Raising your first round [Pt. 2]
Funding is at the top of nearly every startup founders mind. Let's look at why, when, how much and the considerations when it comes to raising your first round. Part 2 of 2.
Have you read Pt. 1?
Following on from the last post ‘Raising your first round [Pt. 1]’, let’s dive into some of the more practical pieces of raising a seed funding round.
Choosing the right investors
When raising capital, you don’t want to take it from anyone who will give it… especially for the purposes mentioned above. Capital is available in many forms (dilutive and non-dilutive), in which come with different considerations. The founder-investor fit is just as important in the startup survival of the fittest arena. Problem-solution fit, product-market fit, founder-market fit, and so on.
Let’s look at how you may choose the right investors for you.
Firstly, there are several types of ‘investors’ and how they fit into the picture. Such as:
Founder(s): The first bit of capital should realistically come from the founder(s).
Friends, family, and fools: Typically the first people you turn to in the early days, because well… they believe in you. But be wary of this. You may be able to convince them easily, but often they’re not experienced investors. This can come with pressure, expectations, and even guilt if things don’t go to plan.
Accelerators: A good accelerator provides guidance, support, and limited funding in exchange for equity. Making it a fantastic option for seed stage. However, you shouldn’t rely on this to be anywhere near enough capital. Be aware that not all accelerators are created equal. Make sure you find a good one, as poor guidance can sink you.
Angels: Angel investors are high-net-worth individuals (or ex-founders), and your best friend at seed stage. Filling your round-up with good angels for your seed is always a good idea.
VCs: Venture Capital firms are pooled investor funds, and can be incredibly beneficial in supporting you from the early stage, through to later growth stages. A VC will typically lead rounds, and/or take up the majority of the round. Be aware of the dark side of VCs, though.
Syndicates: These are groups of investors (usually angels) that come together on a deal-by-deal basis (SPVs). This can be a great option if it brings together great angels and only costs you a single line entry on your cap table.
Family offices: As an investment vehicle for a wealthy family, family offices have diversified portfolios but are increasingly splashing their cash on tech. If the office is set up by a successful founder… well that can be incredibly useful.
Private equity firms: Like VCs, Private Equity (PE) also pools investor funds. However, they typically come in at later, less risky stages and take a hands-on partner approach.
Key considerations 🔑
Put together a strong, snappy one-line elevator pitch. Practice it over, and over. Think of it like your bait.
Just as you would with your co-founder, align on the top-level stuff. Find out what drives them, what their goals are and how they operate. Ask around about them–find out if what and how they do their thing, aligns with the way you do yours.
Understand their investment thesis so you’re not wasting your own time. There’s no point spending time pitching investors that only invest in certain sectors, if you’re companies not in them… Do your research.
Be aware that investors, especially VCs, keep notes on founders after meetings (or even casual meetups) as they process so many opportunities per year. Investors also co-invest into deals together. Meaning the word travels, so take a strong shot.
Find your lead: one of the most challenge parts will be finding an investor to lead your round and set the terms for all the rest. You’ll likely find a bunch of investors that are interested in your round, but won’t lead it. Because well, it’s a lot of pressure.
Create a compelling founding story–how you came up with it, what drives you or something about you and your co-founder(s). This will draw investors in, and demonstrate personality.
Get picky on terms of the deal, because, after all they will likely affect a solid portion of your foreseeable future.
Understand investors typical ‘check’ size and have a target on what you want yours to be. Sometimes smaller retailer investors will get excited to be apart of the story and offer a small investment as their ticket in. Target appriopriate investors and keep your cap table nice and clean.
Some investors will ask for a board seat, known as an Investor Director position. You’ll then need to decide whether or not to allocate them a seat on the board or not. If you’re going to, you’ll want ensure alignment and mitigate conflicts of interest.
Always ask for introductions to other investors. Especially when they’re not a fit.
