What You Should Know Before Fundraising For Your Startup
Nine tips to help you raise money more effectively
A version of this article appeared on Crunchbase on Aug. 29. Read the original here.
Some founders are natural fundraisers. Others see it as a necessary evil. Wherever you lie on that spectrum, there are several tips you should know that will help you run your process. As investors, we see hundreds of startups every year and some of the things we take for granted aren’t obvious to founders. Here are a few:
Forward progress
Mark Suster famously said investors look for lines, not dots. The first time I meet you, it’s hard to evaluate if you’ve made a lot of progress or a little, quickly or slowly. You’re a dot. When we meet again in a few months, I can start to see a trend. Now you’re a line. The single most effective thing you can do is to focus on growing your company. Keep showing progress toward your key milestones. A company that is growing quickly and consistently hitting its milestones is an attractive investment. Keep moving and stay focused on the metrics that matter.
Communicate
Keep me up to date on your company’s progress. Once you make a lot of progress, tell people! A pass today doesn’t mean I’m passing forever. Send a quarterly update with your wins, losses, and requests. This is helpful for several reasons. First, it keeps you honest. Building a company is hard and the discipline of tracking that progress helps keep you focused. Second, it keeps potential investors engaged. Third, it will help you get to know investors better. When you have requests for help or feedback, which investors respond? One of the companies I’m most excited about is one that I passed on a few months ago. I spoke to them again and they’ve made some impressive strategic choices that addressed some of my feedback.
Ask Questions
Each investor looks for different things. Ask us. We’ll tell you and then you can tailor your story to your audience. Surprisingly few entrepreneurs actually do this. More frequently, founders will ask for feedback at the end of a meeting. You should do that as well, but it’s too late! Ask upfront, and then tell me what I want to hear. Some of the most impressive founders I meet with are the ones who ask me as many questions as I ask them. They demonstrate a nuanced understanding of how fundraising works and they show that they are trying to get better at it. Remember, part of what I need to evaluate is your ability to raise another round from investors.
Survive
Live to fight another day. Give yourself time to hit your milestones and run a competitive fundraising process. I tell the CEOs I work with to start having initial conversations with a year of runway and start a formal process with 9 months left. You want to put yourself in a position where you have enough time to talk with the right firms, give them the time to run their process, and don’t feel pressured to take the first deal you’re offered.
It’s a Numbers Game
You will hear ‘no’ quite a bit. We are the first ‘yes’ after lots of ‘nos’ in every deal we do. Don’t get discouraged. Keep finding new investors to speak with. Ask for advice from other founders and your current investors. One of the best parts of the startup ecosystem is how supportive it can be.
Address objections
Be honest with yourself. Why are investors passing? Give them permission to be candid, accept the feedback, and then evaluate it. Investors aren’t always right (duh) and you shouldn’t listen to every piece of advice you get, but you should seriously think about it.
Don’t ask VCs who passed for introductions to other investors
You’re better off finding a warm intro to an investor from someone else. Why? It’s a bad signal. If I love your pitch, I want to keep you to myself, at least until we get a signed term sheet. (Once you have a lead investor you should certainly work with them to build the right syndicate). If I introduce you to another investor, the unspoken question is, “Why aren’t you investing?” There can be situations where it’s appropriate but in general, you should steer clear.
Create scarcity
As with many other areas of life, creating scarcity can induce demand. One of the companies we invested in earlier this year spent months trying to close their round and then when we gave them a term sheet they suddenly had so much demand that we doubled the size of the round. Doesn’t that sound nice? (Although, you should really only raise as much as you really need, so be thoughtful.)
Reference check your investors
When I spoke with Chris Tolles at Yard Stick PBC, he told me that he had reference-checked us before we spoke and I thought that was a piece of advice worth sharing.
When you get a cold inbound from an investor, email someone in their portfolio and ask if they’re a top decile partner. Reference checks are always a good way to hear an unbiased or less biased opinion of what a firm and a partner are like to work with. You might not do this before every first call, but you should certainly do it before accepting an investment.
Brad Pruente is a partner at Prime Movers Lab where he leads deal sourcing and supports the diligence process. His work spans Prime Movers Lab’s six sectors, but he has a particular interest in agriculture, food tech, and robotics. He serves on the board of directors for Robust.AI, Diamond Age, Dalan Animal Health, and Bandit (formerly known as Conscious Cultures), and as a board observer for Pyka.
Prime Movers Lab invests in breakthrough scientific startups founded by Prime Movers, the inventors who transform billions of lives. We invest in seed-stage companies reinventing energy, transportation, infrastructure, manufacturing, human augmentation, and agriculture.
