Raising funds is a tough challenge for founders, whether in recent years or during the pandemic. We often hear experienced founders themselves saying that fundraising is like being in show business: it is important to create excitement for your company, to make the process dynamic, and assure that there is constant progress both on the commercial side as well as in terms of fundraising progress.
Fundraising Strategy 101
In general, there are two strategies: you can either create a big buzz, operating in an exciting space and leveraging a commercial momentum in order to receive a pre-empted funding round, or you can run a more structured fundraising process. In any case, make sure that you are prepared: have your materials and data in place, have a realistic time plan, and do not create a sense of urgency for needing those new funds (this may have a negative effect on your negotiation power).
A hint: receiving a deck in Jan 2021 dated with Sept 2020 will raise a question mark. Read our article to double-check which information you should always provide.
The first approach of creating a buzz in order to trigger a pre-emptive funding round will likely enable you to spend less time on fundraising itself (and likely more on building traction, marketing, and PR efforts).
However, you should keep in mind that it may come at a higher cost: according to Y Combinator, pre-emption can actually be more dilutive for founders than one might expect. On average, founders taking preemptive offers are taking ~1.4% more dilution for less money.
The second approach often lets you optimize the setup and terms as you take more time to gather the best partner for scaling your venture.
Whatever approach you choose, we’ve come up with the following questions that you can use as a fundraising checklist in preparation for your first or next round depending on the stage of your business.
Question 1: What is your story?
Your story should be addressing the 5Ts:
Who are you and why do you do this?
A hint: investors love to see mission-driven founders and teams that are ready to go all the way, that will grow faster if they can grow faster.
How big can this be? Are you addressing a problem in a huge market?
A hint: investors want to also see a bottom-up analysis and feel confident that you have done your homework regarding underlying assumptions. We get skeptical when we hear “we will have a 3% market share of an xB market…” without being able to outline the assumptions behind it.
Tech & Product
How unique or defendable is your solution?
Is there momentum? It is often more about the growth/dynamics, rather than absolute numbers.
It can also take 5 years to get to 1 million ARR or 1 million users, indicating a lack of momentum/dynamics.
We want to see that additional capital enables you to grow faster than you would without that extra capital boost. Depending on the stage, investors want to see different things: while at a later stage we need to see proof points for monetization, scalable go-to-market strategy, and retention, in earlier stages we might as well be happy with an impressive signup list of prospective users/customers and a commitment for working on retention.
Why now? What has changed, what makes it an outstanding opportunity right now?
It can be a social inflection point, a tech inflection point, certain market dynamics resulting e.g. in a significant pipeline that can be converted with additional resources.
Question 2: How will you use the additional funds?
What will you achieve with the additional capital?
We want to see a feasible and ambitious plan for how you will use the capital, showing that you know what moves your business forward, that the company will reach certain milestones until the next funding round increasing the company’s value.
A hint: sometimes raising too much can backfire, we have seen companies with a too-big buffer in the bank account that lose the sense of urgency/focus for bringing the product to the market and starting generating sales.
Question 3: Which investors are a fit for my startup business? Who do I want to partner with?
We cannot stress this enough: conduct proper due diligence on investors, joining forces is like getting married! If possible, try to partner up with investors that you already have a very good relationship with, who have had time to get to know you and the company, and are excited about the space you’re in.
Find investors who can really help your business!
Identify the right investors using the following proof points relevant for each stage:
Seed investors want to increasingly see a product/market fit, first traction (revenue, user engagement, …). Top investors expect to see metrics like 20% MoM growth in this early stage
A product with a promising story
A big market
An outstanding team: quality of the founders and team
Showing that the capital can help to grow and reach the next milestones
Round size: typically $500,000 up to $4 million
Series A stage
Ask yourself: is my company ready for Series A? How much significant progress have you made since your last funding round? How much time has passed since your last funding round?
Track record and first metrics that prove that your promising business can be turned into a successful one, proof of product and its market fit; have all your growth metrics prepared (e.g. established user base, consistent revenue figures, first scaling to other markets, other KPIs)
A clean cap table: communicate with your early-stage investors and bring your cap table in order
Show how additional capital will help you grow your business faster
Round size: typically $4 million to $15 million (but of course with outliers)
Later stage – Series B, C, and beyond
In-depth metrics that prove the promise of your product and its market fit – have all your growth metrics prepared
Ability to develop new products, expand into new markets, or acquire other companies
Building a winning product by growing your team with quality talent acquisition: e.g. business development, sales, advertising, tech, support, and employees
Round size: typically $15 million and beyond.