When you’re a startup, you feel like you’re at odds and you should be grateful for anyones capital. But that’s just imposter syndrome kicking your ass. Remember, investors need startups just as much as startups need them.
When it comes to an investors selection strategy, they mostly look at the problem (inc. the market), the founder(s) and the team in the earliest stages. Because everything is likely to change so much, they bet on the right people to weather the storm.
This will mean you’'ll need to be able to develop solid relationships, effectively articulate the vision of your business and intimately talk to the knowledge you have of your industry.
What you will need
Before embarking on a fundraising journey, you’ll need to be prepared accordingly. There are a number of things that investors of all types will request throughout the fundraising process. You’ll need documents and resources such as:
One-pager
Pitch deck (+ one with more info). Include things like:
The problem & solution/value proposition
Market opportunity
Business model
Traction
Team
Target customers
Go-to-market
Product roadmap/future
Competition
High-level use of funds
Your legal entity documents. Including things like:
Shareholders agreements
Any IP assignments
Any founder and/or emplyment agreements
Cap table and vesting schedule
Terms of the raise
Save yourself some time and set up a data room in advance. Throw most of these pieces in there. This will speed up due dilligence and save you a headache when managing documents and email threads.
The process (what to expect)
Finally, let’s look at what a typical raise process might look like. Personally, I think it’s important to address raising with a strategy as well defined as a go-to-market. Get a solid understanding of who or what type of investors you want to bring on, why, and for how much.
Step 1️⃣: Build investor relations
Spend a considerable amount of time simply building investor relations. Network, get coffee, attend events and get as social as you can. Where investors go of course. Do this with the primary intention of pitching them in the near future, or when you’re ready.
Step 2️⃣: Pitch-mode
Go nuts. Define a target period of time (e.g. 4 weeks) and pitch non-stop. Fill your calendar with meetings and work through volume. Refining and improving each time.
Step 3️⃣: Selection & negotation
Your number one concern here should be finding a lead investor. Mark investors as ‘possible lead’, ‘hard circled’ or ‘soft circled’. Go back and forth, and remember that it is a two way street here.
Step 4️⃣: Due diligence
The DD stage can be long and tiresome. Don’t introduce any surprises here. Be prepared and lay all your cards out on the table.
Step 5️⃣: Closing the deal
Pending no spanners in DD, you’ll need to square away your term sheet with your lead investor, bring on your follow-on investors, square away the legals and receive the money. Remember, a deal is not done until you’ve received the cash. Even if an agreement is signed.
Get yourself a good lawyer, and prepare the following documents:
Step 6️⃣: Ongoing management
It doesn’t stop when you get the money. You’ll need to provide investor updates monthly at a minimum. This can be via email, call, or face-to-face. Keep them close and informed.
Key considerations 🔑
You will get a lot of no’s. Get used to it. It doesn’t neccessarily mean your startup sucks.
You will get alot of investors drag you along. Most of the time they’re not a fit, but they see something they like. Don’t rely on these guys to fill your round. Soft circle this capital and understand the conditions attached.
Raising capital takes longer than you’d expect. Whatever you think you can do it in... triple it. Then make sure your timeline works for that.
Be conscious of mistakes and refine your pitch constantly. Run a retro on each pitch. Improve each time.
Create a sense of urgency around the opportunity, but don’t come off as desperate–It’s easy to let frustration kick in after so many no’s. Without any urgency, the process will drag on much longer than expected.
Keep track of your cap table with a tool like Cake or Carta. It will come in even more useful when it comes to ESOP and your founding team.
Wrapping this up with one reminder–be kind to yourself ❤️
It’s easy to sit on the shoulders of giants, compare yourself to media stories, or think you’re not good enough. Even if you’ve done everything right, things can and do go wrong. Not all startups make it. There is an element of luck involved, but that’s for a future post–keep an eye out for upcoming post ‘Generating luck’.
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For the love of startups,
Tim