The Operations of Fundraising Part 1
Inspired by recent conversations with aspiring entrepreneurs and the questions they asked, I’ve been posting recently on topics that are useful during the fundraising process.
I’ve covered storytelling as a tool to help others emotionally engage with the business and displaying empathy for users via a heightened degree of customer knowledge. Here, I’ll cover more of the capital raising process itself and a few tips that should make things go a little more smoothly.
Fundraising is commonly a long process that begins well before an actual roadshow and investment take place. We’ve come to think of the capital raise in 3 distinct parts.
- Part 1: Preparation and iteration – The key milestones here include getting the presentation deck prepared, inviting feedback from key stakeholders, organizing the data room with all necessary information, and creating a place to track investor outreach.
- Part 2: Presentation and follow-ups – This step is self-explanatory and contains the presentation to investors as well as the follow-up conversations that occur after the initial pitch. In the next post, I’ll dive deeper into how to identify and rank these potential investors as well as best practices in communication.
- Part 3: Close – Speed matters. Look to close the deal as quickly as possible after receiving a yes, uncertainty can derail the process if allowed.
More often than not, a snapshot of the headlines on sites like VentureBeat and TechCrunch can give the impression everyone is fundraising and doing so with minimal effort.
What’s missing is the real story, unless a startup is a runaway success, deals rarely come together quickly. In reality, fundraising is usually a marathon that will test resolve and require luck along the way.
Despite that fact, fundraising is an amazing career experience, and with the right attitude, can be a lot of fun. You’ll meet more interesting and successful people in a short amount of time than at any other point in your career.
It’s important to take advantage and learn from every interaction. Great investors will force you to think outside the box about the business and highlight the potential hurdles ahead which they’ve learned from experience as operators and investors. LISTEN, you’ll be better prepared for the next pitch meeting and to run the business overall.
Outside of the opportunity to learn, other benefits include adding new skills:
- Sales – Obvious example, fundraising is all about learning to sell.
- Leadership – Fundraising may have one point of contact, but it takes a team to build a deck articulating a well-rounded vision. Not to mention, the possibility jobs can be dependent on closing the round, placing an increased emphasis on communication.
- Presentation – Another obvious example, being able to present to large groups of unfamiliar faces only gets easier with practice. Additionally, the ability to craft a well-designed deck comes in handy. People love pictures.
Perhaps most importantly, fundraising is unmatched when it comes to teaching humility and bouncing back from failure. Even small venture capitalists see ~500 deals annually, and make somewhere between 8-12 investments meaning “no” is the answer 98% of the time. While it’s important to understand the odds are steep, the fundraising process is an incredible experience that teaches career-long lessons like only it can.
Now that we’ve established fundraising is a difficult, but rewarding task, it is VITALLY important to know when to begin the process. More often than not, we see many startups believe the process will take 3-4 months. Our advice is to take that timeframe and at least double it.
The other crucial mistake we see is not raising enough capital for a given burn rate. This is usually a combination of misunderstanding two variables, as mentioned the first is the length of the process, but the other is much more nuanced: negotiating leverage for the subsequent raise.
Attempting to close while the cash balance is dangerously low is likely to negate any negotiating leverage and creates the opportunity for investors to include less favorable terms. These terms often have the tendency to become an issue at the worst time possible.
We advise raising no less than 12 months of operating capital and prefer to see startups targetting a raise that buys them 15-18 months of runway. This creates a buffer in the event unforeseen circumstances such as a slower than anticipated average sales cycle or a longer than anticipated capital raise create a cash crunch.
Lastly, always know the seasonality or cyclicality of revenue and sales. A downward trend, even if the YoY growth is great and can be explained, creates an unnecessary hurdle. For example, if sales ramp up in Q1 and Q2 but cool off in Q3, it’s best to ramp the roadshow and target a close in those first 6 months or be confronted with undesired friction.
Once the decision to raise capital is made, the next step is often to create a “pitch deck.” However, that’s only the beginning of the process. Great startups recognize that fundraising is much more than a pitch deck, but a process that will likely take months and involve contact with dozens of individuals. As a result, they build the process for scale.
This includes creating various presentations tailored to the type of investor and method of communication, preparing a data room that can be easily shared, and creating a CRM (excel, Hubspot, etc..) to keep track of each interaction.
One last tip, research market comps and use them to direct the narrative of the future. I’ve seen several startups use this tactic, and when done well it can be extremely powerful.
This was a long post covering a lot of (hopefully useful) information. If you made it this far, thank you for reading! I’ll be back in a few days with Part II which will focus on identifying the right investors, keys to pitching them, and how to close the deal.
As always, if you liked this post, please share! Part II can be found here.
Credit: John Tough, partner Invenergy Future Fund, for the inspiring the images used in this post.