Having witnessed countless fundraising processes from the investor side as well as having supported more than a handful myself, I can tell you one thing for sure: every fundraising process is different, simply because people are involved. However, there are a few best practices that you can follow, and I’ve summarized these here for you. Use wisely, because the most important factor in fundraising (as in any human interaction, for that matter) is staying authentic!
1. Tell a great story
The key to fundraising really is to be able to tell a great story — I’ve therefore dedicated an own blog post to this topic: How to create a great (fundraising) storyline.
2. Don’t lie or omit important truths
Admittedly, there is a fine line between not highlighting your weaknesses (which you should) and omitting important truths (which you shouldn’t). But I’m convinced any capable human in reality knows when they’re crossing that line. It’s probably fine to not tell an investor that some of your employees are unhappy with the intra-company communication (instead, just fix it). But not telling an investor about an impending lawsuit is a definite no-go.
Lying might get you the money for this round, but I promise you it will affect any future relations with this investor (and likely all other investors too — the scene is small). I’ve supported an investor on a due diligence process for a startup where I would keep finding new issues that they hadn’t told us about (e.g. one of the co-founders was planning on leaving by the end of the year — which they didn’t tell us, but it was reflected in their business case). No matter how interesting the case might have been, there was no way I would have recommended an investment in this team.
3. Be prepared for standard requests
Have your documents and numbers ready before you start reaching out. It might seem obvious, but I’ve actually experienced very few founders who’ve followed this practice. I would ask for a financial plan and sometimes only receive it 2 weeks later — or have the founder tell me straight out that they still have to create one. The same happened when asking for cohort analyses and an overview of key KPIs. As an investor, this made me question the fact whether the founder was in control of the financials and whether the company was really managed in a data-driven way. Having worked closer with startups, I now realize that the perspective that investors have on startups is often different to how operations really work. But not every investor will have made this experience — so make sure that you have the standard investor requests (i.e. key documents and analyses) ready for your fundraising process (read this blog post if you’re unsure what these are).
4. Update your documents
This is an easy one but all the more embarrassing if you don’t follow it: make sure that your documents are always up to date. Sometimes, your timeline won’t work out the way you’d planned it (OK, actually most of the times), but you really don’t have to be in-your-face about it. I’ve had founders reaching out to me for the first time with a pitch deck that was dated six months earlier. What did that tell me? Obviously the fundraising process was so unsuccessful that now they had to start a second wave of reaching out — again: not uncommon, but you don’t want investors to know that they’re only the second (or third/fourth/…) choice because you weren’t successful enough to get your first choice.
There are a few indicators that point to the start of the fundraising process: you might have directly stated dates in your pitch deck, you’ve included graphs that show KPIs of your business according to months and you show actuals vs. plan numbers in your financial plan. Update these once a month or at least every second month to be up to date.
5. Plan your fundraising timeline
Speaking of timeline, it’s important that you plan your fundraising meticulously. First of all, take into account that investors are humans as well and they will follow the same holiday practices as everyone else (business angels even more so than fund investors). So, expect very slow response rates around Christmas and Summer OR start your fundraising so the process doesn’t fall into these times. An additional plus is that investors are keen on closing deals before these periods, meaning they will work over-time to make it happen — so generally the best months to start fundraising are September and January to April.
Secondly, and even more importantly, make sure that your fundraising process matches your business cycle. What you want to avoid is that your growth rates decrease as the process intensifies. Once you’ve spiked investors’ interest with your pitch deck and first call(s), you want to be able to communicate great week-over-week and month-over-month growth in users and revenues. In practice, if you know that December is a strong business month for you, it makes sense to be fundraising around that time.
I’ve seen lots of founders set a strict fundraising timeline, e.g. telling investors they want to close the round 3 months from today. While it might ensure that investors respond in a more timely fashion, this is a risky move because (as mentioned) lots of things can go wrong and investors will question why you didn’t close in the set timeline. I guess this is a judgement call and it can work really well in certain situations, but I would not recommend doing it.
