection, don’t take it too badly. Often the feedback might not be the most accurate and forthcoming. The decision could have many reasons that you may not be aware of. So just take it in your stride and move on.
Once you have signed off on a term sheet, you will want to close that investment in good faith. But remember that it’s not done until the money is in the bank. So stay focused on the process, and don’t let the investors change or impose unfair terms later. Make sure you have good legal counsel at your end, giving you appropriate advice on the negotiations. Continue to build your relationship with the investor you will be working with. If it makes sense, leave some room in the investment round to bring in angel investors that could be valuable for your journey.
In some cases, you might have more than one investment firm in the round. This makes some things easier, since it's less likely that one investor will push for aggressive or unfair terms. But it does add work in terms of keeping everyone aligned and agreed.
The investment arrives. You can breathe a sigh of relief, and maybe even have a minor celebration. But then, it's time to refocus on what you want to do the most - build your company!
[The above notes are compiled from the fundraising sessions held in the various SeedToScale programs such as FounderStack and Rebound.]