Fundraising Crunch Time
In my earlier article about Closing the Fundraise, I talked about the importance of building a pipeline of potential investors, leveraging the momentum and making the trip. An important part of the fundraising process is managing your time and getting through crunch time. Crunch time for me is the period right before you are closing the lead or anchor investor (an important milestone during fundraising). Using your time effectively and focusing on structured communication will be crucial to a successful fundraise. Here are three things I try to focus on during fundraising:
- Managing the fundraising timeline
- Different types of investors
First, let’s talk about managing timelines. You want to make sure you have a clear internal deadline for you and your team, and an external timeline you communicate to investors (first close date, dates to get documents signed, etc.). The internal timeline is used to tick off and manage fundraising to do’s. For instance, set a due date per investor with short action items: follow up emails, sending requested materials, etc. We have learned at Golden Gate Ventures to schedule weekly fundraising sprint meetings when it’s closer to crunch time. During these meetings, you only focus on the investors that have indicated strong interest and work through outstanding action items. Because it’s crunch time, the best thing you can do is act on the outstanding items during or right after the meeting (this helps you keep momentum).
Fundraising never goes according to plan. During crunch time you have to be flexible and prepared to drop everything to get investors over the line.
- Make sure your team is aware you might need to clear your schedule to close the lead investor. Postpone meetings that are not crucial to your fundraise or shift these meetings to your colleagues. Prioritization is vital during these moments. Use the “free” hours to do more research and source more potential investors (build that pipeline).
- Don’t get frustrated by timelines and deadlines. Things change along the way. Update timelines where necessary and work according to the updated plan. Realize that investors have their internal processes and timelines which they need to follow. It’s difficult to influence that process entirely. Key is to stay focused on the goal, which is getting the investor on board at the right terms. If they need more time for due diligence, make sure you’re able to answer their questions quickly and thoroughly.
Lead vs. Strategic vs. Follow on
How do you manage spending time on the long list of prospective investors?
I use the following structure to divide my time. 50% of the fundraising time is spent on the lead investor, which includes identifying the lead investor, due diligence, negotiating and closing the deal. About 30% is spent on strategic investors* and the remaining 20% on follow on investors. Every investor is important to your funding round, but with only 24 hours in a day and a business to run, it’s essential to prioritize. Why is this much time necessary for a lead investor? The lead investor typically shapes the terms for the investment and that will likely determine the follow on investors.
*There are plenty of cases where your lead investor will also be the strategic investor.
Strategic investors are typically seen as corporate investors who are seeking alignment between your company and their core business. Examples are insurance companies working with fintech startups to develop a proof of concept for a new product, or retail conglomerates working with online marketplaces to distribute products online. Other than commercial value, strategic investors can provide different added value. Think about the network investors can provide. Strategic investors can also be instrumental in the next round of funding. They could be a potential lead investor or bring on later stage investors.
Securing a Lead Investor can be a delicate process and quickly grow into frustration, especially during crunch time. In the next part, Communication, I’ll talk about my experience how to manage this process. Before we get into that, here are some pointers to take into account when committing to a lead investor:
- Understand what their typical terms are when leading an investment
- Will the lead investor terms have a negative effect on your next round of financing
- Is the lead investor local/regional? Follow on or Strategic investors might prefer a local lead investor with local knowledge and a relevant network.
- Is the lead investor a (brand)name who attracts other investors? Although investors make their investment decision based on the founders and their business, a well-known investor can be helpful to your fundraise. For instance, if the investor is known for their added value, domain expertise or for being entrepreneur friendly. Follow on, or Strategic investors would want to vet your lead investor and understand if they bring more opportunities or eventually become a risk.
Assumption is the mother of all……well, you can fill in the rest. This is why it's essential to keep an open dialogue with your (potential) investors during fundraising. So what's important when it comes to communication?
- Ask your potential investors which materials they need to get to a decision on your investment. You might assume the information in your data room is sufficient, but the investor might want to see more data on the competitive landscape or market dynamics.
- In case of a potential lead investor, ask them if they have lead deals before and what their typical terms are. A lead investor might request specific terms. Make sure these terms are clear and talked about early in the process. You don't want any surprises during crunch time. In that same line of questioning, you can ask about their investment process and typical timelines. Note that some investors might be optimistic about their own timelines. Always add a 20% buffer to avoid disappointment.
- Talk about your own expectations, process, and timelines with the investors. Doing this early makes your life a lot easier. Do you have a fully up and running data room? When in the process do you want to share detailed information? After the first meeting, or after the investor expressed genuine interest? Are you offering site visits and management interviews? Do you offer client references? Do you want the investor to work within a certain timeline and does that align with their internal processes?
Like everything else, you’ll get better at fundraising the more you do it. Unfortunately, there are no short cuts. I tried (see below) and it didn't work out.
The good news is you can manage and control your own process. Don’t get frustrated but adjust your process and expectations as needed, and keep your sights on the end goal.
Partner @ Golden Gate Ventures