The Importance Of A Fundraising Strategy And How To Make It
Why are you raising capital? How much are you raising? What will you use the money for? I have one word for you today; Strategy!
This is the fifth episode of a 10-part Fundraising Series originally published on The Celestial Podcast.
Yes, today is all about getting clear on your fundraising strategy, so you can show up prepared and kick off your round with confidence and clarity on what you’re getting yourself into.
To kick this off I have a quote from a serial entrepreneur and investor named Maximilian Fleitmann:
“Over the last couple of years, I have accompanied dozens of startups from the beginning of their fundraising journey through the closing of the deal. In studying these startups, I’ve noticed that the main difference between a founder who is good at fundraising versus a founder who has problems raising funds is the structure of their fundraising process.”
In other words, what he is talking about here is your strategy. How you will approach your fundraising, which investors you are going to look for, and the process behind both the preparation and execution of your round.
What is a fundraising strategy, you might ask?
A fundraising strategy outlines, simply put, how you plan on going about raising investor capital. A fundraising strategy is ideally a written document, not too complex or long at all, but just a simple one-pager that answers the most important questions about your upcoming round. The point of this is not really the document itself because nobody else will see this, but more so the thought process and conversations that you and your team will have to go through in order to get clear on what goes into the document.
A good fundraising strategy, at the very minimum, answers these five questions clearly:
Why, How Much, Who, When, and How.
Why are you raising capital? How Much capital will you raise? And this should be both now and in the future. Who are you raising the capital from? When are you raising capital? Also now and in the future. And finally, How will you go about raising the funds? So what’s the process you will execute on in order to successfully raise your round?
In this post, I will cover each of these questions and how to structure your fundraising strategy and plan, and how to best prepare for your upcoming round.
You can also check out a Fundraising Strategy Template and Checklist that I made as part of this post, to make it a bit easier for you. You can find that here.
Let’s get started.
Why are you raising capital?
Whatever the stage of your startup, whatever your goals, whatever your valuation, one thing will always be required — the reason why you are seeking investor capital. Diving in unprepared and without clarity as to why you’re talking to investors in the first place is one of the most certain fast track to flopping on your round.
I meet a lot of founders that are not clear on why specifically they are raising money, and too often I hear the “well, isn’t that what all startups do?”. To put it very bluntly, that simply is not a good enough answer and will make you look a bit like an amateur. And we don’t want that.
5 reasons why investor capital will benefit your company
I suggest you sit down and take out a pen and paper, or open your notes app, or whatever you use, and then you list at least five ways your startup would benefit from the capital that you will raise for the company. And be very specific here.
There is a very large distinction between having to raise capital because you are running out of money, which is never a good place to be in, and raising capital because it can genuinely fuel your team and company to reach the next large milestones on your journey towards becoming a successful business.
It’s easy to come up with five reasons you need the money, but really investigate if these reasons will satisfy an experienced investor who will surely dig deeper into what the money will be spent on? An answer like “we will invest 30% in marketing” is not good enough. Unless you can also answer what your specific marketing metrics are, like funnel conversion rates, customer acquisition costs, customer lifetime value, etc. And in this case, that you can show that investing the funds into marketing will quite surely produce a great return on investment for the company in terms of how many new customers you can get, and what monetary value that will add to the company — and it’s future valuation. If you got that down, or feel close to it, then certainly, feel free to say that 30% will be spent on marketing. In that case that’s probably a very good bet on where to put the money to best use to propel your company forward.
These 5 reasons should of course be aligned with your overall strategy and business plan of where you are going, how you will get there, and everything in between. A note on this; your plan of raising investor capital should naturally come from your business plan in the first place because this is the overarching game plan for the type of company you are building, dictating why external money will benefit you and investors greatly.
Which major milestones will the capital enable you to reach?
Besides the 5 reasons, I suggest you get clear on your objectives and milestones that this investor money will enable you to reach. What will this capital enable you to do? Which large milestones can you reach? Can you get to the next milestones faster by raising money?
Write down the major milestones that will be the most impactful for your company to reach in general, with or without investor capital. Which milestones and reaching them, will truly move the needle for you in terms of becoming a successful company with paying customers?
If you don’t have a condensed business plan besides the things that go into your deck or have a written strategy for that matter, a framework I swear by and use myself is The 2-Page Strategic Plan made by Gino Wickman, the author of ‘Traction’. The 2-pager makes it easy for you to fill in the most important milestones and really get into the deep thoughts of if you have all aspects of your business covered in your strategy. You can find the resources and templates from the book here.
Without your reasons for why you will raise investor capital, as well as the major milestones that that money will enable you to get to, it can be quite difficult for investors to understand what the whole point of investing in your company actually is.
You want to be clear on why and how specifically this capital will contribute to you building this company. How will the amount be allocated, to which areas of the business, why is that important, and where will that take you?
How much capital will you raise?
From figuring out why you want to raise investor capital, you likely have an idea of how much you want to raise. Here it’s important to get very specific on the amount and what the money will go to because it will ultimately be what investors want to know as one of the first things, it will dictate what you will be able to do and how fast, and it will impact your dilution in the company.
