Fundraising Etiquette: A Guide for Founders

If you are the founder of a technology company, fundraising will be an activity of critical importance for the success of your firm — whether you like it or not.

Some founders are natural talents in conveying a fundraising story and creating investor interest. Others convince with a strikingly good team, model, product or traction. Regardless of how you aim to convince investors, we believe that there are some important principles that founders should follow to make the most of this process.

Preparation is everything

Once you have figured out the right time to raise additional funds, which is when you are able to execute the fundraising process professionally, you should kick-off the fundraising by setting a goal. Define the amount you aim to raise and the valuation you want to achieve. While it is important to define a clear goal internally, you should not so openly communicate it to the outside world just yet — we will discuss later why.

You should also think about the characteristics of an ideal partner. Some startups might optimize for valuation when choosing their VC, while others seek particular industry expertise, reputation or other kinds of support like recruiting or debt access from their investor. Always keep your “favourite” investors close, and engage in informal conversations with them along the way, even before the actual fundraise. This increases the probability that they will preempt the round, meaning an offer to invest in you even before you start actively seeking money from others. Otherwise, you can quickly warm up the conversations when the structured fundraising kicks off.

Also, define a rough timeline during which you want to have first calls, provide data room access, facilitate deep due diligence, aim to receive first term sheets and finalize the fundraise. Accurate timing is particularly important to achieve competitive dynamics by receiving multiple term sheets in parallel. If you receive term sheets within a similar range of time, you have a much better position for negotiation. However, you shouldn’t be too harsh in adding artificial deadlines. Instead, communicate clearly the time ranges for the different respective stages. Putting too much pressure on investors might push them away, and therefore might prevent them from undertaking adequate due diligence.

Next, develop a strong storyline. Creating a storyline takes time and many loops of iteration — so start well in advance of the first investor calls. Discuss preliminary ideas with the management team, existing investors and advisors to achieve the best possible result. A good story typically covers: the team’s strength, major milestones and achievements, and a grand vision with a clear roadmap to success. It can help to start formulating the story on paper during the process and develop a draft for a pitch deck. Focus on content, not on design. When the former is finalized, it is time to work on the look and feel. To be efficient, consider working with a freelancer or design agency to make the pitch deck look appealing — but monitor this process closely! During and surely by the end of this chapter, you should do a test pitch with your existing investors or business angels. This feedback can be extremely helpful and allow for great preparation for the new investors you may want to get on board.

Before going out into the market, it is essential that you also arrange the data room to avoid not having all relevant information accessible to investors. You can set up the data room with a certified data room provider, or by using a normal cloud solution. The data room should include at least the following documents:

• Deck / Memo
• Financial model
• Traction data (revenue growth, retention, customer pipeline, CAC, etc.)
• Cohort data
• Cap Table

And, if applicable, you can also add:

• Recorded product demo (e.g. via Loom)
• Customer testimonials
• P&L

If you have done all of the above, you should be ready to kick off the actual fundraising!

Building an Investor Pipeline

It is immensely important to run the fundraising process in a structured manner. Part of that is to track the contact details of people whom you have already spoken to, to understand the status of the conversation, and to consider the next steps. An investor track sheet can help with this. It should be populated with all investors who are relevant for the current state of fundraising. Add investors in accordance with your

• Geography
• Industry
• Round Size
• Stage

Based on the criteria and the reputation of the investors, you can now assign priorities as to whom you want to speak to first. Generally, it makes sense to initially focus on funds that are able to lead your round. You should also be familiar with the investment hypothesis of the different funds. If your business model is in line with the hypothesis of a VC, it is naturally a good fit. In this context, it is also crucial to find the right person at the VC firm to talk to, as the choice of the individual person you talk to is almost as relevant as the choice of which VC to approach. You should prioritize VCs that have already shown interest during earlier discussions or because they actively approached you and requested a conversation. Overall, you have to manage a balance between the efficiency of the raise and optimizing for the probability of success when deciding how many investors to approach. It is definitely preferable to be on the safe side and have a sufficiently filled investor pipeline.

