Fundraising. “A necessary evil.” “The worst part of the job.” “An exercise in surviving rejections.”
Almost all startup founders feel this way about fundraising. Admittedly, there are a few who enjoy the process, but they are very rare and often they are hiding in the fundraise activity to avoid the reality of the business.
Fundraising doesn’t have to be the bane of your life. No-one expects a founder to ‘love’ fundraising, but you don’t have to hate it either. With the right mindset, preparation and desire, your next fundraise can be more predictable, timely, and successful.
Before we go through the three main phases of a fundraise and provide some tips, hints and tricks to help you, let’s establish a few key points that most venture participants would agree on:
- You, the entrepreneur, were born to change the world with your business and idea. Very few founders wake up in the morning and scream: “Hello, world! Today, I am going to fundraise!”. Starting, scaling, growing, and sustaining your business should be your North Star.
- But… your startup will need capital to grow, especially in the early stages (i.e., prior to Series A and/or securing dependable, recurring revenue and being sustainably cash flow positive), and that capital is almost always going to take the form of trading equity to investors in exchange for cash.
- Most founders will face the ‘chicken & egg’ dilemma at least once in the life of their business. This refers to the situation of needing to fundraise in order to achieve a business growth goal (often revenue), but needing to have already reached that milestone in order to fundraise. Or simply: “I can’t raise if I don’t have recurring revenues, but I can’t generate recurring revenues without a raise.”
Every business is a snowflake: totally unique and incomparable to any other business in so many ways. However, there are more comparisons than contrasts that one can take from ten years of investing in over 350 startups. Whilst this article is based on a ‘sample of one’ (and that one being SFC Capital’s team and portfolio), we think we have some experience worth sharing.
If you have made it this far, read on. The hints, tips and tricks for how to secure investment in as little as four weeks are coming up.
We have broken the investment process down into three distinct phases.
Phase 1: Approaching investors
During this phase, you will be delivering your investor/pitch deck to various investors: funds, angels, syndicates, and more. You might also be considering crowdfunding platforms, but as they usually require 30% or more of the capital to be pre-raised, we will ignore them in this article.
TIP 1: Be selective
Most (if not every) investor has some sort of specialism or preference. Some are sector-specific, others are life-cycle-stage specific. Some invest for tax benefits as well as financial upside. The point is this: be as picky as they are. Don’t take the ‘spray and pray’ approach of sending your deck out using a mail-merge to every fund and angel that ChatGPT can generate for you. Be selective and purposeful in who you send your deck to, and as much as possible tailor your covering email to their thesis. Not sure which investors to target? Look at your competitor and peer companies who have raised funds and see which investors participated (LinkedIn posts are great sources for this). If they invested in your sector previously, they will probably invest in it again.
TIP 2: Use some tech on your deck
When you send your deck as a PDF, you have no way of knowing/tracking if the recipient has opened the deck. Investors, especially funds, receive 1000s of emails and decks a year. Consider if you can/should share your deck via a docusend link (or similar) so that even if you don’t get a reply email, you can see who has accessed your deck and when, and reach out directly.
TIP 3: Structure, structure, structure
There’s a reason why most pitch decks follow the same structure: numerous studies have proven it works. Follow the market on this one. You will undoubtedly have more exciting ways to tell your story in the first pitch meeting/call, but when it comes to your deck, keep it simple, clear, and enable the reader to follow the logic because every slide is part of a familiar narrative. You will need 10-15 slides that clearly and concisely describe your business model, traction, team, market potential and execution plan.
TIP 4: Show your achievements
Even early-stage startups must show what they have managed to achieve before asking for money. Do not approach investors with just a concept. The least you can do is some practical market (customer) research that shows a real need for your solution, and that it is capable of commanding a price (i.e., it is monetisable). Remember the goal here is to prove you are an entrepreneur who can deliver.
Phase 2: Meeting investors
So, your deck has been catching fire – what next? Investors will want to meet you, and nowadays that first meeting is usually online. This meeting will help investors to get more information about your business and, most importantly, a better understanding of the people behind it. This is your time to really shine!
TIP 1: Respond to questions
Investors will be asking specific questions and they will expect precise responses. Talking too much and touching on numerous different points will make any investor’s job more difficult. A long meeting might be less productive than a short one. This meeting might be the investor’s first of the day, or it might be their tenth. Don’t use twenty words when five will do.
TIP 2: Be likeable and professional.
The impression that you make as a person is sometimes more important than your deck or business plan. Tech stacks and revenue models can be fixed. Attitudes and mindsets are much more permanent. How you come across is very important and investors want to work with people they trust. This is especially true when you are raising funds for the first time and the business is very early-stage. Investors in these businesses are, first and foremost, investors in people because, at this stage, there is often not much more in terms of tangible assets than you!
TIP 3: Demonstrate your product.
Whatever it is, make sure you can explain it in an easy and simple way. If you can demonstrate your product and how it works, that’s even better! Put yourself in the shoes of your investor: after the meeting, can they turn to their colleague or spouse and explain your business/product in one minute or less?
Phase 3: Closing the deal
By now, you have hooked a few big ‘fish’, right? Time to reel them in. There will be a few more meetings (usually online, but sometimes in-person) to carry out proper due diligence on you and the business. The investor will be looking at the risks, opportunities, and potential of the business.
Depending on the circumstances, the investor might offer an amount of money in exchange for a percentage stake in the equity of the business, or they might negotiate or accept the offer you made to them previously. Sometimes, a Term Sheet is involved (a topic for another blog post).
TIP 1: Be responsive
Due diligence will be an exercise for you to provide a lot of different information and documentation. Delaying this, or not responding to questions clearly and completely will delay the fund raise. Try to see this as a chance to carry out a ‘spring clean’ on your business: it might be gruelling at the time, but by the end you will have a tip-top operation – and, hopefully, a healthy bank balance!). Keep track of all the questions and your answers, as these can also form the basis of an ‘Investor Handbook’ (another topic for another day).
TIP 2: Walk a mile in the investor’s shoes
Investors may propose some terms that initially might not sound great. For example, they might want to be appointed as directors, have a say on your salary or expect you to keep a minimum bank balance. These are precautions to make sure your business doesn’t go off the rails. The investor will almost certainly have a smaller stake in the company than you, so they will be looking out for the best interests of the business. Also, bear in mind that early-stage investing is very risky, and investors expect to be reasonably rewarded for taking the risk.
TIP 3: Avoid valuation consternation
Negotiating with various investors at the same time to reach the highest possible valuation – or passing on a deal in the hope of achieving a better valuation in the future – is not the best strategy. This doesn’t mean that you should accept any valuation or that you cannot negotiate, however valuation shouldn’t be a deal breaker. Proper investors will propose a valuation that is fair and represents the value, risks and potential of the business. They also want you to be motivated, so it is not in their interest to undermine you. Remember, it is better to own 20% of a business valued at £100m (£20m), than to be clinging on to 50% of a business valued at £15m (£7.5m).
In closing
Four weeks is a long time in business. In May 1995, the first prototype of JavaScript was implemented by Brendan Eich in only ten days. Liverpool striker Luis Suarez scored ten premier league goals in a month. When the world’s largest office building, The Pentagon, was approved on a Thursday, Brehon Somervell had the plans completed by the following Monday morning.
You do not need to be Eich, Suarez or Somervell to successfully fundraise in a short period of time. Just follow the above steps and tips and that ‘necessary evil’ will be swiftly and successfully delivered and in your rear-view mirror – until the next fundraise round!
