Fundraising Best Practices: A Guide for Deep Tech Startups

Startup companies exploring solutions to today’s environmental, industrial, mobility, connectivity, and health challenges need substantial capital. Often considered a daunting task, a necessary evil, or a distraction from the core work conducted in labs and testing grounds, fundraising nevertheless remains pivotal to the growth and sustainability of any startup.

Tech startups that adhere to best practices, leverage their internal resources and external partnerships, and provide the investment community with comprehensive information about their mission can ease the anxiety and obtain the financial backing and other support they need to achieve their desired exit.

The following structured approaches to raising capital and guidance on expressing ideas, negotiating terms, and engaging with investors will help startups sidestep common fundraising pitfalls. They take entrepreneurs beyond merely presenting a concept to engaging with investors on a deeper level, understanding their priorities, addressing their concerns, and showcasing the team’s capability to deliver on its vision. Investors are not just looking for profitable returns; they’re seeking impact scalers they can trust, who share their values and exhibit a passion for making a real difference.

Startups can give themselves the best chance to secure necessary funding through a thoughtful approach throughout the process:

Funding Needs

Tech startups must be strategic about who they approach for funding. The investor landscape is diverse, with each ecosystem participant bringing unique interests, risk appetites, and sector understanding. Identifying the right investors can be as crucial as developing the perfect pitch.

Startups should start funding rounds well before they need the funds. Financing agreements never fall into place as quickly as parties expect. It is recommended that startups initiate new funding rounds while their current burn rate leaves them at least 12 months of runway.

Even for the most promising startups, it’s common for fundraising cycles to take six to nine months to come to fruition. Deals can fall through; terms sheets get re-negotiated; and new investor leads come into the picture. Twelve months of burn rate gives management teams proper breathing room to run disciplined fundraising processes, secure favorable deal terms, and focus on growth rather than perpetual cash crunches.

For best results, startup teams should strive to meet potential VC partners’ expectations when presenting their selling propositions, expressing their funding needs, and assembling key personnel. VCs prepared to write 7- or 8-figure checks rightly demand thorough preparation, a compelling narrative, and a sharp vision of the company’s future.

Startups should consider historic burn rates and future initiatives to give venture investors the data they need to make intelligent decisions. They should be prepared not only to candidly explain how much they’re seeking for the current funding round but also to justify revenue, expenses, growth, and market condition assumptions with proformas and other financial documentation. They must get commitments for enough financial support to reach the next inflection point. Miscalculations that require bridge financing will put startups on their back foot. They will sacrifice leverage and be forced to accept unfavorable terms owing to their heavily diluted status.

But fund seekers must resist asking for more than they will need. Having excess cash lying around causes more dilution early and may tempt startups into reckless spending in a quest for rapid growth. Once-lean organizations become bloated and uncompetitive. Investors want to know precisely how entrepreneurs will use their contributions. Will they go toward product development, sales and marketing, horizontal integration, or talent acquisition? Startups must have a coherent high-level roadmap demonstrating how the new investment will supercharge growth and increase company valuation before the next raise.

Business Plan

A robust business plan should clearly and comprehensively articulate the tech startup’s vision, strategy, and potential for success, instilling confidence in potential investors.

A compelling value proposition succinctly conveys what makes the company unique, valuable, and destined for success. Crafting the value prop requires a deep understanding of the market, the problem being addressed, and the startup’s competitive advantage. Investors want to support companies that demonstrate a clear grasp of the competitive landscape, the customer pain points, and why their approach is the best way to address those challenges in a differentiated and scalable manner.

The business plan should outline the startup’s monetization model, target market, competition, and timeline to profitability. Investors want to see the revenue streams, pricing strategies, and addressable market size. A well-crafted business plan should also include a revenue proforma that projects the startup’s financial performance over time. This should be based on realistic assumptions and supported by market data and industry benchmarks.

Entrepreneurs should outline a clear growth strategy. A scaling schedule based on technology development and sales forecasts should include plans for expanding product lines, integrating into new geographies, and establishing strategic partnerships. Investors want to see a well-thought-out roadmap for expanding the business and achieving self-sustaining market share.

The business plan is only as good as the data that backs it up. Startups should defend their plans and forecasts with relevant market insights and comparable company analyses (comps). This shows investors that the business is keen on leveraging industry dynamics, market trends, and the competitive landscape to its advantage. Investors appreciate startups that have done their homework and can substantiate their claims with hard data.

Pitch Deck
As the initial gateway to captivating potential investors and communicating the essence of a startup’s vision, strategy, and growth potential, these concise presentations set entrepreneurial organizations apart. VCs and CVCs are inundated with investment opportunities, so a well-crafted pitch deck can pique their interest.

The pitch deck is the startup’s opportunity to distill the complexities of its business plan into a high-level, visually engaging narrative. It should effectively communicate the problem the startup is solving, the target market, the competitive landscape, the proposed solution, and the team’s expertise. VCs and CVCs want to see a compelling story that aligns with their investment philosophy and showcases the startup’s potential for disruption and extraordinary returns.

