3 Core Principles On Startup Fundraising
How to conduct a successful fundraising process is arguably the most popular topic of discussion among entrepreneurs and VCs. Which shouldn’t be surprising considering how much of a science and an art it is, with a bit of black magic thrown in some would say. This post augments previous related discussions — when to approach a VC, raising a seed, crossing the series A chasm — with three core principles around raising a round.
1) The Timing aka how long before I get a term sheet and when to accept it?
My consistent experience from both sides of the table is that a successful fundraise takes 1–3 months. Perhaps goes without saying — if you have laid enough groundwork with the eventual investors then you will get quicker answers, if you haven’t then the process will be slower. If you are getting term sheets quicker than 1 month, probably through inbound interest, you are likely in the 1% of startups with the luxury to direct the process more strongly. In other words, you have higher bargaining power and could negotiate for investors that are a better fit at more favorable terms. If you are not getting a term sheet within 3 months, I strongly believe you should pause the process to analyze the reasons, irrespective of the trends in your space. The key question to discriminate then is whether it is your pitch that is not resonating (and what you should change) or if it’s the fundamentals of the business (and what milestones you then need to prove).
2) The Syndicate aka should I sign up first follow investors or a lead investor?
The evidence is overwhelmingly in favor of signing up a lead investor first in order to put a good syndicate together. Consider the point of view of a follow investor — the more clarity around a round especially around the terms, the more likely it is for a partnership to approve an investment. That said, there is definitely an alternative strategy of getting soft commits from a variety of investors contingent upon getting a good lead and then cashing it all in one go.
If you are looking to hedge between these two strategies, the best way is to parallel process as much as possible. The idea is whenever any particular conversation goes a further step you can use that momentum to push other conversations forward too. The risk is obviously systemic failure ie one negative conversation can launch a chain of nos if the potential investors are talking to each other.
3) The Visibility aka how much should I divulge that I am fundraising?
I find entrepreneurs are generally unaware of how much investors talk to each other about them, as much as how unaware investors are of entrepreneurs talking to each other about them. Point is no matter how quietly you try to do a fundraise it will reach the ears of other VCs and, at least in the US, be filed with regulatory bodies and show up on databases like Pitchbook. My general advice to entrepreneurs is to embrace the porousness and leverage it to your advantage. If you are getting interest from many parties then only follow up with a few. If you are suspicious of hearing a rejection early in the process then pause that conversation until you have enough positive signals. If you are raising a follow-on round then leverage your existing investors as ambassadors as much as possible. You cannot control the spread of information but you can certainly influence your perception.
These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). I would be stoked if they get people interested enough in a topic to explore in further depth. I work for Samsung’s innovation unit called NEXT, focused on early-stage venture investments in software and services in deep tech, all opinions expressed here are my own.