Any founder who has raised capital knows that fundraising is hectic and stressful. Maintaining the momentum you need to secure favorable terms means keeping track of where you are in the process with each investor as you progress through getting introductions and setting up a series of meetings. In order to do this well, founders must be proactive about their process and organization.
After raising roughly $150M in venture capital over my career, I’ve learned some techniques that can be helpful to founders looking for an efficient and effective process that will produce the best results from their fundraising rounds. In this post, I’ll explain how to execute some tactical steps that are often overlooked in each of the three stages of fundraising:
- Identifying compatible investors
- Setting up investor meetings
- Closing the right deal
Identify compatible investors
Before reaching out to an investor, you want to gather some relevant info to show that you’ve done your homework and to save you from wasting time reaching out to investors that are not a fit for your company.
Start by gathering each investor’s basic information
As you perform your preliminary research of investors, record basic information about each investor, such as the name of the investor’s organization, if applicable, what type of investor they are (Angel, VC), or what type of organization they invest for (Seed Fund, VC, etc.).
The final item of basic information that you should find out is so simple that people often forget to question it: is this investor/organization currently investing? If so, continue with the research; if not, then it’s probably best to move onto other prospects.
Building your investor pipeline
Fundraising is an overwhelming time for many founders. As you begin talks with different investors, you may think you’ll remember the details of each conversation but, over time, it all gets jumbled up. To help with this, we’ve created a spreadsheet that will help you stay organized when researching, scheduling, and following up on investor meetings.
Then, do your research to find out strategic information
Investors have more to offer to startups than just capital—they also provide useful insights and give access to rich, professional networks. Do your homework to find out which specific investors—not just the firm or fund—can be a valuable ally to your business.
Look beyond prestige and notoriety and determine the investor’s strategic value adds. What is it about this investor, in addition to their capital, that would give your company an edge?
One example of a good value-add is having a similar go-to-market experience. If an investor has been involved with a startup that’s executed a similar go-to-market strategy—as a board member, observer, or advisor—they may be able to provide key insights that could help your company navigate some of the challenges that come along with the go-to-market strategy you’re enacting now.
Another example of a useful value add is having contacts with potential strategic partnerships that would benefit your business. Strategic partnerships are often more art than science, and having an investor in your company making these intros can result in better outcomes than cold-approaching these potential partners down the road.
Doing this will not only help you identify the tangible benefits of working with a certain investor but also allow you to communicate your reasoning for wanting to work with them when the time comes to reach out and request a meeting, improving your chances of getting a response. Instead of reaching out to the firm directly, or to their main investor, you want to reach out directly to this individual.
Check whether their approach to investing—commonly referred to as their “thesis”—is in line with your company’s profile and goals. An investor’s thesis will typically be included in the “about” section of their website, and will state the stage of companies they invest in (seed, early, mid, growth, late), as well as the sectors, industries and specific areas of investment focus (social media, technology, software, back-end infrastructure, computational medicine, etc.). Other places to look for their thesis, and what they’ve been focussed on lately, are the investor’s Twitter page, CrunchBase profile, and any recent press they’ve had. Avoid reaching out to investors who don’t invest in companies like yours, based on their portfolio and thesis statement.
If your company matches the investor’s thesis, then you have a thesis fit with this investor and you can move on to assessing competitor investments. Before reaching out to an investor, you want to find out if they are currently invested in any companies that your company is, or would be, competing with. In general, an investor will choose not to invest in a company that threatens the success of one of their other investments. There are many exceptions to this rule, so you have to use your judgment here—either way, this is valuable information for you to have before reaching out to any investors.
Setting up investor meetings
Investor intros: Before you start setting up investor meetings, you need to get introduced to the investors. The best way to get introduced is to find a mutual connection—ideally a first or second-degree connection—and request an introduction to the investor from them.
Tactically speaking, you should keep track of the intros that have been sent and the ones that you have followed up with. When you start reaching out to ten or twenty different folks you can start to lose track. By tracking this in a central place, it will make it much easier for you to know where you are with each investor and not drop any balls.