Once you have a good overview of all the VCs you want to talk to, ensure to get as many friendly introductions as possible. It will substantially increase your chances of getting into a conversation. In order to facilitate the intros efficiently, prepare an outreach template and a teaser deck and share it with your existing investors as well as other notable people from your network. Best case scenario, your existing investors can tease your financing round at almost all VCs on your list. However, introductions by people who are not yet involved in your venture but highly regarded in the venture ecosystem — e.g. unicorn founders — are most powerful. This is because existing investors are naturally “biased” when introducing you to potential new investors, as they have a strong interest in a successful financing round themselves. Therefore, do not only share the list with your existing investors but also discuss with your network to decide on who can introduce you to whom. Whenever you get an intro to a relevant investor, reply quickly and schedule a call with them soon after. You can use a tool such as Calendly to make scheduling easier.

Now you are ready to kick-off the actual fundraising and go out into the field.

Navigating investor conversations

After having generated a pool of potential investors to eventually source from, it is time to actually step into the ring, interact with them more profoundly and talk business. In many cases, it makes sense to entertain competitive dynamics in the fundraising process. The earlier you receive a term sheet, the more competitive it gets — and the hotter the deal, the higher the valuation you will be able to achieve. Start your outreach with 40–50 investors as a first batch, be in active conversation with 20+ VCs, and in close conversations with at least ten of the latter. If these numbers drop during the fundraising, restack the panel as quickly as possible. Make sure that you schedule and cluster the outreach to investors appropriately and that your pipeline never dries out.

When you start these conversations, always communicate a clear timeline. Also mention that you are in active discussions with several VCs, but avoid name dropping. The amount of capital you want to raise should be communicated as a range rather than a precise number. In this context, share that the valuation will be in the typical dilution range — don’t be too specific in the beginning. You will provide certain valuation signals anyway, such as the size of the raising, the valuation of the last round, and the total amount of capital raised.

Consider the following scenario as an example: You aim to raise a €15 million — €20 million Series A round and communicate that the valuation will be in line with typical dilution which is usually in the range of 15–25%. This will result in a valuation spectrum of around €45 million to €113 million pre-money. It is then in the hands of the market and the different competing investors to decide at which valuation they are going to offer an investment. By doing so, you will minimize the chance of being in a position in which you fail to reach a valuation if it was set too high initially. You will also avoid scaring off investors by communicating an overly aggressive valuation target and instead leave space for interpretation.

When the conversations with VCs advance, they will request additional information to assess the investment opportunity. Luckily, you will have already prepared your data room. Make sure to only share data with investors who are actually interested in partnering with you. Some founders, for example, only grant access to the data room after at least two conversations. You can also share the data one step at a time as opposed to all at once. However, bear in mind that there are equally several risks associated with not sharing enough information. One is that investors are not able to perform their diligence and do not feel comfortable enough to offer a term sheet in the first place. Another risk of not sharing sufficient information upfront and waiting until after signing a term sheet is that the investor may change their mind after signing and receiving all information. Post-term sheet, only confirmatory diligence should be necessary. Overall, share information wisely and trust investors, but always use common sense too.

For the whole fundraising process, timing is key. Once the first term sheet is on the table, time is running against you as VCs typically have deadlines and you don’t want to risk losing a term sheet without having a strong alternative.

If you are in the attractive position of having received several term sheets, you have to decide with whom to go. Before signing, make sure you are going with the right partner. Leverage your network to learn about experiences other founders had working with the VC. You can and should also request introductions to portfolio founders of the VC to get first-hand references. Always consider that you are partnering with the investor for the very long term, and that information like this can be very valuable for final decisions.

Don’t start the negotiation of the terms before the first investors actually put up a term sheet. With all investors who put up a term sheet and seem like a good fit, continue the closing process and start term sheet negotiations. It is crucial that the term sheets cover all important clauses and leave no critical points open. This is of grave importance as most term sheets are subject to an exclusivity clause which, as soon as signed, restricts you to further communicate with other investors. If not all critical terms are agreed on pre-signing, the negotiation post-term sheet can get very difficult and may even lead to a situation in which at least one of the parties backs out. If this happens, it also complicates re-engaging with investors who offered other term sheets prior.

Ultimately, if you agreed to all terms and decided on the perfect partner to go with, sign the term sheet and get ready to close the deal.

Closing the deal

After signing a term sheet, be prepared for post-term sheet due diligence. This can take several weeks and may include additional customer references, a deep dive into your product and your financials, among other things.

Also, make sure to prepare all legal documents in time. If you have many small investors or business angels on the cap table, it is critical to start collecting the power of attorney well ahead of the planned notary date. In many European countries, for example, if one business angel is unavailable for some reason during the time of closing, it can block the whole deal from being legally finalized.

Once the deal is formally closed it is time to celebrate, and, more importantly, to fully focus on your business again.