I suggest that you look at the major, specific milestones, and reasons for why you want to raise capital, and have those in front of you. With those, you should now figure out what you need to make those milestones a reality. So that would be which resources you need in order to execute on your plan to reach those milestones — people you want to hire, technology, tools, platforms, marketing, consultants, and so on. Basically, everything going into your budget.
Yes, you guessed it. It’s time to make your budget if you haven’t already.
Make your budget
Building an accurate budget is not always easy, especially for early-stage startups with limited historical data to forecast with. The biggest items in a budget are usually payroll and HR expenses for the team, equipment, marketing, legal, and your stack and technology.
Base your numbers on facts and realistic assumptions. For example, if a top-level engineer is required for you to get to your next milestone, research what the average salary for this profile is in your region, or where you want to hire them, and then base the numbers on that. It won’t serve you, or your future investors if you underestimate the amount you need or the cost of, in this case, bringing on a skilled engineer. You will simply just run out of money faster after you have finalized the raise.
You can approach this in two different ways. Either by answering how much cash and thus resources you will need to get to a significant and impactful milestone. For example, x amount of customers or partnerships with fancy brands x and y.
Or you determine it based on how much cash you will need to operate for the next 12–18 months with hypotheses of the milestones you will work towards in that window of time. For example to ‘find replicable customer acquisition tactics at a low customer acquisition cost’. The latter is usually if you’re early stage and still experimenting with elements such as your product-market fit or your go-to-market.
In any event, the amount you’re asking for must be tied to a believable and realistic plan. If you have no data showing that you can consistently acquire new customers at a certain cost, then it’s wishful thinking, projecting that you will reach 1 million paying customers 12 months from now — even though that would be pretty great. So be aware of the underlying drivers that make your milestones possible and believable. In this example of 1 million paying customers that could be your funnel conversion, acquisition costs, and your other marketing and sales metrics.
You don’t just want to pick an arbitrary number and base your round on what others raise. There definitely are benchmarks for the size of different rounds throughout the journey as an entrepreneur, but it always has to be rooted in your own company, at this moment in time.
Ideally, you want to forecast the funding needs throughout the entire lifetime of your business, so investors can see the clearly defined milestones — your key metrics for example — and how much funding you will need to get to the end game, however that looks. I know this can be hard, but at least make sure you have an idea of the long-term plan, milestones, and funding needs.
A note on your valuation
How much you’re raising is also determining your valuation and your dilution. Your valuation in the early days is usually derived from different factors, including your team, your proven track record, the market size you are addressing, and the risk associated with your company.
You can check out how I suggest you can go about setting your valuation in this post: ‘The Basics Of Fundraising’, or listen to this Podcast episode covering the same topic if you prefer:
Who are you raising capital from?
There are different types of investors. And even the types of investors, say Business Angels, or Venture Capitalists, are different. They each have their own preference of which types of companies they invest in to, how much they invest, and often also geographical and industry preferences.
You want to make sure that you are looking for the right ones and don’t waste your time speaking to VCs if you’re really looking for a very early stage round of $100,000 for example, where Business Angels would probably be a better fit for you.
When you know your milestones, the why behind raising investor capital, when you know how much you’re raising, and have your budget and allocated what the funds will go to, you are ready to find out which investors you should be looking for.
Get clear on which investor type, industry, geography you will be looking for, before anything else. You already know which industry and market you’re in, so start reaching out to investors that are looking for companies in that area. If you have an e-commerce business, a VC focused on Gaming and the Metaverse will very rarely invest in your company. So don’t waste your time and energy, and focus on the ones that specifically focus on e-commerce, in this example.
How to find investors
“A warm introduction is by far the best way to meet a new investor.”
The way I would get in contact with the right investors today would be to reach out to people I know in my local network and ask for referrals. A warm introduction is by far the best way to meet a new investor. To get a great referral, start connecting with industry leaders, mentors, peers, and those who have already navigated the fundraising landscape in your industry.
- Look online on LinkedIn, Crunchbase, AngelList and see if you can get a foot in the door with some investors there.
- You can also reach out to Angel Networks globally and locally. This way you can get in touch with many at once instead of one at a time. You can search these networks up on Google by searching for something like “angel network [your region or area]” or “angel investor network [your region or area].
- Ask your advisors such as accountants and attorneys. They likely have a network of clients that might be investing. Maybe they could give you an introduction?
- Reach out to founders in your industry who raised before and ask about their investors and if they would be willing to introduce you.
- You can also reach out to early-stage VCs and ask if they could connect you with some of the business angels they work with or know that focuses on your industry.
A good idea when connecting with investors is to conduct your own due diligence on them. Reach out to companies they invested in or other people that know them well, and ask how they are to work with, and how active they are in helping out, and how they are as a person in general.
Choose investors that will not only provide the capital but that also truly believe in you and stick with you through thick and thin. Ideally, you want to bring on investors that are somewhat active and will help you through to the next major milestone — and hopefully much further.
