The Ultimate Guide to Startup Fundraising Part 5: How to Structure Your Fundraise to Close Your Round Faster
Welcome back to Part 5 of our Ultimate Guide to Startup Fundraising. If you missed the previous posts, I highly recommend you read through those first before continuing.
The Ultimate Guide to Startup Fundraising Part 1: Understanding Investors 101: The Pros and Cons of Angel Investors, VCs, Syndicates and Venture Debt Part 2: The Memorable Elevator Pitch that VCs Can’t Ignore Part 3: The Killer Startup Pitch Deck VCs Can’t Ignore! Part 4: The 13 Biggest Fundraising Mistakes Startups Make Part 5: Structure Your Fundraise to Close Your Round Faster
And now, if you are ready, let’s get on with the program.
Because fundraising is part of almost every serious startup. Because when you’re changing the world, it’s never easy and usually requires a lot of time and talent – both of which cost money.
This article (and the fundraising guide it is a part of) is for those looking to do it bigger and better, looking to fundraise (not just quickly, but efficiently) to get the fuel they need to power through development and growth and build something meaningful.
So, let’s close your round faster.
Because fundraising doesn’t HAVE TO be hard.
Because no one actually likes fundraising.
Because you need to get back to working on your business.
Let’s assume you’ve got a startup and need funding. The next logical question is: Now what? So many entrepreneurs struggle with this when looking to turn their idea into a fully fledged business.
And it is no wonder… you’ve never done this before. And there are plenty of ways it can go wrong. Which is why I recommend you read Part 4 of the Ultimate Startup Fundraising Guide: Top 13 Mistakes Startups Make While Fundraising.
Assuming you have read that and the previous articles above and that it is actually the right time to go about raising (if you’re not sure, see this post) then it is time to get down to business.
The 7 Steps to Any Successful Startup Fundraise
1. The Ask
Before even considering creating a pitch deck or pitching investors, you need to know how much money your business ACTUALLY NEEDS. That’s the entire purpose of the fundraise after all. You wouldn’t be giving up hard earned equity in your business if you didn’t REALLY need the cash.
Hence why I say NEED here. Because if you are reading this article, you’re probably pretty new at this, i.e. early on in the startup growth cycle. Which of course means that raising too much or too early could spell major dilution for you as the founder(s). And no one wants that, so let’s focus on what you NEED.
First question: What are you going to use the money for? Many startups like to throw around big round numbers and huge valuations because it looks good and sounds cool.
“If XYZ raised a $1M pre seed, we can probably get $1.25M, right?”
But where does that $1.25M number come from? How are you going to deploy that capital? Hire some developers, hire some salespeople… Pour a bit into Google and Facebook ads (btw I hate advertising as a main acquisition channel because it keeps costing money. If you’d prefer viral organic growth, let’s talk about how I could help scale your marketing blowing your money on ads 🙂 Heck, maybe you’d even like an actual office and for the founders to be able to afford more than Ramen and pasta…
All of that seems reasonable, right?
But what does $1.25M actually buy you?
What does it mean in terms of runway?
How many new people can you hire?
What will happen to your burn rate and cash reserves? (Btw, there are always unexpected costs…)
Sure it can all seem a bit overwhelming at first, but that’s your job. And while you don’t need to be a CFA to succeed as a startup founder, you do need to be able to do some back of the envelope math, or better yet, bust out some Excel. You NEEd to understand your numbers and overall financial plan – even relatively early on.
Because that funding round you’re planning better cover the next 18 months. With the 5-6 months it generally takes to raise a round, you’re left with basically one year (12 months) to make serious progress and hit your next sets of milestones.
And time flies when you are having fun practically drowning and racing a million miles a minute.
PRO TIP: You should dedicate an entire slide of your pitch deck to your ASK – i.e., how much you need with a pie chart breakdown of how you’ll use the funds. For more, see Part 3 of this guide: Crafting a Killer Pitch Deck.
PRO TIP 2: Remember, you’re raising money to accelerate growth. That needs to be taken into account for funding and team needs. Said another way, if your overhead costs in 12 months aren’t significantly more than they are now, you’re probably doing something wrong or not growing fast enough.
