The Fun in Fundraising
Fundraising can be one of the most challenging aspects in getting your startup off the ground. While there are many theories on how you should go about it, investors are not a homogenous group. They have different investment strategies, missions, goals and approach. Furthermore, financing deals come together in many different ways and can be attributed to a well-executed strategy, access to a vast network or just plain luck.
While there is no single strategy, we have compiled a set of eight basic rules every entrepreneur should know before embarking into fundraising.
Whether you think you can or you think you can’t, you’re right. Attitude is not optional when it comes to fundraising. If you decide you want to fundraise, have a winning attitude. Investors can smell ambiguity from miles away. You need conviction if you want to convince people on your ability to execute. Be all in.
2. Decide how much money you need
Before you start having meetings, figure out how much capital you need. This will impact who you target and how to target them. Don’t spend hours creating a complex financial model trying to figure out how much capital you’ll need to become cash flow positive. If there is one thing we know with certainty about startups, it's that early-stage financial projections are always wrong.
Focus on the length of time and the amount of funds you will need to get to the next meaningful milestone that will buy your company credibility in the market. If you are starting out, think about how long it will take you to get your product into the hands of the user or customer. If you’ve launched, think about how long until you get to a certain number of users or revenue target. Supposing there is no revenue growth, think about your monthly burn rate to get to the next milestone.
Make sure you give yourself enough cushion to cover ramp up and unexpected expenses. The length of time you need to forecast will vary dramatically by the type of business you are building. A software development company should be able to account for progress in 12-18 months. In contrast, it could take several years for a life science company to get through clinical trials and approvals. Don’t agonize about this. Make sure you have enough cash to get you to the next breakthrough and make sure you understand what you are trading off.
Avoid! When setting your fundraising target, avoid using ranges. Investors don’t like them and neither would you. Be clear.
3. Prepare fundraising docs
Different investors will require different things, but the most basic items you’ll need are an Executive Summary and a Slide Deck.
Your executive summary will ideally be one page long and include a description of your idea, product, team and business. Don't forget to include the market size, a high overview of financials (revenue if any, current and prior fundraising) and of course, your location and contact info.
The slide deck is generally 10 slides and clearly defines the problem you are solving, the size of the opportunity, the strength of the team, the level of competition and the competitive advantage you have over them. You’ll also want to include your plan of attack and a summary of financials. By financials, we don’t mean a complicated financial model. Most investors just want to see how you’ll use proceeds and what milestones you will achieve in the allotted time period. Be careful not to over specify milestones, you don’t want them showing up in your term sheets.
If you have the capacity to produce a demo, do it. Investors love to interact with demos, prototypes and alphas. It creates more of an emotional interest than just a document.
Avoid! Don’t over do it with design - substance is always more important. Make sure your docs are clear, concise, thought provoking and easy to process. Caveat - You are a consumer-facing product where user experience will matter a lot.
4. Do your homework: find the right investor.
The best and most effective way to find good investors is to ask other entrepreneurs. They can give you an unfiltered perspective about investors they’ve enjoyed working with. An intro to an investor from an entrepreneur is always more effective than a cold email. If you don’t have a strong network, there are a number of databases that can help you identify potential targets like Crunchbase.
Look For! Research industries they invest in, what stage of growth they prefer, past successes, failures, approaches and strategies, bios and key personnel at the firm. You can also learn a lot by following investors on social media!
5. Approach Investors How you connect with an investor has a significant effect on what process you’ll have to go through. Some investors will only fund entrepreneurs they have a prior connection with or those that have been introduced by a fellow colleague. Some investors avoid working with first time entrepreneurs. Distinguish the investors preferred channel and know if you’ll have to work your way upstream.
If you are reaching out to a firm, your goal is to get in front of the general partner or managing director. Most firms hire associates to actively source deals but they’re not likely to be the one’s making funding decisions. This doesn’t mean you shouldn’t meet with them, just don’t get overly excited if that’s who you are dealing with. Before you jump through hoops providing information, make sure you are talking to a partner level person.
As you meet with potential investors, you will be able to categorize them into one of three groups: the investor who is clearly interested and wants to lead, the investor who is not interested and passes, and the investor that gives you the firm maybe. The last one can be the hardest to deal with, especially if they are slow to respond. While they are clearly not going to catalyze your investment, it is important to keep them warm through constant communication. As your deal comes together, you can go back and bring them in to the mix.
Avoid! Asking for NDAs, fundraising through automated emails or contracting with someone to fundraise for you. Investors receive a lot of inquiries and are unlikely to sign NDAs and don’t like it when you rely on third parties to tell your story. Automated emails as a way to reach investors is considered just plain lazy.
6. Evaluate Investors
If you are successful in reaching investors, they’ll begin the due diligence process and likely ask for presentations, projections, customer pipeline, targets, development plan, competitive analysis, and team bios. You can learn a lot about the investor by the way they conduct diligence.
If you are raising your first round of financing, have no revenue or no product, and the investor asks for a five year detailed financial projection then pounds you on the numbers, he or she may not have a lot of experience or comfort making early stage investments. If you feel like an investor is drowning you to get exact projections and has unrealistic expectations, consider if they are someone you can work with in the long run.
This is a great time to go back to those entrepreneurs you know who've worked with the investor. Ask about challenging times, co-founder breakups, leadership transitions, failure to meet milestones, etc. You want to learn how your potential investor handles difficult situations. Partnering with an investor is like a marriage, but it's often easier to get a divorce than to get out of an investor agreement.
7. Negotiate: Choice is Power
If you can, allow yourself enough time to raise money so you don’t feel the urgency to get a deal done. A short window can lead to investors passing because they don’t have enough time to evaluate your company. You also want to avoid a sense of desperation, it doesn’t help your negotiating position.
Having multiple investors interested will provide insight into how different firms work and give you leverage to negotiate the terms of the deal. As you engage investors ask about their process and timeline for investing. Some will tell you, some won’t. If you have a sense of their process and timeline, you can customize your approach in an effort to synchronize term sheets.
Avoid! telling investors who else you are talking to for investment. Investors talk to each other. If they know who you are talking to, it is very likely they will reach out to ask what they think of you and your deal. Sometimes this works in your favor, sometimes it doesn’t. Either way, it's better to stay quiet, only make connections between firms as term sheets come in.
8. Close the deal
Just because you have a term sheet doesn’t mean the deal is done. You still have to sign definitive documents and get the cash in the bank. Generally, lawyers do most of the heavy lifting here, so be sure to engage yours in your fundraising process. Just know nothing is done until the cash is in the bank. Closing the deal means you get back to running your business.
- the Crew