Standing On The Shoulders Of Giants — How To Find The Right Investors For Your Startup
If I have seen further it is by standing on the shoulders of giants
-Sir Isaac Newton
Good entrepreneurs always have fundraising in the back of their mind. There are three phases to the funding cycle: preparing for fundraising, in the process of fundraising, or closing one round of funding. All while thinking where the next round of funding is coming from. As many like to say, “fundraising is a full-time job” — however, does it always have to be?
Nobody argues that startup fundraising can get fairly complicated. Raise in exchange for equity or use debt financing? How about convertible notes and SAFE (Simple Agreement for Future Equity)? Then come the preferential investor terms: anti-dilution clause, liquidity preference etc. Furthermore, convincing investors to invest in your business requires a great deal of communication, presentation, and negotiation skills, as well as a dedication to due diligence in order to ensure that both parties are getting a good deal.
Fundraising can be exhausting. If the company is still in the early stages (seed and pre-seed), most of the work will be carried out by the co-founders: in most cases one or two people will have to meet with tens or even hundreds of investors, constantly update their deck and pitch, and provide everything that investors will request as part of the due diligence process.
Entrepreneurs can often find themselves running out of runway, and at this time they make a crucial mistake: out of desperation, they start pitching to a broader set of investors. Instead of increasing their chances of closing a funding round, this might prove even costlier — not only does the time spent fundraising increase, but investors that already committed might pull out of the deal.
In the early stages of a startup, the investors that you take on are crucial. These should be the type of investors that not only bring cash, but also their network, industry expertise, and even mentorship to you and your business. Despite this being a relatively well-known fact, we’ve seen entrepreneurs waste time by trying to contact and pitch to investors that were very unlikely invest in their business.
For example, a founder running an E-Commerce startup may be pitching to an angel that has never invested in anything other than EdTech as that is where his expertise and network lies. This scenario is still not the worst one: the investor will quickly turn down the offer and will not waste more of the founder’s time.
However, what about all those cases in which the investor likes the business idea but doesn’t quite click with the founders? As not much traction can be shown in the seed and pre-seed rounds, angels invest mostly on what they call “a gut feeling” — actually, they mean to say they invest in entrepreneurs they get along with, founders that remind investors of themselves one way or another. This being said, entrepreneurs may find this beyond their control. We believe that a platform like Roundly+ can be extremely useful in targeting investors (more details about it at the end of the post).
Not being focused with your pitches is a bad idea for another reason: it increases your chances of ending up with what I like to call “toxic investors”. These investors not only do not bring much added value to an early-stage company aside from money, but having them on board might be actually detrimental to the business. Most of the toxicity comes from very unfavourable investment terms.
Here’s an example given by Sprint Pirates’ Investment Director, Patrick Lou, in his latest Medium post on SEIS is the UK (check out the full post). A SEIS fund invested £50,000 into an early stage company, with their investment agreement containing charges from the startup such as:
· 5% outright broker fee totalling £2,500
· 2.5% annual management fee payable for 3 years. That’s £1,250 per year, totalling £3,750
In addition, the investor that would sit on the board of the company would have to be paid another couple hundreds of pounds each month for three years.
You could say that just over £6K in three years is not that bad, however when this cost comes with no added benefit, it should be a red flag for entrepreneurs.
Entrepreneurs often forget that once an investor has expressed his interest and offered a term sheet, due diligence should go both ways. After all, this will be a person that, like it or not, will have a significant influence on your business. This becomes even more important when Venture Capitalists come into the mix, as the influence they can exert is even greater than that of business angels.
A recommended route to take before proceeding with investors’ money is to go through their network, connect with founders of some of their portfolio companies, and get a better idea about the type of people they really are, and how they contributed to the success of these businesses.
There are many variables to take into account when fundraising for your startup, especially when you are a first-time entrepreneur. We came up with Roundly to make at least one part of this process easier. Based on Newton’s words, we hope we can be the shoulders for an entrepreneur to stand on, a reference for “discovering truth by building on previous discoveries”. We want to reduce the time entrepreneurs spend looking for funding, and we want to do this by matching them with investors that are likely to actually invest.
Roundly+ will not only show you the right investors for your business, but will also equip you with as much information about them as possible, in order to facilitate a good connection. You can read more about its complete features here.
As an early version, Roundly is up and running. Try it for yourself. The steps are simple:
1. Go through a few questions and provide information on your business
2. Within 24 hours you will receive a free investor suggestion, along with contact details
3. Contact the investor and tell him or her about your business
4. Profit???
5. If you have not reached step 4, we can offer more investor contacts for a very low price.
You’re welcome.
We would encourage entrepreneurs get in touch with the investors we provided because even if he/she will not invest immediately, they might keep you on their radar for future rounds. Who knows, maybe you’ll even get further introductions. Don’t forget: the only sensible way to prevent fundraising from becoming a full-time job is to spread the time spent fundraising over a longer period of time. Build connections early and often.
