Written by Taos Edmondson, Founder, The Seed Stage
It takes huge amount of time, effort and (often and ironically) money to raise money
from venture capitalists and other start-up investors. And, even then, many fundraising processes end in failure.
The problem is particularly acute at Seed and Series A.
Although hard to quantify, only a small fraction of start-ups which attempt to raise a Seed round actually achieve it, whilst only 20% of start-ups manage to make the leap from Seed to Series A. Fundraisings at this stage can also take a surprisingly long amount of time.
There are three key reasons why early stage fundraising can be so painful:
There are huge volumes of start-ups competing for a limited pool of capital at Seed and, to a lesser extent, at Series A.
It’s very hard to underwrite a start-up at Seed / Series A due to the limited traction inherent to this stage. Rather than relying on established financial performance, an investor has to buy into the founder and vision
A herd mentality is a defining characteristic of the VC industry. Once one reputable investor commits to a start-up, then it is much more likely that others will follow suit. As a result, getting that first investor over the line is far more difficult than snaring the (n+1)th investor
It’s paradoxical to me that VCs, the bastions of technological innovation, still pedal an archaic and counterintuitive fundraising process.
After all, everybody wins if founders spend less time fundraising and more time growing their businesses.
I don’t profess to have the answer here, but one of the guiding motivations in my VC career is to help make the fundraising process a little easier for founders. That’s why I set up The Seed Stage, Europe’s leading early stage demo day, and that’s what drives my choice of blog content.
With that in mind, I plan to write a handful of blogs with tips on various stages of the fundraising process, tilted towards the Seed and Series A stages.
When you embark on your Seed or Series A fundraise, you will be champing at the bit to engage investors. However, formulaic preparation pre-outreach is worth its weight in gold. Below, I summarise some key steps to take before you approach new investors.
🕑 Plot your fundraising timeline
Break your fundraise down to its constituent parts and milestones. The constituent parts would be: initial outreach, initial meetings, commercial due diligence, legal / compliance due diligence and execution (negotiation of investment documents and transfer of funds). The latter two stages often run simultaneously, but not in all cases.
When plotting the timeline, start at the point you’re due to run out of money and work backwards. It’s wise to aim to conclude your fundraise at least a month or two before the end of your current cash runway.
Then estimate the length of each constituent part, and date of the associated milestone, to arrive at a start date for the launch of your fundraise. Then add a month as a buffer — the process will always take longer than you think!
Considering only the process from investor outreach onwards (i.e. after all the actions covered in this blog), you might end up with a timeline something like the below.
This suggests you should start your investor outreach on 17th February, if cash runs out on 20th July!
Without being too pushy, it’s worth laying out key milestone dates when you first speak with investors. For instance, ‘we expect to receive term sheets by w/c 5th May and funds received by w/c 20th June’, or whatever it is.
If you’ve incorporated a sizeable buffer into your timeline, don’t shout about this to investors. Given the number of start-ups we see, most VCs live a hand-to-mouth existence where we have to dedicate our time to whichever workstream is the most pressing. As such, its important to maintain a message of relative urgency (without implying that your business will fail without immediate funding) and maintain the momentum of your fundraise.
💵 Calculate your cash requirement
Before you approach investors, you must know how much you want to raise and why. Although, bear in mind that the quantum must be realistic. An idea-stage start-up shouldn’t be looking to raise £1bn, to take an extreme example — look at your peers to identify a reasonable amount for each stage of the lifecycle.
Make sure to have a line-by-line breakdown of the uses of cash from the forthcoming round, and have a clear answer to where this funding will take the business to, in terms of financials (the financial model will be discussed a bit later!) and other measures, such as team size and quality.
Any investor will know that the financial forecast, in particular, is finger-in-the-air stuff at Seed to Series A stage, but you should still present the post-raise milestones with an air of certainty.
If you’ve been through the cash requirement calculation exercise in a previous round, revisit your previous cash requirement forecast and outcome, and adjust your cash requirements accordingly. For instance, if you underestimated costs by 20% at the last round, adjust accordingly this time round.
My final tip here is to aim to raise an exact amount. Say £1m, rather than £1m+. This specificity, and simplicity, is comforting for investors.
⚾ Have a ballpark valuation in mind, with a defined lower limit (but keep it to yourself!)
Company valuation is a very murky discipline at the best of times, but particularly at Seed to Series A.
There’s very little data on which to base valuation, and it’s usually a case of gradually working towards a happy medium, where all stakeholders are satisfied. A revenue multiple may sometimes be applied at Series A (and, very occasionally, at Seed).
In terms of deciding on a ballpark valuation before approaching investors, there’s a couple of important considerations. Firstly, consider the very maximum dilution you would be willing to accept with the given size of fundraise; this determines your lower limit.
Second, consider where the current fundraise will get you to by your next round. At the next round, it is more likely that the company will be valued at a multiple of revenue. Using this method, estimate a reasonable pre-money valuation for your next round, then divide that by 2 to arrive at a reasonable upper valuation limit for the current round. A start-up should aim to be achieving at least a 2x valuation uplift between rounds to send a positive signal to potential later stage investors.
As enticing as a ludicrous valuation might be now, it could be terminal for your start-up if you are forced into a down-round next time out.
💻 Prepare your financial model
Firstly, make sure to have a clean overview of your P&L, cash flow statement and balance sheet, both historically and for the next 3–5 years.
Behind the scenes, start-ups are, by their very nature, tumultuous. However, the fundraising dance is all about showing investors your long term vision, and how you are serenely executing upon that vision today.