2. The Pitch Deck
Shows like Shark Tank, Silicon Valley and Billions have glorified entrepreneurship, hyping up “the pitch,” and “the art” of raising money. Most are terrible examples for real startup founders. That’s because most founders that go on TV are either really inexperienced (and there because the producers want laughs) or raising money for businesses with almost no chance of venture scale returns (i.e. the ability to 100x). And if a company can’t go 50-100x, most VCs aren’t interested.
If you haven’t already read Part 3 of our Ultimate Guide to Startup Fundraising: Crafting Your Killer Pitch Deck and created your “deck” as it’s called in the venture world, you should do so now.
And if you’re having trouble quickly explaining your idea/business or grabbing people’s attention, it is worth re-reading my Elevator Pitch guide a read as well.
(Still need more help? I help lots of companies perfect their pitch deck and plan their fundraise. Let’s talk).
3. The Investors
Having the right investors can make or break a startup. Do you think Uber or Airbnb would have become super unicorns if their early investors had expected an ROI in the first couple years? Of course not.
That’s why aligning investor expectations is so so important. (For more on this, see Part 4: The Most Common Fundraising Mistakes Startups Make and Part 2: Understanding the Pros and Cons of Each Type of Investor).
But having investor alignment on things like timing, check size and follow-on funding aren’t the only things to consider when building your “dream investor” list. And yes, you should have a dream investor list, even if only to show that you’ve done your homework and understand the space.
Because anyone that thinks all money is created equal is probably too naive and inexperienced to make it in the brutal world of venture.
You need to know that most investors have a thesis or a sector focus. Some only do B2B or SaaS, or only B2B SaaS. Others only invest in California, or in Europe, or in Asia. Most firms have a specific stage and check size – like pre seed, seed, Series A etc… and not all funds are willing to lead a round (i.e. set the deal terms and be the main investor – this usually only becomes a topic at or after seed).
All of these things are things that founders need to know. If you pitch The Vision Fund on a pre seed startup or look to YCombinator for your Series E, you come off clueless. You wouldn’t ask Gordon Ramsey to pour a bowl of cereal or McDonald’s to smoke you a side of caviar, now would you…?
To avoid looking dumb and possibly ruining your chances an investment (either with the VC you’re pitch or with other firms, because word gets around…), consider the following factors before deciding which investors to reach out to:
- Portfolio track record
The first three are pretty straightforward. They either do seed stage fintech, or they don’t. They either consider Swiss companies, or focus elsewhere. You should be able to find the basics on their about us, thesis or portfolio page.
Portfolio’s a bit different though. That is where you can really differentiate the funds in terms of their focus and track record, and also possibly separate yourself from the competition. Knowing a thing or two about the investors you’re pitching, shows you’ve taken the time to research them and can help grab their attention, especially if you reference their investment in a relevant company when structuring your outreach.
“I know you invested in Uber. Well, we’re like Uber for boats, so anyone can grab a ride to the mainland and hop aboard from anywhere…”
3a. Finding the Investors
Attracting investment is unfortunately a numbers game. To increase your chances of success, you should pitch at least 100 investors… If that seems like a ton, it is because it is. You need to break through all the noise. Remember, many investors receive dozens (more likely hundreds) of pitches and pitch decks a week.
Even if you are the best thing since sliced bread, it is good to keep in mind that most investors passed on Facebook, Uber, Airbnb etc… Hence why fundraising is all about hustle.
But now that you know what to look for and how many investors you’ll need to find, it’s time to start looking. Sites like Crunchbase and CB Insights can be great places to start. Both feature lists of top investors by geography, sector, even stage… Which let’s you whittle down your list of prospects and save time for honing your outreach.
Other great resources include Angellist (which have both syndicates and venture funds – for more on the differences, see this post), Signal (a new venture focused “social” platform), DealRoom or even good ole Linkedin. On top of that, I’d recommend Googling for things like: “top biotech investors” and “top seed stage investors,” all which combined will give you a pretty good base to start building your VC list.
Which then becomes an overwhelming mass of spreadsheet rows.
So it’s time to pick favorites.
