As entrepreneurs, most of us have gone through the painful process of fundraising. Some describe it as a necessary evil. Others say it’s the worst part of being an entrepreneur. Almost all describe it as challenging.
Over the past several years, I’ve raised several rounds of funding for my startups. I’ve also helped several other startups with their fundraising processes as a fundraising coach. While there’s no easy way to fundraise, there are some tips that bring method to madness:
If you know you’ll be fundraising in the next three to four months, start planning ahead of time. Depending on which round you’re looking to raise (seed, Series A, B, etc.), prepare a list of potential angels and/or venture capitalists. You can start with an online search or ask friends who are entrepreneurs or investors. If you’re part of an incubator, then this exercise becomes relatively simpler.
During our first round at my last startup, we didn’t follow this approach and were rushed in the end. This is never a good thing, as your tendency to make sub-optimal choices is higher when the clock is ticking.
Do Your Homework to Establish Fit
I can tell you from experience that a lot of entrepreneurs, especially first-timers, don’t do a good job at this. Once you have your initial list ready, refine it based on investment thesis and fit.
The first step is relatively easy since you can find that information (sector focus, what stage they typically invest in, fund size etc.) online by looking at their website and portfolio. Fit requires more work: Given that an investor’s inbox is always filled with cold outreach, they tend to mostly take meetings that come through a trusted source to make the process efficient.
Try to find people in your network who can introduce you to the angel or someone at the firm (preferably a partner) if it’s a fund. You can also ask for introductions to founders of portfolio companies. Founders are a pretty powerful source for connecting with angels/VCs; they’re in the “trusted circle” since the investor has already made a bet on them. I gained several of my investors through founder recommendations.
Don’t Ask For Money Right Off the Bat
The reason you do this exercise three to four months in advance is so you don’t pitch or ask for money in the initial meeting. Yes, you heard that correctly: You should first get to know them, build a relationship and evaluate if they are interested in you and your idea. But what exactly do you talk about?
I’ve heard great advice on this from different experts. Ask them for their thoughts on the sector and hold a genuine brainstorming session on your business. Keep it brief, ask for advice, and ask if they can help with recruiting and sales leads. If they agree to help, that’s a positive sign. You can mention that you might be raising a round at a later date, and inquire if they’re interested in setting up a meeting closer to the process.
We followed this process for my current startup, and it has worked out quite well. This is because both sides know what they’re doing, but neither side is desperate nor under pressure to make a decision. This will also help you further refine your list for the folks who might be hot leads when you start raising in a few months.
Prepare Your Pitch
I’ve advised multiple startups on pitch preparation, and almost always, founders take too long to get to the point. Hit your big points on the 30-second, one- and two-minute marks of your pitch, or else your chances of success diminish substantially.
Yes, you may have already heard this before, but let me repeat it: follow the KISS principle (Keep It Short and Simple). Keep the main deck between seven and 15 slides, and pack all the powerful content up front. Be sure to include slides on your team, PSR (problem, solution, results), market size, a competitive overview with your differentiation, current metrics, future milestones and projected use of funds.
You can and should have a detailed appendix, but remember, it’s an appendix for a reason. It should be used to offer additional details and answer specific questions.
Be Aware of The Nuances of Different Stages
Having raised or helped startups raise multiple rounds, there are clear differences in fundraising strategies depending on the stage. This is especially important for first-timers. Depending on your round, here are a few best practices:
- Seed/Angel. In this stage, it’s mostly about the founding team, so focus on that. Investors are interested in the idea, but they’re more interested in you. Once you like an angel or early-stage investor, make sure you hold several meetings in both formal and informal settings. Showcasing your working prototype, minimum viable product, customer pilot results or initial traction are big pluses.
- Series A. These rounds are mostly VC-led. Unless you’re inventing new technology that will disrupt the market (think Google search), investors will want to see that you’ve established product-market-fit and have gained some initial traction with actual customers/users. Here, having a list of referenceable customers will come in handy. It’s an in-between stage where you’re still in the early adopter curve, hence team and vision still play an important role. Be sure to show how the raise will take you to the growth stage.
- Series B and beyond. This round is all about growth metrics and numbers. A charismatic founder or team can help increase valuations, but don’t expect to get top investors on board using only your story with no actual metrics behind it. Be sure to have conversations in advance with your board, advisors and potential investors on what it will take to raise the next round, and manically focus on delivering those numbers.
The next time you’re looking to fundraise, start early and go through the process in a more structured manner. Fundraising isn’t easy, but the above tips will make the process more efficient and prepare you for an optimal outcome.