There are many myths about startup fundraising, but the truth lies in solid preparation and good execution, like many things in life. This article will explore some critical elements of a successful fundraising campaign, from how much to raise to building demand among target investors.
Startup fundraising is hyped and glamorised by the trade press, but the reality is somewhat different for most founders. Only a small percentage will get the front-page article, win the competition, or make it to the top of the league table. Raising money for your startup is time-consuming, intense, and an emotional rollercoaster of opportunity and rejection.
Capital Pilot's statistics show that nearly half of all companies start their campaign to approach angel investors or venture capitalists with a flawed investor proposition, significantly reducing the likelihood of success and potentially burning significant investor opportunities.
How should founders think about their early-stage fundraising rounds and get their proposition in the best possible shape to maximise the chances of success? It's a competitive market with more startups than money, and investors hold the whip hand. Let's look at how you can put yourself in the best position to raise the capital you need to grow and scale your startup.
Planning your startup’s fundraise
One overarching piece of advice we give to all startups contemplating a fundraise is to take a long hard self-critical look at your business and your team before you kick things off. Fundraising is not a rite of passage, a badge of honour, or a must-have. Make sure that it is the right thing for you - and the right time for your business.
It is common to think about a startup's journey in terms of its progression from seed to Series A, B and C. It sounds simple, but there is a lot more to it than that. Fundraising is what enables you to reach your targets, not a target itself.
Fundraising requires enormous time and energy, takes away your focus on the core business, and exposes you, the founder, to scrutiny and judgment, which can be uncomfortable.
So with that in mind, here are some key things to consider well ahead of time:
Don't fundraise if you can avoid it: Why would you put yourself through an angel or venture capital fundraising process if you could avoid it? Make sure that you have exhausted all other alternatives first. These include:
Grants which enable you to develop your proposition further and improve your attractiveness to investors,
R&D tax credits - a potentially significant source of liquidity, and
Loans - many early-stage growth companies don't have the proper credit profile to take out a loan, but some startup loan options are available.
And finally, think about your current revenue? It's easy to get caught up in the idea of fundraising, but if you can grow your business through generating sales, then explore that first before you settle on equity fundraising.
Decide what kind of company and team you want to be: Once you're on the fundraising ladder, it can be challenging to jump off. A startup founder-turned-VC in the US told us of his experience as a VC-backed founder: "It's like driving a car as fast as you can along a windy road. When you get to a sharp bend and want to slow down, you realise the VC has their foot on top of your foot on the accelerator. It's 50/50 whether you crash or not." Seeking funds for your startup isn't a journey for everybody, so make sure that your team buys into the pros and cons of a high-intensity scaleup journey.
Plan, Plan, Plan: It shouldn't be necessary to say this three times, but we know how many startups fail to plan appropriately. It is not easy to plan too much ahead because things move fast in startup land. There is also a trade-off between starting your fundraising campaign in good time and delaying achieving the next milestone for the company, enhancing your investability. Planning and forward-thinking is essential, and we talk more about this later in this article.
Fundraising is a Sales Process: Inexplicably, some founders approach fundraising with different standards to those they would apply in a sales campaign, but they are identical in most respects. Think of investors as high-value sales targets, and treat them accordingly.
Recognise the Impact of Fundraising on Your Core Business: Fundraising will need to be the principal focus for at least one of your founders for around six months. Your company needs to be prepared to adjust that person's workload to accommodate. The fundraising process will impact your whole team, and priorities may need to shift to accommodate the demands of potential investors.
Prepare for your fundraising campaign
Now that we've been through the health warnings let's talk about how to go about raising money for your startup. Here are pointers to running a successful and relatively pain-free equity raising campaign.
Type of funding: Have you looked at all of the different funding types - grants, R&D tax credits, loans - and either discounted them or used them already?
Type of investor: Once you've settled on an equity raise, what is the appropriate audience for your company, sector, business model and stage of development? Friends and family, angels, venture capital and crowdfunding, are all potential options; you need to decide what fits you best.
Timing: Do you have appropriate traction proof points the type of investor requires for your stage of development?
Investor proposition: Can you articulate how you will achieve their value creation objectives in terms that resonate with the investor?
Objection handling: Have you thought through the potential negatives in your proposition, and do you know how to address them?