3b. Ranking Potential Investors
As we’ve said, some firms are better than others – either in terms of their fit for your company or their overall reputation and signaling power. Get a terms sheet from somebody like Sequoia, Andreessen or Benchmark and there’s a good chance more money will pile on – not just in this round, but in subsequent rounds as well.
That’s why it’s important to pick favorites. There is only so much space in your round (and every VC is going to want their bite).
Ranking your prospective firms will help to prioritize your outreach. That said, scoring everyone from 1-10 is probably overcomplicating things. Give each investor a score from 1 to 3 based on everything we’ve already outlined.
And then, all the sudden, after countless days of research, you’re ready.
Are you ready…?
NOTE: Don’t reach out to your Cinderella funds right away. Odds are, you’ll botch the delivery or do something dumb. It is much smarter to first pitch the lower “tier 3” investors that you’re not all that excited about first. That will get the hiccups out of the way and help you tailor your pitch based on the feedback and reactions of those initial calls.
4. The Outreach
Think about how many emails you get a day. Multiply that times a hundred and you’re probably looking at the amount of cold inbound, email, Linkedin and Twitter DMs many VCs are dealing with.
So, what is going to make your pitch stand out?
A warm intro is always the best. If you know someone that knows someone, that can be your ticket to a first meeting. Check Linkedin – their connections feature is quite helpful.
If you’re somehow connected, that means you’re going in cold. That means you need to be attention grabbing and precise.
NOTE: Some funds have specific ways they want to be pitched or even pitch Typeforms on their site. Be sure to check before sending a cold email.
Assuming you’re going email, it always starts with a Subject Line. How do you stand out?
Including: PITCH: in the subject may help, just in case they have special email filters in place.
Then, it’s time for your elevator pitch or your traction, whichever is sexier. Maybe both.
Some Good Examples:
- PITCH: Amazon for collectible automobiles – Growing 30% MoM!
- PITCH: DTC Recycled fashion brand doing $30k/mo
- PITCH: Yoga app for the visually impaired – 20k users, $15k MRR
- PITCH: Email automation tool – min: 30% less emails, 1M+ downloads in 2 months
Short, sweet and to the point. Plus, they show you know what VCs care about and respect their time. If you’ve picked the right fund and they’re interested in your stage and vertical, they will open that email.
Then it comes down to the email itself and getting them to read your pitch deck.
For the email, keep things short and get them excited without revealing everything.
It helps to make things easy for them to set up a call as well.
Saw you invested in Peleton. We’re doing something similar – instructor-led yoga-at-home sessions for the visually impaired.
We launched 2 months ago, have 20k users and are already at $15k MRR. We need $1M to accelerate growth and cover North America. Our CAC is $1 and our LTV is already 12x that with a churn of 1%.
Here’s our deck – I’d love to tell you more.
Here’s my calendar link or just tell me any time that works for you for a Zoom call.
That’s only six sentences and any VC is going to open that pitch deck and probably set up a meeting. The company’s crushing it, the founder is competent and the business model/elevator pitch is pretty unique.
Sure, it is probably not that easy for your company and the numbers here are made up, but think along the same lines.
What do you do?
What kind of traction do you have?
Why should the VC care?
If you answer those three questions well, you’ll pique any investor’s interest.
5. The Pitch
While some investors have a specific way they want you to pitch, most will let you lead the meeting. That means, you need to have practiced a ton in advance. Think dozens of times in the mirror and in front of family and friends.
And even then, you might be nervous. Heck, you probably will be nervous. You are asking someone you barely know to give you a bunch of money to build your business that was once barely even an idea. That’s terrifying, especially the first time – Hence why you pitch the “ugly ducklings” first 🙂
But even before preparing your pitch, you should know how much time you’ll have. Nothing is worse than running out of time.
Unless otherwise specified, it’s probably safe to assume you’ll only have 30 minutes. That means, you should get your pitch done in 10-15 and leave the rest for questions and follow up.
That’s pretty tough. 15+ slides in 15 minutes… And you’re going to be nervous. That’s where practice and refinement come in. You need to know what you are going to say and how you are going to say it.
I can’t help you there. All I can do is emphasize again the importance of practice.
But don’t stress too much. If you mess up, laugh about it. Say you’re a little nervous, they’ll understand. If they don’t, you probably don’t want them as an investor anyway.