When are you raising capital?
Your timeline and timing matter — a lot. The timing of raising capital can influence you in so many ways, but most tangibly in your valuation and dilution. You want to raise capital from a position of strength, and not 3 months after you launched your monetization model and all you still hear is crickets. Not ideal. You want to raise at a time of most momentum and progress, where it looks like the company might very well take off or hit the next major milestone quite soon.
As a rough guide, you should raise money when you have figured out the market opportunity, who the customer is, and when you have delivered a product that matches the needs of customers and is being adopted at an interestingly rapid rate. It’s not always possible to have all of these in place in the early stages, but the more of the factors you can establish certainty around, the stronger of position you will be in when you raise your round.
I suggest that you look at your overall plan and projections, and then figure out when you will have enough traction or proof of achievements that it will put you in a strong position to raise capital.
Investors also need a bit of a push and incentive to take action on investing in your company, so I suggest that you make a timeline and set a closing date for the round, so you can communicate which date the investment round will close.
Be realistic here. If you just started the round, and say “we are closing the round in 3 weeks”, not very many investors will believe it, and won’t take action on the urgency anyway. It usually takes longer than that, even though some rounds do happen in a matter of weeks.
How will you go about raising the funds?
You should have a plan. Fundraising should be approached and managed as a process. Where will you manage your investor contacts? Which channels will you reach out to them on? What is your short 2-sentence pitch gonna sound like? Which documents should you have ready to send out besides your pitch deck? Who can connect you with the right investors?
You will make your own life so much easier if you set up and even automate some of the processes and prepare as much as possible. Have all the documents ready before you kick off the round, do your research on which investors would be ideal for you, know your numbers and metrics, and have your pitch deck in different versions (or be prepared to make different versions) ready to start sending out, and have your documents ready to share on a link you can send out easily.
I covered how to make your pitch deck in these two posts: ‘The Basics Of Fundraising’ (covers the 10 essential slides you should have and how to make them), and ‘How To Make Your Pitch Deck — A Practical Guide’. Both episodes can also be found on the Podcast:
Prepare your document package
I suggest you have these ready. The more you raise, the more you should expect to prepare.
- Your pitch deck
- One page introduction
- Budget and P&L depending on how old the company is
- 3-year projections on financials as well as key metrics such as revenue and customers. A good idea is to include your financial model, so your business model, so there’s no doubt how you intend to make money over time
- Your Key metrics and KPIs and how they have evolved over time — for example product metrics, marketing metrics. This one is more in-depth than in your 3-year projection
- Your cap table
- Important contracts with partners, employees
- IP documentation
- I usually also include either a term sheet or the final investment documents if it’s an early-stage round. Then the investors can already see how I intend to execute the round and they can give feedback or negotiate based on that instead of having to wait till the last minute.
How many of these and how well polished they depend on the round you’re raising. If it’s the first round and you just started out, a deck and a budget might in some cases be enough.
Set up an investor CRM
Another thing I always do is set up a CRM with the sole purpose of managing all my investor contacts. You can for example use Hubspot. Some of the workflows in there can be automated and the first board is free. Here you can store the information you have on each investor and make sure that you’re following up on all leads. Here I would include:
- Phone number
- Which type of investor they are (BA, VC)
- Ticket Size ($)
- Round focus (Seed, A, B, C)
- Industry focus
- And notes on my last conversation with them and what I promised to send as a follow-up
- Geographic focus if it applies.
- And possibly their LinkedIn and Twitter URL depending on who they are
And remember an early-stage round usually takes 2–6 months to raise, depending on how prepared you are, and how much you need to tweak to make the investment case ‘click’ for investors. So make sure that you start with plenty of time to spare, and way before you run out of money.
Final note
The final note I want to leave you with before wrapping this up is that either you’re fundraising or you’re not. The in-between dance with a lot of uncertainty can make you look a bit unprofessional and possibly scare investors off, because “how can you not know if you’re raising capital or not?”.
If you’re in doubt about what to do and want to talk to investors, ask about advice specifically and ask for their input on what to do and how to go about it. Asking for advice is cool, just don’t be on the fence.
That was all I had for you today. I hope this gave some insight into how you can best put together your fundraising strategy, so you can kick off your round with clarity, intention, and confidence.
And again, you can find the Fundraising Strategy Template and Checklist here.
If you have feedback, questions, or topics for me to include here or on the podcast, please feel free to reach out to me at hello [at] celestialpodcast [dot] com. I would love to hear from you!
This is the fifth episode of a ten-episode Fundraising Series originally published on The Celestial Podcast. Here we focus on fundraising for entrepreneurs — all with the purpose of helping more women, in particular, get knowledgeable and confident about fundraising, and to increase the current <3% of investor capital going to female-founded companies.
If you feel a bit overwhelmed with your upcoming fundraising round, then check out my course: “Flawless Fundraising for Founders” here.
Listen to the Podcast episode version of this post here:
