Hey Mehdi, I started my startup and planning my first fundraising. Would you have some advice for me?
That’s the type of questions I get every time from the local crowd. I won’t mention the obvious such as it’s not enough to show up with beautiful slides and a concept.
I expect a bit of execution through a test market and that I get to hear all the things that went wrong during a series of experiments.
It’s still a very exciting time for a founder, however. To raise millions of dollars from the top-tier VCs is extremely rare. As a result, I frequently witness entrepreneurs rushing into the procedure and creating investor meetings before they’re ready, resulting in a bad outcome.
Because fundraising is a powerful driving force for you to think carefully about your company and where it’s going, this is a lost opportunity.
Since 2015, I’ve observed businesses raise money in pre-seed and seed stages firsthand, and I’ve spoken with a few VCs about it. Through my observations, I’ve noticed several successful and ineffective fundraising methods.
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This article is for entrepreneurs who have ideally already raised a pre-seed round and are considering their next fundraising. It’s worth noting that those basics apply to Series A too.
I’m writing this having in mind companies that offer software, hardware, or other similar products. However, there are many exceptions, especially those with lengthy product development cycles and firms seeking capital outside the United States and Europe.
In the end, fundraising is all about trust. We read about new Series A, B, and C rounds every week. Pre-emptive offers and blank check term sheets from well-known investors are on the lips of everyone. All of this may lead us to believe that raising money isn’t difficult. It’s a false belief.
If only we could hear about all the fundraising that fails, it would give a more realistic perception to everyone.
Every investment is critical to each fund, and in order to persuade a fund that you are worthy of that large payment, they must be convinced that you are able to take that venture to the next step.
Fundraising Process Breakdown:
- Cold Emails
- Running the 1st round of Investors meeting
- 2nd round of Investor meeting
Everything is about Preparation
First, you must determine whether and when you should raise around. Many entrepreneurs only begin fundraising after they run out of money.
The fact is that venture capitalists don’t invest in you because you’re running out of money.
They invest because they anticipate their equity position will appreciate in value. I mentioned in Seed Smart what’s at stake for them and the expectations of their LPs.
For example, in SaaS, it’s common that companies that have made a basic product with one simple killing feature and found few customers that paying (not just some Letter of Intent) and making $10-50k ARR are told they are ready.
It is acceptable to not yet reach what we call product/market fit, but the rockstar teams that already achieved such can sometimes get a super seed round.
They can raise more than the average because they simply put themselves in a position of strength right from the start and it would change everything if everyone would aim for that.
Think of it, they got:
- A real Product! Not a killing feature
- Their user base is growing at a frenzy rate already
- Customers are all paying and are happy.
- They demonstrated that they know how to get to market.
- They are not posted revenue; they are profitable already.
They are already ahead of what is expected for a Series A. I call it a perfect Seed play.
Investors desire to invest in growth. When it comes to investing, investors want companies that are growing quickly in comparison to their peers and maintaining a moat.
Even with low revenue, it’s not a problem: “Mewenti” as we say here in China.
When you believe you’re ready, the first step is to compile your most important metrics and accomplishments, such as growth rates, revenue figures, and customer testimonials.
But also remember that the ability to show that you understood something in a market that nobody noticed gives you an edge.
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What you need in terms of documentation:
- A killing deck that makes people dependent (7 – 10 slides).
- A lengthy presentation deck with some secrets (12-15 slides).
Best startups provide materials that tell a compelling narrative. It explain what has been accomplished, as well as a compelling why. The plan is insightful and will catch a lot of value from the target market.
There’s plenty of data to support everything., it’s like reinforced concrete when the others struggle to prove market validation ideas.
I believe that what is key to remember from that post is that fundraising is all bout building trust. Think of it as trying to get married with kids with a big house vs a one night stand.
Each bit of intel provided broadcast your beliefs.
Profitable startups don’t have to look at their runway, if your startup is post-revenue but not profitable, ensure to have twice your runway vs the closing date you have in mind.
Here is the work breakdown structure to plan your roadshow:
- Building Decks and Memo
- List of VCs and Angel
- Scheduling your investor meeting
- Pitch adjustments and reflection
- Running your investor’s meetings
- Legal coordination and Follow Up.
- Final meeting + Term Sheet comparisons and selection
Note that some of those steps can be run in parallel. Knowing that it could take 2 to 3 weeks between the moment cold emails are sent and the first meetings takes place.
Running your investor’s meeting
I would recommend up to 2-3 meetings a day and even more if everything is in remote due to the post Covid era, but it’s an exhausting process. Having time to reflect after each pitch allow to refine it.
For each closure of a meeting to have your set of final questions ready such as:
- Does the business make sense to them?
- What else is required?
- What and When is the next step of their process?
You’ll have to document what you have done by writing down who and when did you meet? what document had been shared so far for each stakeholder to ensure a proper follow-up. That’s basically a project management job. Get yourself a excel spreadsheet with your team about it.
Keep everyone on the same schedule, since after you receive an offer from a VC (famous Term Sheet), you won’t have much time to respond.
That’s the best way to be able to compare offers.
Remember that this article has for purpose to help and give an overview but technically it does not always happen like this.
I saw all kind of shh.. surprises and consider myself like a student. Expect the unexpected, the startup world is just unpredictable by design.
One more thing: you should watch that, this and that.
You are about to raise soon? Contact me or reach me on Linkedin!