Don’t hide things, as problems will always come to light, but don’t show potential investors any unnecessary detail or complexity. The narrative should be smooth and simple.
Apply this approach to your financial model.
The model should be simple, well-structured and have the right level of detail. It should be built around the key levers of growth, so investors can see the impact of these different levers and can play with the assumptions. The model should also highlight the progression of your top 2/3 KPIs.
Accentuating the growth levers and outputs will give investors confidence that you know where your team should be devoting its time in order to drive the company to success.
As for the forecast itself, you will not live and die by it at Seed and Series A. Investors at this stage know that the forecast is worth little, due to the number of unknowns at this stage in a start-up’s life. However, it should be premised upon sensible assumptions and yield a sensible growth trajectory, which is ambitious but not outrageous. Finding this balance is a key signal of a founder’s credibility and ambition.
Unless pre-launch, where all growth channels will be new, in most cases I’d advise that a start-up builds a base case based on existing product lines / sales channels / geographies first, and then present any unproven product lines / sales channels / geographies as potential upside to the base case, rather than baking it into the base case.
Finally, one useful thing I like when I see it in a financial model is a cover page which describes each tab of the model in a couple of bullet points, to help guide the potential investor around the model.
📚 Perfect your pitch deck
Your pitch deck, or fundraising deck, is the first thing that investors will want to see. As with the financial model, you will need to create, and perfect, this before you engage any new investors.
As a rule of thumb, I would suggest sharing the pitch deck with a VC when you reach out to them or when the VC requests it. Most VCs will want to digest the deck before taking a phone call, to save time on both sides, and it is a real turn off when a founder is reluctant to share the deck (or does not even have one prepared).
As with the financial model, the pitch deck should offer a simple and seamless narrative, covering what the company is, what it aims to be, and how it’s going to get there. The main body of your presentation should be 10–15, easy-to-consume slides, with the key point of each slide jumping off the page and tying in with the messages given on the preceding, and following, slide.
It’s worth paying a lot of attention to aesthetics here. Seed funds, in particular, see 1,000s of pitch decks each year, and may spend a very short amount of time scanning each one. As a result, pitch decks must make a quick impact.
A study by Docsend found that, on average, a VC spends 3 minutes 44 seconds reviewing a Seed stage pitch deck. This amount of time is probably on the generous side. Anyhow, a punchy, well-presented narrative should be able to resonate in 60 seconds or less.
If slide design isn’t your thing, it may be worth bringing in some external support for the sake of a few £100.
👷 Build your data room
When you engage investors, they will want to review the pitch deck first, and then, probably, your financial model.
After that, they will want to see all other documents which will inform their decision.
All these documents should be pre-prepared, well-organised and ready to share with investors via a data room (there are lots of ways to do this, more basic approaches include using a GDrive or SharePoint folder).
The data room should cover:
Anything useful for commercial due diligence — such as cohort analysis, sales pipeline, organisational chart, cap table, management accounts
Documents for legal / compliance due diligence — such as IP / patent documents, template employment contract, supplier contracts, insurance policies. It’s also worth including key documents which can be found on Companies House, such as Certificate of Incorporation and Articles of Association, for completeness
There are many more documents that I’ve not mentioned here. My advice is to be as comprehensive as possible.
It’s also well worth either having a Q&A (or DDQ = due diligence questions) document in the data room, or, at least, to hand, ready for questions from potential investors. Even if you’re not fundraising right now, I recommend setting up a live Q&A document, organised into sections, where you add questions and answers as and when they come up. This should save a huge amount of time when it comes to fundraising.
🔍 Create a target list of investors, and identify the right person to reach out to each
Start-up fundraising is definitely a volume game. However, reaching out to every Tom, Dick and Harry will leave a lingering stench of desperation around your funding round amongst the investor community.
It’s vitally important to only reach out to investors who’s strategy aligns with your start-up’s stage and sector.
It’s worth putting some hours in to build the investor target list. If you’re not familiar with many VCs or angel investors, a good tactic is to pick the brains of people you know who are embedded in the investor landscape — they should be able to conjure a list of relevant investors. You are at a particular advantage if you already have a VC or angel onboard — make them sweat their network — it’s helping you but it’s also to their advantage to do so! At dmg ventures, we pride ourselves on opening doors to relevant, later stage VCs for our portfolio companies.
Once you have your list, identify who, from your team and wider network, has the closest link to the potential investor, and get this person to do the initial outreach when the time comes. A warm contact will typically yield better results.
🎯 Practice makes perfect
Once all the above is prepared and you’re on the cusp of reaching out to new investors, prepare your first meeting pitch.
Typically, the founder will do a voiceover of the pitch deck, followed by Q&A, during the first meeting with an investor. The voiceover should be 10–15 minutes long, making it doable in a 60–, 30-, or even 15-, minute call. As with the deck and financial model, it should be simple and straightforward.
However, it’s also worth sprinkling in some anecdotes to really bring your narrative to life.
Once ready, practice the hell out of your pitch to yourself, your team and any investors you know. By the time of your first new investor meeting, the 10–15 minute verbal pitch should be second nature.
Now, you’re ready to approach investors!
Preparation is paramount to any fundraise, but particularly at Seed and Series A.
Going through the steps laid out here will, I hope, boost your chances of fundraising success. I intend to write 1 or 2 more blogs with tips for later stages of the fundraising process, including how to handle those pesky investors!
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