How to generate leverage before stepping into a meeting
Once you’ve identified suitable investors to target, it’s time to set up meetings to pitch your company and, ultimately, convince them to invest. In the beginning, these meetings are essentially sales pitches—selling the potential of your company to produce returns for its investors. If your pitch works and the investor decides they want to be involved, a negotiation of investment terms will follow, and negotiations are all about leverage.
The most powerful source of leverage is having options. Having options, in the context of fundraising, means having multiple investors lining up, wanting to invest in your company. The more options you have, or the more investors you have to choose from, the more leverage you’ll have to govern the terms of these investments in your favor. But how do you maximize the number of investors you have to choose from?
Creating a liquid market for your startup
Before any demand is generated for investing in your company, and while it’s ramping up, you’re essentially operating as a seller in a thin market—there are few buyers, and the spread between your asking price and the actual bids will likely be unfavorably wide for you as the seller. Your goal is to transform the market for investing in your company into a liquid one—one in which there are several potential buyers, and the spread between the ask and the bids is consequently decreased, getting you the investment terms you’re looking for.
It makes sense, then, to aim to engage with as many (suitable) investors as you reasonably can within as short of a window of time as possible. To successfully do this, I suggest booking these meetings two months in advance so that investor’s schedules are more open. Then schedule as many of these meetings as you can in a two-week window so that, during those two weeks, you can effectively operate as a seller in as much of a liquid market as you could engineer. During those two weeks, you will then enter each meeting with more demand and leverage than you would have if you took meetings gradually over the span of two months.
Tracking & scheduling investor engagements
Scheduling investor meetings
When you start to schedule meetings, log each meeting and partner meeting/pitch date in a meeting calendar to visualize the liquid market you’re aiming to create. The target two-week window is something to aspire to but, in practice, things don’t always go exactly according to plan. The goal is to pack your meetings into as narrow of a time window as you can. Avoid aiming to schedule meetings during the months of July and August, as it’s common for VC investors tend to take vacations during these months.
These meetings are typically an hour-long, so you can schedule a few in one day if the times and locations work out—but don’t overdo it. You don’t want to be rushing to these meetings and you need to have the right energy and focus going into each one. The strategy of what goes on during the actual meetings is a separate topic we’ve touched on previously.
Make sure to then follow up after your meetings within 24 hours to thank the investors for their time. If the investor requested any information, such as metrics or your pitch deck, send this to them as soon as possible within the same day.
Reference check your potential investors
Before signing a term sheet, do a reference check to find out what it’s like to have this person as an investor in your company. You’re making a long-term partnership agreement and you want to make sure that you share the same values, align on growth strategies, and can collaborate well together. An investor should be an invaluable asset to your company. If you don’t feel like you mesh well with an investor, be cautious about moving forward with them. Get in touch with past companies they’ve worked with—both the successful ones and, perhaps more importantly, the unsuccessful ones. It’s easy to be supportive when things are going well, but things don’t always go well with startups, and you’ll want someone who can support you through the good times and the bad.
Closing the right deal
Talk is cheap and time is the killer of all deals. The fundraising process isn’t over when you’ve convinced investors to invest. It’s over when the money hits your bank account. So you want to complete the closing process quickly. Even though most of your legwork is done by this point, now is not the time to let up on your attention to detail. Keep track of which investors have been sent paperwork and which ones have received, and signed their paperwork.
I won’t discuss how to negotiate a term sheet in this post, as we have dedicated resources for that topic.
Keep track and record which investors you have sent a confirmation of receipt to once you have received their signed paperwork, and, finally, which investors’ funds have actually transferred to your bank account. This all may seem very obvious, but now is the most crucial time to stay just as organized and diligent as you have been leading up to this stage of the fundraising round.
Securing the investment capital
Remember, fundraising is a skill that takes practice—just like pitching your company — and will become more natural the more experience you get with it. Though even for an accomplished founder like CEO of Reddit, Steve Huffman, fundraising can still have its challenges. To help founders achieve the best results from their fundraising, we’ve put together an Investor Tracking Sheet (pictured throughout this post) that can be downloaded, shared, and edited for the tracking and organization of fundraising. Follow the steps discussed in this post along with the Investor Tracking Sheet to replicate the same process I’ve used to raise capital for my companies and set yourself up for a successful financing round.