Pitch decks must address several key elements:

● Market Opportunity — Startups need to demonstrate a thorough comprehension of the market’s size, dynamics, customer personas, and the potential for capturing a significant share. This analysis should be backed by credible data and third-party industry expertise, showcasing the startup’s deep understanding of its domain. Showing a clear entry into a large market full of eager customers is the best way to start investors’ mouths watering. Startups ready to attack total addressable markets (TAM) topping $10 billion with acceptable compound annual growth rates (CAGR) with a credible go-to-market strategy will attract corporate and financial venture capital. Those able to establish competitive moats and barriers to entry in blue ocean markets will have their choice among investors.

● Competitive Landscape — Investors want to see how their potential portfolio company stacks up against industry incumbents and other emerging startups. They will base their decisions in part on how well the prospective investment differentiates itself from the competition, the service gaps it can fill, and the ways it improves upon current offerings. Investors become intrigued when the startup can present convincing third-party reviews and positive test results. They are more inclined to write the check when the entrepreneurial team can show its intellectual property is immune from threats and has a strategy for overcoming growing pains. They are looking for first-class unit economies from drop-in solutions adaptable to multiple customers’ processes without requiring significant disruption to implement.

● Team Dynamics — A startup’s executives, managers, and technical experts are of special interest to potential investors. The pitch deck must highlight the founders’ backgrounds, industry experience, and ability to execute the strategy detailed in the business plan. Investors bet on the team as much as the idea itself, and a strong, well-rounded team can significantly enhance the credibility of the pitch. This section should show investors that a diverse team of marketers, sales representatives, deal makers, and technical experts are collaborating to steer the company to the desired exit. Investors also want to see that the CEO is the right person to lead the startup, making optimal decisions under pressure and accepting coaching and advice from investors.

● Financial Projections — Investors want to see a realistic yet ambitious revenue model supported by sound assumptions and a clear path to profitability. The growth strategy should outline the startup’s plans for organic and inorganic growth. Venture organizations also expect their portfolio companies to keep their eyes on the big prize — the exit and payoff. Whether the startup’s endgame is IPO or acquisition, it should map its funding requirements for the duration so they are not constantly scrambling to keep the lights burning.

Building the Dream Syndicate

Startup companies give themselves the best chance for funding and business success when they assemble an investor syndicate that possesses the capital, expertise, strategic focus, and other resources they can use at every stage of their life cycles.

Carefully researching and assembling a diverse group of investors sets startups on the road to long-term sustainability and maximizes their chances of achieving outsized returns.

Fledgling businesses should start by identifying their ideal partners and the optimal mix of financial and strategic investors, go-to-market professionals, and other advisors.

Startups need financial investors who boast proven histories of leading successful investments in their specific industry or sector. They should target investors that have led multiple funds, built a reputation for active participation in the boardroom, and maintain a dependable stable of limited partners that can potentially bring additional future value to their organizations.

Startups should also seek out strategic investors that provide more than just capital, bringing corporate resources and internal expertise in business development, customer and supplier contacts, and facilities to bear. Ideal strategic investors will be well-established companies or organizations that operate within the industry or a complementary sector. They should be able to move swiftly through the investment process without demanding exclusivity or contractual obligations, allowing for a smoother and more flexible transaction.

Go-to-market experts and other ecosystem players represent another crucial component in an effective startup investment syndicate. These individuals and organizations deliver invaluable assistance in deploying prototypes, launching pilot programs, and navigating complex market dynamics. Their deep industry knowledge and connections can help startups overcome barriers to entry and accelerate their go-to-market strategies. They can provide critical components, resources, and tools necessary for product development, supply chain management, and operations scaling.

A dream syndicate forms a consortium of investors united by the common goal of generating extraordinary financial returns, strategic value, and societal good. A systematic approach that involves collaboration, strategic planning, and meticulous preparation can build a winning team. Startups should consider collaborating with existing investors to develop a prioritized list of potential partners for each investor category based on previous wins, industry expertise, strategic alignment, and demonstrated synergies.

From the ranked list, startups can execute a coordinated outreach strategy to build a balanced and complementary team:

● At least one investor has participated in several funds, demonstrating a long-term commitment to the industry.

● Collective capital resources and assets under management are sufficient to support the company’s growth over time.

● A majority of investors with an active history of participating in follow-on rounds, indicating their willingness to provide additional capital as the startup scales.

● A lead investor that has assembled strong syndicates for past investments, showcasing their ability to curate a diverse and complementary group of partners.

● Lead or co-lead partners that have invested in notable portfolio companies relevant to the startup, demonstrating their industry expertise and successful track record.

Conclusion

TDK Ventures strives to help startups — even those in which it doesn’t invest — take a professional approach to funding and syndicate development. We encourage persistence in the entrepreneurs we meet. Not all potential investment partners will work out. Seemingly ideal partners may opt to pass for a variety of reasons. Often, the reasons may be beyond the startup’s control. Not all investment opportunities fit all fund investment theses. Some may not match a CVC’s mandate from its corporate parent. Some may not have achieved the valuation threshold. Others may not answer the “why now?” question, a hook that drives an investor to strike while the iron is hot.

Special thanks to the authors who contributed to this article:

Anil Achyuta, Investment Managing Director | TDK Ventures
Tina Tosukhowong, Investment Director | TDK Ventures