A Guide to Raise Investor Money for your Startup

Tips to Considering When Raising External Capital

Entrepreneurship is a hot button topic right now. Stories in business publications have shed light on the exhilarating and prosperous accounts of men and women that have founded tech companies. Pop culture has even raised awareness to Main street on what is going on entrepreneurship through shows like Silicon Valley and Shark Tank. Our culture’s fascination with tech icons such as Jobs, Musk, & Zuckerburg has raised the mainstream interest in entrepreneurship.

But despite our culture’s general knowledge of successful startups that have grown through venture capital, I find that little is really known about how startups can obtain $1M in seed capital from venture funds. This is evident when I meet first-time founders and review their materials. I empathize with each entrepreneur because I sat in their seats a couple years ago and had no idea how to prepare for the fundraising process. So, I’ve decided to help demystify the experience by sharing these eight tips that startup founders can use to position their startup to raise external investment capital.

1. Develop proof of concept with Minimum Viable Product (MVP)

Before you begin securing capital for your startup, you must first determine if your company is ready for outside capital. Most experienced venture capital investors in this investing climate will want to see that your team has made significant progress bootstrapping (which means the entrepreneur has founded and built a company from personal finances or from the operating revenues of the startup) the company. At a minimum, seasoned early stage investors will want to see that a startup team has built an MVP that has displayed some traction of a small committed user base or early revenue. Lastly, VCs see it as a plus when a founder has galvanized support from their closest relationships — therefore it is always good to first raise a friends & family round if possible. For seasoned investors, it signals that you are able to effectively convey your vision to others and it shows that the founder has tested the model on their own dime before risking institutional capital.

2. Determine what type of capital you need and how much is necessary

Headlines come out every day describing how a new young startup founder has built a promising product that will disrupt another trillion dollar market. The reason these startups are usually featured is because they have raised millions in a Series A or Series B round of financing from Venture Capital firms. This has caused most aspiring entrepreneurs to believe that the only type of good capital is venture capital. But this isn’t the case there are numerous examples of startups that have grown through bootstrapping and reinvesting earned revenue.

The question I ask founders first is do they really need venture capital to reach the next growth milestone? Venture Capital is a particular type of investment capital that is best suited for high risk/high growth early stage ventures. These are typically equity investments that come at an equity and ownership cost to the founders. So it’s best that you understand what your goal is as a founder first, before pursuing venture capital. There is a common narrative in the current entrepreneurial ecosystem, that correlates with the emergence of more and more startup unicorns (private companies valued over $1B), that success is only building & exiting a billion dollar company — and that’s just not true for everyone. Many entrepreneurs have created prosperous businesses from small business loans or small investments from friends & family. So before embarking on building pitch decks and networking with potential venture investors, decide to yourself what is your definition of success for your startup and what are you willing to give up (time, ownership, equity stake, etc.) to obtain that. If the answer is yes to the VC route make sure you determine the minimum amount of money you need to reach the next large milestone (users, partnerships, features) in 12–18 months. Conduct research on what the average total fundraising amount is for your industry and stage. This is important because this could create doubts in your leadership if a VC sees an exorbitant target dollar amount at the seed stage of a first-time founder.

3. Create a sound, simple, and compelling investor deck

Now you have decided to raise capital and want to share the vision of your startup to the many investors you anticipate will be fighting over a chance to invest. Hold up a second Steve Jobs — you will need to package that vision in a succinct and compelling investor deck. As an investor, whenever I am reviewing a pitch deck, I look for answers to 5 questions: 1) What’s the problem your startup will solve? 2) How does your product solve the customers’ pain points? 3) How big is the market? 4) What’s your team’s competitive advantage to win the market? 5) What’s your ask (investment total)? I recommend that investor decks be approximately 7–10 main slides and as many as 10 appendix slides. Remember that the goal of your investor deck should be to share the journey so far of the startup and create an interest for your targeted investor to want to learn more about your startup & team.

4. Do research to find potential investors

The venture capital asset class is becoming more ubiquitous — similarly to the shift in the private equity industry last decade. Promising founders, now more than ever, will be able to find capital for their startups from so many sources. There has been a rise in investments from family offices, accelerators, corporate strategic investment arms, and (the ultimate laggers) investment banks. I’m not saying that raising capital is a walk in the park, but the current amount of willing capital has risen thanks to the proliferation of non-traditional venture investors. So for the founder, this means that there are a large number of potential early stage investors, but it is important that the startup executive team does their research to find the right set of investors.