6. Support every claim with numbers
Investors love numbers. Venture capital investing is not a science — especially in early stage — but investors tend to be very analytical people, and they love any hard proof that your business would make a good investment. So, make sure that every story that you tell and every answer that you give is supported by numbers. If the question is, “How do you feel about expanding to another country?” (hint: they don’t actually want to know about your feeling), your answer could resemble the following: “We were incredibly successful in expanding to our second country. With a limited budget of 200k EUR we reached over 4M EUR ARR from 10 customers after only 6 months. With the learnings we’ve generated we will be able to achieve the same results in our next country with a budget of only 150k EUR.” And if you’re asked whether your customers love your product, tell them about your NPS, your Google rating and the number of returning users. I think you get the point.
7. Know your numbers
This concept, similar to the one before, is again to show investors that you’re numbers-driven. In managing your business it’s not necessary to learn every KPI for every point in time by heart, but investors do expect you to do exactly that. If you find it difficult to memorize the numbers, a good trick is to write the most important numbers somewhere on the wall where you can see them during investor calls (most interactions with investors are virtual anyways, even pre-Covid). What are important numbers? Depending on the type of business these will include: number of users/customers, revenue/GMV, costs, burn rate and marketing expenses — and rough year-to-year growth rates of each, as well as number of employees, annual run rate, cash-on-bank and runway.
8. Hit milestones with your financing rounds
Somewhat related to the last point is the concept of raising around milestones (Ashley Lundström from EQT Ventures mentioned this to me and I love the idea). What did you achieve with each investment round? Let’s say you raised 500k EUR for your Seed round, what did you spend the money on and what did you achieve with it from the day of the closing until your next financing round? Good examples are concrete product improvements or key hires that you made and the corresponding traction or achievements on the other side.
The same concept then applies to the current investment round: what are you raising the money for and to which important milestone will this get you? While investors like to highlight that there is no standard Seed or Series A round, there are in fact a few milestones that you should hit in order to get to the “next level” (i.e. investment round). For a Series A this will often be getting at least one important brand as customer or expanding to a second country, and a specific amount of GMV or revenue. Check out the Point Nine funding napkin for an idea of these milestones. Investors will feel much more comfortable knowing that you’re able to make good use of the money that you raise AND it shows that you know how investors think.
9. Above all: Create FOMO
I’ve kept this for last, but — if mastered — it’s actually the concept most likely to ensure success in your fundraising process (it’s a good thing you read the article to this point). FOMO — the fear of missing out — is a powerful concept because it’s what investors are most scared of: who wants to have missed out on investing in Uber when they had the chance? Lots of venture capitalists keep an “anti-portfolio” list of companies that they did not invest in that turned out to be winners — which in terms of return is even worse than investing in a failing startup (remember that VC funds rely on “fund returners”). The idea of creating FOMO around your deal then is to make the investor feel like they could potentially be missing out on the deal of their lifetime. So, how do you do that?
The easiest way to create FOMO is by giving the impression that lots of investors are interested in the deal and that things are moving really quickly. You can prove this for example by giving updates whenever you’ve received further commitments from investors (e.g. send an email that says you already have commitments for 60% of the round, but you would love to have the investor join the round and how is their due diligence process evolving?). But don’t forget that investors talk to each other, so make sure that these commitments are not made up (referring to point 2 of this article). Another option is to have several of your contacts reach out to the same potential investor — this can give the impression that your deal is the talk of the town. However, this has to seem very natural, because if the investor realizes it’s a set-up, it will have the opposite effect and seem desperate.
A last, neat trick you can use is to reach out to the most promising potential investors and tell them that you will be in their city for two days this week (of course, spontaneously) and whether they’d be available for an in-person meeting. If done right this gives the impression that you’re in advanced talks with an investor in this city and it can be very powerful in creating FOMO (make sure that your available time slots reflect this “meeting” with the other investor).
If you know of any more tricks and best practices that have worked in your fundraising process, I’d love to hear about them here! Reach out to firstname.lastname@example.org — of course, also if you are planning to fundraise and are in need of a fundraising consultant.