Venture capitalists are always looking for the next big thing. They want to invest in startups that have the potential to reshape entire industries. But how do you get them to invest in your company?
Let’s first take a step back and ask ‘what gets VC funds excited?’ The key to answering this lies in understanding VC fund returns. To oversimplify, the handful of successful investments need to more than cover the losses from the remaining failures to make a sensible overall return (Link to article about VC maths). Getting a VC fund excited depends on demonstrating a plausible path to a multi-billion dollar valuation and sustainable profitability at some point in the future.
With that out of the way, startup fundraising can be broken down into three distinct phases: (1) preparation, (2) pitching and (3) closing. Raising money requires getting things right at every step and avoiding the many pitfalls you’ll encounter on your journey.
The first step is to have a good story that answers three key questions:
- What is the market opportunity?
- Why is your company best positioned to win in this market?
- Why is now the right time to invest in you?
Your story will have weaknesses, know what these are and prepare for investors to challenge you on these points. These questions should be answered in a pitch deck, no more than 10-20 pages. (YC’s guide to writing and designing a pitch deck).
In addition to the pitch deck, you need to have all of your financial and legal documents in order. If your company has been operating for a while, consider preparing a dataroom ahead of time.Finally, it’s important to plan your investor outreach before you start taking investor meetings. Don’t rush into pitch mode. Make a long list of investors you want to reach out to, making sure that you fit somewhere into their investment criteria.
Pitching is a very time consuming process and it will take your focus away from the business. For this reason, we recommend that you are either in ‘fundraising mode’ or ‘business mode’ — it’s nearly impossible to succeed at both simultaneously. Co-founders are great here, since only one founder needs to be pitching (typically the CEO).
If you’re not currently fundraising and you receive inbound interest, it can be tempting to take the meeting but we would strongly advise against doing so. It is almost always better to tell the investor when you plan to fundraise and re-engage with them when you enter fundraising mode. Play hard to get.
At the pre-seed and seed stage, it’s normal for companies to reach out to between 50-200 investors. Once you’ve prepared your list of target investors, try to reach out to them all at once. This helps you generate buzz and competitive tension as VCs will talk to each other!
Time is your friend here; if possible, try to set deadlines to get responses, but be wary of pushing VCs out of the process if you’re not making progress elsewhere. It’s also a good idea to avoid holidays over the summer and new year as you will lose momentum.
Every VC fund will have its own process but these typically involve several meetings over a couple of weeks and questions / information requests about the business. Make sure you keep track of responses and follow ups from investors.
If you’re lucky enough to receive a term sheet from an investor, take your time to understand the terms being offered. It helps if you receive more than one term sheet as this will allow you to compare terms and will put you in a stronger negotiating position.
Having a good lawyer really helps here, as they can explain any unusual terms and give you a sense of what is ‘market standard’ and what is ‘off-market’. It’s also a good idea to ask other startup founders for advice as well as references on investors.
Some investors have started ‘open sourcing’ their term sheets (Concept Ventures, Cherry Ventures). It’s worthwhile familiarising yourself with these terms ahead of time.
The best way to increase your chances of getting funded is to make sure you are well-prepared before you even start pitching. Follow our tips to make sure you have a strong foundation in place and most importantly, don’t give up – fundraising can be tough but it’s worth it in the end!