PRO TIP: Practice doesn’t only apply to the pitch, but to the Q&A at the end as well. Brainstorm any possible questions or objections investors may have and have great answers ready. Nothing’s more powerful, reassuring or convincing than responding automatically to their concerns.
PRO TIP 2: Do a bunch of push ups, sprints or jumping jacks before practicing your pitch. Huh?… Think about it. Your mind will be racing and your heart pumping when you give your actual pitch… Doesn’t it makes sense to practice under similar circumstances?
NOTE: Your main goal with the first meeting is to get a second meeting, because most VCs need at least 2 meetings before investing. As such, your follow up is one of the most important aspects of your pitch. Be sure to both thank them for their time and casually add one or two more reasons for them to act now so they don’t miss out on your round.
Maybe something like:
Thanks so much for your time and questions. We’d be honored to have you as an investor as we disrupt the $100B+ unsustainable fashion market and cut out 50% of the costs for consumers.
Let me know if you have any more questions or want to set up another call before the round closes. I’m available whenever and would love to share more.
And then you hit SEND.
Suddenly, you’re done. You’ve made it through your list of investors, tons of pitch emails and had a handful of solid (if nerve-wracking) calls.
Now, cross your fingers, pray to whichever god or otherworldly deity you believe in (plus maybe a couple others for insurance sake… fundraising is a numbers game after all :), and then, get back to building your business. All you can do is hustle. All you can do is dedicate everything to building the business bigger, faster.
Because more than anything else, success attracts success. Winning solves pretty much everything else – like your cash crunch, your need for investors, your struggles attracting customers… The bigger you are and the faster you grow, the easier everything else becomes – other than HR, operations and being a “real” CEO, of course. But you’ll get to those later. First, you need to survive.
Which is all about money.
Which means revenue.
Unless you get a term sheet.
6. The Term Sheet(s)
Step 6 is a PS on a particularly successful fundraise, it means you actually have investors interested. Congratulations! Only 0.05% of startups ever attract venture funding, which puts you in rarified air.
And if you’re in the fortunate position of having multiple term sheets, all the better. Because beggars can’t be choosers…
Assuming you’ve got the term sheet in hand, you won’t have long to think about the offer. You’ll need to evaluate it pretty quickly (unless you have lots of leverage in terms of other term sheets). That means, it’s worth knowing the ins and outs of a term sheet and also having a lawyer ready to read things over. Some things are best left to the experts, hence why I’m going to link to the following rather than try to clarify everything to know/look for in a term sheet:
When it comes to negotiating, weigh your options carefully (YC has a good guide here). How bad do you need the money? Do you have multiple offers? Is a bigger valuation really worth potentially wrecking the round? Is the VC someone you like and trust? Remember, you’re going to be in business together for a long time, at least if things go well.
So, think before you sign.
Step 7: The Due Diligence and/or Close
A term sheet isn’t actually a done deal. It takes time after a VC agrees to invest for additional due diligence on your company. They will want to check everything you claimed in your pitch deck, see more about the inner workings of the company, the finances, the cap table, legal structuring etc… All that takes time.
Generally, startups should plan for closing to last about 30-60 days. That means if you’re desperately fundraising and running out of cash, you might need to start your fundraise even sooner
NOTE: Of course, if you get a term sheet and are about to die, investors can expedite the process to keep the company afloat, but the more time and runway you have, the better… because negotiating is all about leverage.
And that is what fundraising is, a negotiation.
Fundraising is a means to an end, not the end itself. And now that we are at the end of our Ultimate Guide to Startup Fundraising series, it’s time for a new beginning. It is time for you to get down to business and get started preparing your fundraise.
I hope this has been helpful.
I hope you raise your round.
I hope you change the world.
Don’t forget to check out the rest of the Ultimate Guide to Startup Fundraising
Part 1: Understanding Investors 101: The Pros and Cons of Angel Investors, VCs, Syndicates and Venture Debt Part 2: The Memorable Elevator Pitch that VCs Can’t Ignore Part 3: The Killer Startup Pitch Deck VCs Can’t Ignore! Part 4: The 13 Biggest Fundraising Mistakes Startups Make Part 5: Structure Your Fundraise to Close Your Round Faster