The nuts and bolts
So, you’ve worked out when to raise and how much you would like to raise (which in itself is not easy) and now it’s time to get out there and raise the cash — but where to start?
As we’ve said time and time again, it is important to recognise that fundraising is tough. It’s tough because you already have a (very) full time job running a fast-growing business. Layering on top of this having to go into the market to fundraise and you very quickly find yourself doing two full-time jobs in the same 24 hours.
No two fundraising processes are identical, whether from the investor or the company’s perspective — founders are often surprised how different their fundraising experiences are to each other and even at different rounds in their own company.
“Raise enough to ensure you can get back to focusing 100% on growing the business for at least 18–24 months — and then allow 6 months at least to raise your next round” Ed Bussey, founder and CEO, Quill.
There’s a seemingly endless list of possible trip hazards on the fundraising road from a customer crisis to a badly-behaved VC or 2 and pretty much everything in between. I have tried to lay out below some tips and tricks that I hope will help set your fundraising up for success.
1: Notwithstanding Joe’s thoughts on when to raise try to pick the quietest window you can in your company’s calendar for the busiest part of the process.
£2–10m fund raises “usually” take 3–6 months to execute — and I use the word usually very judiciously — and probably take another 3–6 months to plan, so from end to end it may take up to a whole year. But there isn’t constant work load here. In my experience the most intense part of the process for founders is post the first pitch meetings until close. I say this because in advance of this, you are usually the one in control of the timetable. Once your first pitch meetings are over you suddenly have parties involved on the other side who will follow-up with (hopefully sensible!) requests for analysis, time and information. So, if you have the flexibility, try and plan for your first pitches to happen at the start of a quieter or more stable time in the business cycle.
2: Wherever possible give yourself some breathing room during the fundraising process by upskilling your team ahead of starting the process.
Maybe take on that extra hire just a little bit earlier than you had planned or give some of your team that “step up” opportunity they’ve been after — it will be good for them and you — but critically don’t just abandon the business to get the cash in the door, so many businesses see declining performance during or just post a process and it’s really unhelpful! From a value perspective, even 6 extra months of salary of that hire may help you perform better during the fundraise and maximise pre-money valuation and chance of completion.
3: Get organised!
Speak to your existing investors, they can help you with all the below and will have a wealth of experience to pass on about how to manage the process — not to mention the fact they may well be keen to participate. Build a financial model you’re happy with (more on this in a later article…). Create a deck explaining why it’s a great investment (and much more on this in a later article!). Pick a lawyer to work with — you’ll need them to help you, and the good ones will understand the venture space and be a font of knowledge even on non-legal topics.
“Picking the right lawyer is critical. Your lawyer sets the tone at the outset for the relationship with your investors as you negotiate terms which will ultimately govern the operation of the company post-investment (including future funding rounds and what happens on an exit). A lawyer that has a track record of working with start-ups, high-growth businesses and venture investors can provide invaluable market insight and will help you project manage the entire funding process. When choosing you should seek out recommendations from across your network and always meet them for a cup of coffee to ensure you like and can work with them — however talented they are legally the client/lawyer relationship has to work on a personal level for it to be successful with mutual trust and respect.” Ali Ramadan, Partner, Orrick
4: Decide if you need a corporate finance advisor
Generally, the smaller the round the less likely you are to need an advisor. Below Series C you don’t “need” one and picking a bad one will likely make the process less smooth and certainly more expensive.
My personal suggestion would be if you’re really light on resource (and / or experience) to raise a Series A or B think about getting a consultant to help you with the prep ahead of going out to market. Ultimately VC is a people business — we are investing in you the founder, so we need to get to know the business through you, not a broker, so whoever you work with make sure they don’t get in the middle of that relationship!
5: Work out what type of investor you’re raising from
I’m presuming that at this point you’re raising a round that is bigger than your current angels (or them plus some others) could support, and this probably rules out crowdfunding on its own, unless you have a significant community already. Crowdfunding often lends itself better to D2C businesses where consumers can get personally excited about supporting a company.
This probably leaves VC (your bog-standard Venture Capital firm with institutional investors); CVC (Corporate Venture Capital: like VC but the investor is a corporate) or Family Office.
As well as deep financial pockets a top-flight partner brings many non-financial advantages (a lot more on this later in the series) from hands on support, to a mentor for you, to a significant network to leverage.
The gold standard is a backer with a long-term view (and funding to match), a great reputation (firm and individual), who knows your sector / business model really well, is located close to you, is willing to roll their sleeves up and help when wanted and has big ambition to match yours. Remember this is a marriage not a speed date! So, a short Wishlist…
6: Don’t try to speak to all of them — focus will be a bigger marker of success
London is blessed with a lot of VC’s but from a founder time management perspective this can be a nightmare! Before you contact any try to create the long list of all the funds that will give a business of your type (revenue, location, sector) the amount of cash you want to raise.
Historically even creating this list could be quite a task in itself taking up time, favours and coffees to map out the network. Today there are many excellent tools you can use to quickly filter through which funds match what you need. Suggested tools include databases such as Beauhurst or Crunchbase.
Below we’ve pulled together three lists showing the thirty most active funds in the UK in the last two years by round size. You’ll notice Smedvig don’t feature in the £2–5m list even though these deals are within our parameters, which might seem a little odd! But as we only look to invest in 2–3 new businesses a year, becoming long-term supportive partners to our portfolio, this result just means that in this period the companies we invested were raising slightly more capital — but if you are raising 2–5 and we’re otherwise a fit please do add us to your list!
Then prioritise this list based on the following factors:
A. Most importantly, good or bad things you have heard about the fund and partner (although the two are interlinked, the individual partners working with you is as important as the fund).
B. Do they currently have money to deploy? There’s nothing worse than pitching to a zombie fund!!
C. Stylistically do they appear interested in rolling up their sleeves and helping you when/if you need it? A lot more about this in a subsequent post, but we strongly believe that VC’s have a lot to offer companies and therefore should have the bandwidth and desire to support you when you need it.
D. Have they invested much in businesses with your business model? (e.g. B2b SAAS?)
E. Have they invested much in your sector?
And then pick the top 5–10 from this. I wouldn’t go beyond this number unless you start to get negative feedback from the initial reach outs. Focus on making the interactions high quality rather than high quantity — manage it in the same way you’d manage your sales funnel.
“Always try and build relationships with investors long before going out to fundraise. This gives you a chance to build trust, get a better understanding of how they work, and what exactly appeals to them when investing which ensures you have the right things in place that will appeal to investors by the time you go out to fundraise. Overall this gives you a better chance of success with investors that you feel are well suited to you and your company.” Adam Ludwin, Co-Founder, Captify
I hope this has helped set the framework for funding. Please do get in touch if you have any questions or queries. Next month Peter will give you the inside story on our funnel and how to leap form one stage to the next of the investment process. And as always, if you have any other questions or thoughts please join the conversation below.