Preparing Now for The Next Round
Make sure you pave the way for future funding rounds by keeping an eye on the future in this one. Some thoughts on forward planning...
It may seem like a bit much to think about future funding rounds when you are just trying to get the current one going. However, there are some things you should keep in mind that can help prepare you for the future.
Build Relationships Early and Often by Asking for Advice
If you are an early-stage startup, you might be too early for some VCs and angels. But that doesn’t mean you shouldn’t engage with them. In fact, it can be really worthwhile approaching investors well ahead of time if the right expectations are set. Often it leads to a much more relaxed and productive conversation because you’re not asking for money.
When you are thinking ahead to a future round, do some research on who the relevant investors might be. Most importantly, find ways to start connecting with them to build relationships.
A great way to build these relationships is to ask for advice. Everybody - particularly in the early-stage world - likes being asked, and many investors will have experience that will be helpful. Figure out what that is and use it as a way to arrange a short call or meeting.
Some ideas on approach:
They might have a portfolio company or an exited investment with a similar business model to yours. They could have insights they could share with you on what went right, and what to avoid.
They shared a post on social media that aligns with your product/service or world view. This could be a good opportunity to engage and explore their thoughts in more detail, and will help you confirm that you are working on the right problem/solution.
The benefit of this approach is getting on the investor’s radar in a low-pressure way. And you may get some expert advice that can help you as a founder beyond your fundraise. Investors are normally happy to give advice if approached correctly, and approaching them outside the fundraise context changes the dynamic.
Do a Regular Update Newsletter
When fundraising you are hopefully engaging with lots of angels and VCs. The vast majority of them are going to pass on this round inevitably, and this could be for a variety of reasons. Maybe you are too early for them, or they want to see a bit more validation. Perhaps they are between funds or don’t have the liquidity to invest at the moment. Maybe they want to follow another investor, not lead the round. Whatever the reason, unless you are very obviously not a fit, these are warm leads and relationships with people that could either invest in a future round or connect you to someone that might.
We recommend adding potential investors or introducers that you are in touch with on your current funding round to a mailing list and sending them regular, monthly or quarterly, updates on your progress. This is probably similar content to what you share with your existing shareholders, without some of the more sensitive data, so it should not need too much additional effort.
The groups of people we include on our mailing list include:
All VCs we have engaged with, even those that passed on us
Former colleagues and social connections who invest or who we know are interested in startups. If they don’t invest themselves they may know people that do
Accelerators that we may not have got into but expressed interest in our business
The purpose of the update is to demonstrate that you are active and making progress in different aspects of your business. But the newsletter is also an opportunity to ask for help - maybe providing feedback on a piece of web content, or recommending new hires. Potential future investors can keep track of you through your newsletter without you chasing them, and you stay front of mind for involvement in potential future rounds.
There are plenty of views on how to structure your update email. We generally keep it high-level and succinct, using bullet points so it’s a quick read. It typically includes:
Highlights - what has changed since the previous update, what are we most proud of, and what maybe hasn’t gone as well?
Asks - we often have one or two things we’d like to request from our readers, such as feedback on a product feature
Metrics - Updates on our key performance indicators, and information on progress in key areas
Team updates - new hires, open roles, etc.
Timeframes and Runway
When thinking about how much to raise, the general rule is to raise enough for around 18 months of runway. The reason is that you will need to start your next fundraise around 6 months before you need the funds, and as a founder, you need to get off the fundraise treadmill and focus on product, customers, employees, scaling the business and all the other stuff to ensure you are maximising the benefit of your current raise. Credible expectations around revenue generation and forecast expenses will underpin your runway expectations. It goes without saying that your fundraise should also be appropriate for your stage of development as a business.
Overall, remember that fundraising is an extended sales process. By engaging early with future investors you are building and qualifying your future sales pipeline. Along with some well-planned marketing, such as your newsletter, you will maximise your chances of successful future engagements.