Is your house in order? Are your Companies House filings up to date? And your management accounts? Do you have contracts for all your staff? Have you got your EIS advance assurance in place (if relevant)? There are plenty more items that an investor will expect you to have or request to see, and it is worth doing an early audit to spot gaps and fill them.
Once your preparation phase is complete, it's time to try out your investor proposition. As founders, we spend so much time in our own bubble that we forget how to communicate our story to strangers - and in particular, investor strangers. Whether verbally or in writing, your key messages need to be clear and persuasive, and you will need willing helpers, if not professionals, to assist in polishing your messaging.
Think Beyond your Current Fundraising
If you are an early-stage startup, you might be too early for some investors, particularly venture capitalists. But that doesn't mean you shouldn't engage with them. It can be worthwhile approaching investors well ahead of time with the right expectations in place. Often it leads to a much more relaxed and productive conversation because you're not asking for money.
When you are thinking about investors for your current round, do some research on who the relevant investors might be for your next round and find ways to start connecting with them to build relationships. An effective way to build these relationships is to authentically and genuinely ask for advice. Everybody likes to be helpful, particularly in the early-stage world, and many investors will have practical, real-world experience to share. Figure out what direction you need and use it to arrange a short call or meeting.
This approach helps your current fundraising campaign in two ways. First, the ability to speak about potential future investors can attract other potential investors. Second, it will encourage you to consider the value creation proposition you will need in 18-24 months in your next round. Future milestones, goals and targets all enhance your credibility with investors today.
Startup Fundraising Timeframes and Runway
When thinking about how much to raise, the general rule is to raise enough for around 18 months of runway. You will need to start your next fundraise about six months before you need the funds, and as a founder, you need to get off the fundraising treadmill and focus on growing your business. Credible calculations around revenue generation and forecast expenses will underpin your cash flow expectations.
Your fundraise and valuation should also be appropriate for your stage of development as a business. Take a look at Capital Pilot's other resources to learn about financial forecasts and valuation.
Manage your Startup Fundraising like a Sales Process
Pretty much every startup has a CRM system to manage its sales activities. Use it for your fundraise too. Just like a sales process, you will research and generate leads, prioritise, make initial contacts, validate leads, and manage them in your pipeline towards an eventual action through the provision of appropriate collateral.
A warm introduction is just as crucial in fundraising as in sales. Once you have identified a potential investor, do your best to find a way to get an introduction rather than filling in the contact form on the website or sending a cold email. Venture capital investors tell us there is an 80/20 rule here - 80% of funding requests are through cold emails or the contact form; 20% from warm intros. 80% of their investments are from warm introductions.
A word of caution - do not waste time approaching investors who are not a good fit simply because you can arrange a warm introduction. Ultimately, it will be a waste of time when time and resource efficiency is critical.
Key things to consider when setting up your fundraising process:
Know your audience - generally as investors and individually as sales targets.
Build your investor proposition to meet the requirements of your investor.
Create a target list of investors that are a good fit for your business. Qualify, research and identify essential sales points with bespoke approaches.
Maintain a strict sales funnel so that you can identify where each potential investor is in that process.
Follow up swiftly and frequently; don't take silence as a no; your target may have just missed your email.
Don't waste your time chasing leads where there is no fit.
Have materials ready ahead of time for the next step in the sales process.
Design a closing process to create a driver for action within a set timetable.
Note: Unlike a sales process, you may need to corral several different investors to complete your round. Process management and realistic but clear deadlines are vital to ensure you can herd the cats and complete your fundraising according to your timetable.
Putting It All Together
Whether your business is just an idea and looking for friends and family investment, or a revenue-generating scaleup seeking venture capital investment or business loans, the approach to fundraising is similar. Know your audience, fit your investor proposition to that audience, prepare well, and manage your campaign like a sales process.
Fundraising is competitive, and as a founder, you owe it to yourself and your team to be among the 50% of companies who begin their fundraising campaign in the best possible shape, rather than the rest who go to market ill-prepared.
We designed the Capital Pilot's investability assessment and rating to provide founders with benchmarking, insights and suggestions for improvement on their investor proposition, ensuring that you maximise your chances of fundraising success. Find out your rating today.
Where Can I Learn More?
Capital Pilot is here to help founders value their startup. For more information, check out all our Startup FAQs here. Or, if you are ready to get your investability assessment and rating, click here.