This is part 2 of a 3-part series on First-time Fundraising. You can read the overview of this series here. Here are part 1 and part 3.
You’ve decided raising venture capital is the right move for your business. How do you set yourself up to run a tight process and maximize the odds of closing your round?
Hard vs harder raises
While raising is never easy, closing a round is hardest when it lacks momentum and investor competition. While fundraising has some similarities to b2b sales, there is one key difference: there is no inherent latent market demand for your round, and you can’t convince someone to buy. You have to generate sufficient demand and make investors want to invest.
It is very difficult to have active fundraising conversations and build top-of-funnel investor interest at the same time. Ideally, a critical mass of investors will consider the round at the same time, generating competition and a healthy dose of FOMO. Nothing ever goes entirely according to plan, but understanding these dynamics and spending sufficient time preparing before you kick off your raise can meaningfully accelerate your fundraising timeline.
As we’ve written about before, early stage investors over-index on trust and belief. Founders with strong pre-existing relationships with investors, proximity to VC networks, and a “track record” typically have lower hurdles to overcome. But if you’re not Adam Neumann, you will likely have to set the foundation for a strong offensive position.
You can break down the elements of a successful fundraising process into the following phases:
Build a pipeline of prospective investors
Establish familiarity with and/or access to these investors
Prepare your materials
Run a fundraising process
Build a pipeline
If you are setting out to raise a pre-seed ($500k-$1.5M) or seed ($1M-$4M) round, I recommend building a list of at least 50 qualified prospective investors to start. Make sure these investors are aligned with your stage, round size, sector, business model, geographic location, and values. Jenny Fielding (General Partner at The Fund) built a great Google sheets template (more context on using this template here).
Finding investors that are a fit for your startup is the first challenge. VCs are easy to track down, but if you are raising a pre-seed round of less than $1M, you will likely want to supplement your list with prospective angel investors. Platforms like Crunchbase and Pitchbook generally have up-to-date info on active investors and recent deals. You may also want to check out resources like OpenVC, No Warm Intro Required List, and First Round’s Angel Directory. Twitter can also be a good place to discover active investors and communities (e.g. Amanda Robson from Cowboy Ventures has put together a list of 100 female and non-binary operator angel investors). For more context on how to build an angel network from scratch, don’t miss this article by Sapna Shah (angel investor, retail expert, and three-time entrepreneur).
Establish familiarity and/or access
Once you have this list, you need to find a way to connect. Ideally, an introductory meeting will establish mutual fit and interest. In this meeting, you should generally cover your background and vision for the company, in addition to learning about the firm’s investment strategy and general process. You can also use these meetings to further expand your network, as these investors may have ideas for others you should speak with as well. (Note: if you know that a specific investor prefers not to meet companies too far in advance, or generally moves very quickly, you may not need to meet them months before you raise. In those cases, it can be sufficient to just make note of how you will get in touch with them when the time is right – i.e. Do they have an open submission form? Do you know someone who can connect you?)
Inefficient and suboptimal as it may be, the vast majority of investors still prioritize warm referrals over unsolicited pitches. Your fundraising process will likely rely on a mix of both.
If you are asking someone to make a “warm intro” for you, make it easy for them. This article on forwardable introduction emails by Alex Iskold (Managing Partner at 2048 Ventures) provides a simple overview on how to make this request.
If you are reaching out cold, make sure your efforts are targeted and personalized. If the investor is active on social media, you may want to engage with them there to build up some familiarity. Yuliya Belyayeva (Co-founder & CEO of Notus) created an excellent resource on cold outreach. Also ensure that your digital presence (LinkedIn profile, website, etc.) is consistent with the information you share via email (for more context, read this piece on what we look at online to decide to take a meeting).
When you meet someone, establish how they’d like to keep in touch. You could add them to your investor/community update list, you could agree to check in again in a few months, or you could make a note for yourself to send personalized updates.
Prepare your materials
You’ve built a network of prospective investors, business is going great, and it’s almost time to raise. Before officially kicking off your process, prepare your deck and data room. Get feedback on these materials from existing investors, other founders, and trusted advisors. These materials will evolve as you gather feedback.
Run a process
Once you officially launch your raise, maintaining momentum is key. As much as possible, you want to move investors through the process in parallel.
A common piece of advice is to first meet with your second- or third-choice VCs for practice; after all, you don’t want to blow your shot with your top choice. If this gives you peace of mind, go for it, but don’t overthink.
As you meet with investors, make sure to ask for feedback. What is their initial reaction? What are their hesitations or open questions? What are the next steps? Use this information to provide additional materials that may assuage any concerns, potentially adjust the pitch, and keep the process moving forward.
When investors ask where you are in your process, be honest, but don’t divulge too much detail. If you are still in early meetings, you can say something like “We are in the middle of first meetings with potential investors. We’re expecting to go into due diligence over the next 2-4 weeks and are aiming to close the round before the end of next month.” As you move into due diligence and approach term sheet discussions, keep everyone in the loop and nudge them to see if they require additional information to move forward with their process.
Keep in mind that VCs know and talk to each other. Never overstate or misrepresent where you are in the process with another firm. Exaggerating urgency or setting arbitrary hard deadlines (“we are closing the round this Friday and need commitments by then”) can backfire as well. In order for the FOMO and momentum to work, you have to legitimately have enough irons in the fire. Finally, don’t be afraid to push investors to a “no”.
Putting the pieces together
Here is an example of a potential timeline for this process, end to end:
March 1 - March 30: build a pipeline
April 1 - July 30: establish familiarity and/or access
August 1 - August 30: prepare materials
September 1 - September 30: kick off the process and secure first meetings with all prospective investors
September 15 - October 15: secure second meetings / enter due diligence processes with some investors (inevitably these will be some overlap between 1st meetings and 2nd meetings because of scheduling constraints)
October 15 - October 30: complete due diligence, confirm a lead investor, and sign a term sheet
November 1 - November 30: secure follow-on investors and close round
If you are gearing up for a raise, your pitch deck is likely the most important document to create. The last article in this series digs into this topic. If you have any thoughts / feedback, reach out via twitter (@geri_kirilova) or email (geri at laconia dot vc).