Some venture firms invest in only artificial intelligence, while others focus on e-commerce startups. When building your target investor list, it’s important to do your research to make sure that all your potential VCs invest in your industry and stage. If you are an edtech founder of a K-12 solution and you attempt to reach out to a higher-ed only focused edtech venture firm, you are wasting your time and the potential investors time. It is key to understand each venture fund’s investment thesis and you can find this out by reviewing their website, reviewing the general partners’ blog posts, and reading articles about the fund. Lastly, once you have identified a prospective investor list, make sure none of the respective firms have a direct competitor of your startup in their portfolio. It’s very unlikely a fund would make a bet against one of their portfolio companies.

5. Leverage your network to get warm leads to investors

As an entrepreneur you have already developed the skill of “respectful” persistence in building a product, iterating based on customer preferences, and securing sales. You should apply a similar aggressive restraint when getting connected to VCs. If you are very involved in your local startup ecosystem you should be at most 2 degrees of separation from active investors.

Whether you an active networker or not or an introvert or extrovert, you should always strive to obtain warm leads to potential investors. LinkedIn is the key asset to leverage and will become your best friend. It’s important to not use LinkedIn as another method to send a cold email. Use the social networking platform to find connections — former colleagues, friends, family or associates — that can connect you to that partner at your ideal VC. Your number one option is to find a warm lead. Do not simply send out cold emails because that will not hold as much weight, and has a much less likelihood of getting noticed amongst the hundreds of pitch deck emails that are sent to the VC or respective partners. Find someone who can vouch for you through the introduction.

6. Keep track of investor meetings and due diligence requests

Once you get started in meeting with investors, it will get really easy to slip up on follow ups and correspondence. I would suggest creating a potential investor table on Google Sheets or Airtable, to keep track of all the moving parts during your fundraising period. The due diligence process for each venture firm is different and could include meetings with associates and partners, or site visits at your startup’s headquarters. Capturing notes from each meeting to record key hard questions, due diligence requests, and unclear messaging during your pitch, will help you refine and anticipate issues in future meetings with other VCs. Lastly, having all the requests and artifacts in one database will help with the turnaround time during due diligence, which could (emphasis on the word “could”) shorten the process of the venture firm coming back to you with a yes or no answer.

7. Remain persistent through the fundraise

Nine times out of 10, when I meet with a first-time startup founder to review their pitch deck, they inform me they are anticipating raising $1M in 2 to 3 months. They tell me this with a straight face and with a level of optimism that this is their conservative prediction. Past reports indicate that the average funding round takes approximately 3 months but anticipate this range is extended to 3 to 6 months given the funding environment. With so much Venture Capital being locked up in prior investments of startups that have remained private longer than the historical averages, it has caused each stage of investors to want more in traction. This has caused some due diligence processes to be more thorough, which means you can’t come into the pitch meeting with just an idea and charisma.

It’s important that you remain very upbeat and utilize each investor interaction as a customer discovery opportunity. What feedback are you receiving that is helpful for you to secure the right set of investors? Not all the comments you receive will be helpful and you will likely hear “no” a lot. But keep in mind you only need a few investors who believe in your startup and have the expertise to help you reach those next milestones. After speaking to a lot of founders who have successfully and unsuccessfully went through the venture capital fundraising process it reminds me of a quote that every founder should keep in mind — “It’s not what happens to you, but how you react to it that matters.”

8. Negotiate terms in a transparent and decisive manner

There has been so much written in the past about how to navigate negotiating a term sheet. One of my favorite posts is Y Combinator’s “Guide to Seed Fundraising.” The items that I would point out is that once investors say that they are interested in investing in your startup the deal could close in fairly quickly. If you are raising a seed round and using standard documentation for a convertible note or SAFE, the negotiation period should be fairly simple since you only need to decide on 2 factors — the cap of the valuation for the next round and the discount rate you provide early investors. The entire end to end fundraising period can be long and stressful but once you get one investor to say yes — similar to that first key sale — the closing time for others to fill out the round will get quicker because you have one proof of committed capital. Lastly, I will say when negotiating term sheets, understand that the venture capitalists are probably more experienced than you, so it is important to leverage your advisors and colleagues who have successfully raised a round of venture capital.

Hopefully, these 8 tips provide all first-time entrepreneurs and aspiring entrepreneurs with insights that will help them have a smoother fundraising process. Good luck on your raise and feel free to reach out if you have any questions.

Earnest Sweat is an Entrepreneurial Engineer for Camelback Ventures and an Investor in Residence for Backstage Capital. If you have any questions or requests please connect with Earnest through LinkedIn or Twitter.

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