Most advice on raising venture capital revolves around how to craft and deliver a great pitch. The truth is that this is probably what startups are best at with the proliferation of accelerators, incubators and pitching competitions. I believe that inexperience with the startup fundraising process is a greater cause of failure in this regard. Why? Because raising capital is one big distraction from the most important thing in the world of startups: achieving product-market fit.
I spend a significant amount of my time assisting our portfolio on fundraising and have advised on more than 15 early-stage deals. As with most skills, practise makes perfect. To help you quickly get back to what really matters, I would like to share twelve actionable advice on how to go about raise venture capital efficiently.
#1 Get Started Building Relationships Today
Venture Capital is a people business partly because there is a strong focus on the startup team but more importantly because nobody invests in a single data points but rather trajectories revealed over a period of time. Therefore, it is crucial that you give investors a chance to see you challenged and solve problems early on. It generates appetite from investors and they will feel more comfortable that you can deliver on your promises. When researching potential investors make sure not only to find the right venture fund but also the right person within it that you believe can add value to your company.
#2 Turn Funding Mode On and Get Out Fast
Go fully committed into fundraising mode when the time is right and leverage the relationships you have already built with potential investors. Get out quickly regardless of whether you are able to raise the round or not. If you were unsuccessful, then review the feedback that you received, execute on what you believe to be true and flip fundraising mode back on when you have overcome the challenge.
#3 One Fundraises and Everyone Else Work
It is important that the business performs well especially during the fundraising process so try to insulate other founders and let them stay focused. Of course they need to get involved eventually when potential investor would like to meet the team but all the initial dialogues can be managed by a single founder. That person should be evaluating the seriousness of the potential investors on behalf of the team just like investors are gauging startups.
#4 Investor Updates and Polite Persistence
You have pitched your mouth dry but nothing happens. Why won’t anyone bite? To find the answer you need to get into the head of startup investors. They are essentially entrepreneurial people with a passion for technology that want to be a part of an incredible journey. All the “did you have time to look at …” e-mails don’t receive a prompt response because they don’t induce excitement. You need to show that in your business things are moving fast and the best way to do that is through transparency. When you are in fundraising mode you are in the market and just like a publicly traded company all significant information has to flow freely. I warmly recommend keeping an investor newsletter where specific challenges and achievements are communicated in bullet form. Keep it simple and don’t spend more than one hour on it. Both current and potential investors will praise you for this and you will be surprised by the help extended to you.
#5 Don’t Pitch. Discuss Instead
When you are invited to a meeting with an investor remember that this is not demo day or yet another pitching competition. If you pitch you will be interrupted on every single slide. Not because venture capitalists are rude people but because they are just as excited about this space as you are and we come prepared for the meeting. Instead, think of it as a discussion among peers. You have to connect both personally and professionally. Startup investors will ask you hard questions to understand how you think and to learn from you. Don’t be afraid to answer with a counter question or ask for their opinion.
#6 Focus on Cash and Smart Investors
The most pressing risk for a company in the startup phase is building a product that nobody wants. In other words, you have far bigger problems than getting the absolutely best terms and valuation on the market. Focus on getting the necessary amount of cash from the best investors and optimize for speed.
#7 Never Give Up More Than 25% Each Round
When you sit down with potential investors you negotiation will be on how much they are willing to invest, how large a stake you are willing to give up in return and on what terms. Yes, that translate into what is technically referred to as a pre-money and post-money valuation but don’t fool yourself. That is not the current value of your company. It is merely what investors are willing to pay for a high risk high reward opportunity. If a potential investor asks for more than 25% that should raise a red flag because future investors will worry that founders cannot stay incentivized through subsequent rounds. Raising the next round Will be difficult and nobody wants that. You can always take a smaller investment in order to reduce the ownership that you give up as long as the stake is meaningful for the investor.
#8 Raise Money When You Don’t Need It
The best time to raise money is when you don’t need to because you are able to walk away. Similarly, a clear path to profitability will improve your negotiation position tremendously. The luxury of choice will work miracles for you.
#9 Don’t Raise More Than You Need
A large investment usually means a high valuation (to stay below 25%), which translates into even greater expectations. While it seems like a win in the short term you are setting yourself up for failure when you eventually fail to deliver on the inflated expectations. That will likely result in a down round and difficulty to raising the next investment, which is bad for everyone.
#10 Underestimate The Amount You Raise
You need to be ambitious in the amount that you would like to raise because as mentioned before that ties directly into expectations. However, underestimating the amount can be a tactical advantage because it is easier to close a lead investor first by asking for a slightly smaller amount and subsequently top up with co-investors. An example would be to close 75% from a venture fund and then have several business angels commit to the remaining 25%. The competences and resources available to the startup will be manyfold and the investors will be happy to diversify some risk. The trick is not to give everyone a seat on the board to stay agile.
#11 The Round Size and Stage Need to Match
You need to achieve the necessary milestones that enable you to raise the next round. Seed rounds are easy as you essentially raise money to conduct an experiment. That experiment has to have worked and indicate profitable scalability in order to trigger a series A investment, which is much harder. If you ask for an unrealistic amount of money investors will think that you don’t know what it takes to get to the next milestone efficiently.
#12 Take References on Prospective Investors
Taking an external investment is arguably a relationship harder to dissolve than a marriage so you better make sure not to get involved with the wrong people. Prospective investors will conduct references calls as part of their due diligence and there is no reason that you shouldn’t do the same. Ask for a list of founders the investor has previously worked with and schedule short reference calls with a handful from the list as well as one or two that happen not to be on it. A few pointers are to both ask about the fund and the person as well as explore both expectations and concerns. Stick to the most important questions and count strengths rather than flaws when evaluating to avoid getting caught up on single issues.
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