What it takes to raise a fundraising round
As a founder of seed venture capital funds, I’m privileged to spend a lot of time with entrepreneurs during the early stages of their start-ups, when they are perfecting their ideas and looking to kick-start their careers. But as many entrepreneurs know, this challenging phase consists of negotiations, rejection, and essentially trying to convince investors to share your passion. A smidgeon under a third of my portfolio companies have closed deals in their second/third round of funding, so I asked them to share some of their tips and experiences of what it took to make it happen:
Traction - It may be obvious but all investors need to see signs of traction, whether that manifests itself as sales/revenue, customer retention (especially at the point of their contract renewing), and showing that you are able to hire the core employees that will take advantage of the money that you want to raise. Make sure you have a good reason for raising the money and a clear explanation of how you plan to use it.
Customer references - One of our portfolio companies asked their customers to get on the phone to prospective investors, and spend some time complimenting their team and validating the work they were doing. The customers’ zeal was infectious, and the investors were convinced.
Warm intros - Get warm intros from “important friends” and existing investors to VCs that know your space and are hungry to add strategic value. Once you have their attention, get them all engaged in parallel to create perceived scarcity as this will subsequently lead to a bidding war.
Support - Ensure that you engage your existing investors early on in the fund raising process. Gain their support (and hopefully their capital) and encourage them to make intros to other complementary investors. Also, make it easy for them to make the intro - create a compelling deck and make yourself available for calls and in-person meetings. If a referral comes from an existing investor to a professional VC, expect a face to face meeting and prepare accordingly.
Updates - Ensure that you send thoughtful, consistent and detailed investor updates after your first raise as it will make insider preparation participation easier.
Momentum - Overfill your pipeline of VC introductions. Get more intros than you think you need. It creates momentum and gives you choices for which partner will serve your company best.
Preparation - Prepare your data room early. You know investors are going to ask for it. Make it easy.
Determination - Sometimes just sheer and ruthless determination is needed to see things through. Ensure that you have an existing investor who will be an advocate for you with other investors. Be aware that the FOMO (fear of missing out) effect will probably take place when you start closing commitments.
Creativity - Be prepared for an oversubscribed round and be thoughtful about those investors who did not get a chance to participate. Be creative to ensure their future support (create friendships with them/follow them on social media/invite them to any events that you might host) as you never when you might need them again.
Timing - Rounds often take longer than you think so plan the timing out in advance and prepare for it take two months longer than you anticipated. If you are getting close to running out of runway then ask your investors for a small capital injection to maintain payroll. Also realise that there can be a small period of time between a signed term sheet and getting the funds in the bank. Prepare accordingly.
Due diligence - It is okay to run your own due diligence on prospective investors. Ask to speak with their existing portfolio founders and find out about what they were like to work with. If they are a new firm with an empty portfolio, make sure that they actually have money to invest. A good place to start is to check the Fund's S-1 filing: https://www.sec.gov/edgar/searchedgar/companysearch.html
Risk Assessment - Some new firms will “warehouse” investment opportunities to help them raise a new fund (most LP’s don't like to invest in a blank portfolio) or use your round to create an SPV (special purpose vehicle) to solicit investment from other investors. While this is fine, be prepared that this has a high level of risk attached to it (what happens if they can’t raise the money for you) and they might not have the resources to be able to be an active investor for you.
Process - I have seen a rise in some investors offering signed term sheets before they start due diligence and then they renege on the deal at the last point. Never let this happen and ensure that you fully understand their process before you waste your time.
We hope that you have found these snippets useful.
Best of luck