A typical pre-seed to seed fundraising process consists of the following steps:Defining fundraising targets & timing.Mapping target investors & fundraising materials.Having first intros and coffee meetings.Pitching to multiple investors.Negotiating and signing.
If you missed our previous articles from the "Startup fundraising 101" series, read what to expect in the fundraising journey here and learn more about the stages of startup fundraising here.
Step 1: Define fundraising target & timing
The fundraising process should start with defining your targets and timing. How much exactly do you want to raise? What is your purpose? What is the deadline? Build a financial plan and determine scenarios of runway with initial investment. On top of that, build growth scenarios and identify fundraising requirements.
When it comes to your financial plan, you should create a business model/plan and calculate the runway needed for around 18-24 months. This gives 12-18 months to focus mainly on running the business, and 6 months to focus on the fundraise.
In your model you should factor milestones and growth needed to achieve your next round, and perhaps the one after that (Series A). Know your metrics - what do Series A investors in your ecosystem look for? If you are unsure what your local metrics are, it is important to speak to local VCs and angels to understand what they expect.
Remember, there is one absolute truth about your financial plan: it's wrong. The only parameter you can control is costs. Predicting the revenue side is total fantasy when you're just starting out. An early stage investor cares about (i) whether you understand how your unit economics work from an abstract level, and (ii) whether the business you envision can be a big business.
To better understand this process, read why, when, and how much seed money to raise and how to set your valuation and which financing options to choose.
Step 2: Map target investors & fundraising materials
In the second step, ask yourself: who would be my ideal investor? Map friends & family investors, as well as angels (read more about the types of investors when raising money for your startup). Make a list of all the investors you want to pitch to, and then step back and ask yourself: why them? Do they do deals at my stage and in my space? Are there any portfolio conflicts? Figure out which partner would be the best fit and remember to be fully conversant in metrics relevant to your industry. On top of this, search for government grants and loans.
Be wary - an angel might push for a few friends' funds that are not necessarily a logical fit for you. Your job is to cut these out of the list. Meetings with "bad fits" will create more work and lead to extra stress and more rejections. Moreover, you may feel pressure or have intros to meet with investors who are more likely a fit for your future rounds. Accept the intro, but only with the understanding that you will schedule the meeting after you close this round.
If multiple small angels are interested (e.g. tickets < EUR 100K), it may be worth considering pooling their investment in a Special Purpose Vehicle (SPV) investment instead of placing them individually on your cap table. Read more about SPV here.
At this stage, you have a few things on your to-do list:Map investors in the Portfolio investor trackerEmail templates for (i) investor outreach and (ii) request for introduction - 1 liner - 3, 5 & 10 min pitch decks - 1 pager - Teaser: 1-2 page executive summarySet up Monthly Newsletters to your potential investorsConsider creating a 3-5 min video of your team
Step 3: Have first intro & coffee meetings
Here comes a super exciting part of your fundraising journey! What do you need to do?
Start with writing a "forwardable" email that includes:a 1- 2 paragraph teaser about your startup,5- 10 bullet points about your company: traction numbers, press clips, notable milestones,a short pitch deck
Choose who will make the intro, and this is very important - closeness to the target and relevance of the relationship should be taken into consideration.
Angels go for fit and interest - don't set up meetings with investors who are not genuinely interested or not a right fit for you.
Find a lead investor. They aren't necessarily those that put all the money into your deal. They are the first step in the process that makes the rest of the process take flight. A good lead investor typically:adds credibility to the startup,invests a majority amount for the round,negotiates as the principal agent for the agreements (saving you the trouble of negotiating individually with all the other investors),introduces potential additional investors or acts as a marketing point.
At the end of the day, it will be the Partner who makes the call, so if you can, go directly to a Partner. If you have no choice but to start with associates, treat it like a partner meeting and take it seriously.
Step 4: Pitch to multiple investors
Send invites in batches by order of preference and try to fill 10 slots as a first wave. Send out further tranches as you get "no's" from potential investors. More isn't necessarily better — it's often worse and it can make a focused process hard.
Practice, practice, practice. You won't impress VCs with an unpracticed pitch. Take part in 2- 3 rehearsals of your pitch with friendly investors and advisors - or lower-tier VCs before pitching to the VC which you are likely to close with. Do not forget to tailor your pitch and decks to each investor.
Plan your schedule carefully. You don't want to cut a productive meeting short because you've got to rush out to your next appointment nor create a bad first impression by being late to a meeting. Great meetings can often take 90 mins.
Impressions are subjective, so it's helpful to have at least two co-founders at the pitch to discuss the feedback from the meeting. Make sure that the vibe between you reflects the positive energy of your company.
Finally, make every potential investor feel like a VIP, even those from the bottom of your list. It's often surprising who ultimately does the deal. Nothing is worse than ghosting a VC and coming back when no one else shows interest.
Step 5: Negotiate and sign
There is a saying that "time kills all deals" so aim to close the deal rather quickly. The longer the time that elapses from term sheet signing to close, the more risk that your deal will not actually get done. Your number one job as a founder is to get on a track to close your financing round quick! The faster you close, the faster you can get back to building your business.
Be transparent, don't mislead. Be open with your prospective investors about what is going on with your business and team, what you're doing and thinking about including your strength and business. If you tell a VC you have a term sheet, or a verbal commitment from another investor, and you don't, you can destroy credibility and the possibility of a deal. Needless to say, your broader reputation will take a major hit. Also, don't commit verbally to signing until you actually sign.
Keep following up with your committed investors until they've sent you a check - and the check clears. You don't have a deal until the docs are signed and the money is in the bank.
Keep on reaching out to other investors even when you have a term sheet. Having multiple options gives you the confidence to ask for better terms, so do run parallel discussions.
Keep negotiations at a high level - don't negotiate line-by-line, but as a collection of topics in order to get closure on what's important.
Don't hand the negotiations over to your lawyer. Keep direct communication lines between you and the investor open, even after signing the term sheet and as you go through discussions on the agreements.
Set or ask for a timeline on the whole process, agree with the investors and communicate those to the lawyers.
When to walk away?Only exercise a "walking away" strategy when things are bad and you know what your BATNA (Best Alternative To a Negotiated Agreement / Plan B) is.Define your "worst acceptable threshold"If you walk away, do so in a quality way. Be direct, transparent and non-emotional to preserve the relationship.
Never give up on something that you can't go a day without thinking about.
- WINSTON CHURCHILL
Many important accomplishments in the world have been made by people who kept on trying despite little hope for success. Successful people keep moving! They make mistakes like everyone else, but they don't quit.
This article is a part of the "Startup fundraising 101" series. Read also:
Article 1 - Fundraising: what to expect in the journey? Stages of startup funding
Article 2 - Fundraising: why raise seed money, when to raise money, and how much to raise?
Article 3 - Fundraising: how to set your valuation and which financing options to choose
Article 4 - Fundraising: types of investors when raising money for your startup
Article 5 - Fundraising: how to successfully fundraise from pre-seed to seed round