By Orsolya Szlovenszky
Manager, Portfolio Development
First things first: How to get started?
The goal is to find the right investor fit for you and your company. For this it is key that not only they believe in the success of your idea but the project falls into their investment thesis and fund´s strategy.
So, how do you find the right investor?
A good practice is to start by doing a simple market mapping. Information is publicly available online and there are many sites that specialize in this matter such as Crunchbase, Serena Capital´s VC list, Gust, Pitchbook (paid resource). Also participating in events and networking can help you get the necessary connections and potential future warm introductions.
In this step, the main information to gather refers to:
– the stage the investor invests in,
– its geographic preferences,
– areas of interest and verticals,
– list of co-investors in recent deals,
– typical ticket sizes,
– approach as a round leader or not and
– information about the existing funds they have to deploy.
Also, you may find it relevant to know which were the last couple of investments made by the investor in terms of size of the deal, vertical and date.
In terms of the process, it encompasses typically the following phases:
- Defining target list. Definition of A and B list of investors, with profile and rational to invest (include, if available, typical syndication pools among investors). Plan for investors reach-out and identify right approach for list A and “generic approach” for list B.
- Initial marketing and qualifying of investors. Start by reaching out to “friendly investors” with a match profile to refine approach and positioning based on their initial feedback.
- Initial meetings and follow-ups. First meetings should provide first-hand introduction to the business, vision, strategic goals and why we believe the opportunity matches their investment profile while second and following meetings should be about due diligence follow up and validation of key business assumptions.
- LOI received. Indicative offer and negotiations onwards.
Consequently to this timeline, the ideal time to start the fundraising process is at least to start between 6-9 months before the end of your runway.
What topics should my Pitch Deck have?
Having a solid Pitch Deck which you can adjust and improve along the way is crucial to contact and engage with investors. In terms of length, it should not be more than 15 slides, in terms of content the following subjects are important to be covered:
– The current problem/process that a startup’s product seeks to address
– The size of the market/problem (numbers)
– How the product works/looks and how it addresses the problem
– Competitors and why the startup will outcompete them
– How the startup makes money or plans to make money
– Current stage and expectations for growth
– Fundraising plan with amount and use of proceeds
So, at this stage you have identified your target, you have an agenda/timeline and you have all of the necessary documentation prepared, you are ready to” go out in the field”.
The 15 rules of fundraising that every entrepreneur should know:
- 1. Plan to contact a lot of investors – the larger the pool of candidates the better your chances are, typically you will end up having serious conversations with genuine interest with about five. Having this said the investors should be investors targeted to your sector. The reach can be through cold reach, either directly at events (harder in current times) or via LinkedIn or preferably via warm introductions by shared connections, via your current investors who have a large network and can facilitate the process.
- 2. Build relationships with investors and corporates starting yesterday. Networking, networking, networking. It is crucial to keep relationships going, even when you are not looking to raise money quite yet or are too early on for the investor’s target stage. Developing these relationships is very important, as many investors like to see the evolution of a company, and even if the startup is not quite there yet in terms of metrics, the evolution of the company in the long run will be an important factor for the investor.
- 3. Don’t burn bridges. The venture community is small so anything you say or do can and will be used against you, in other words will classify your approach to business.
- 4. Build passion into your pitch. Who else better than you to talk about the essence of your business?Investors want to know that building your company is your passion, and exactly what you want to do for the rest of your life as well as your employees/team.
- 5. Follow up three times. Follow up quickly and consistently – preferably in a two- to three-week period so that you keep the momentum going. Do not be afraid to get NO as an answer, it is more useful for you to spend time on the targets that matter. Also, try to receive a detailed feedback on why the opportunity was declined – you may learn a lot from other peoples´ insights and it can help you reshape your pitch.
- 6. Decide between metrics focused or big-vision when pitching the business when applicable to your sector. In case of having strong business KPIs vs. your competition you may need to decide whether it’s better to pitch the hype or your strong metrics. Either way real metrics say the business is working. On the other side, if the metrics are still not there do your best to pitch the vision and how you expect the execution will come along.
- 7. Use the information you gathered when prequalifying the Investor in your approach, e-mail and meetings.Know everything you can possibly know, including recent deals, fund details, shared connections and of course the fit as mentioned before regarding market mapping. Show your investor how you are the best fit for them and present your case from their perspective. This may need a little extra work on your side by adjusting your Pitch Deck to match the target Investors investment philosophy, but it is worth the effort. Know reasonably well both the investor and the person you are reaching out to.
- 8. Don’t lose your focus on the business as raising money is not your main objective. Pay attention to the team and your business at the same time. You need your business to be running smoothly and successfully so that you can attract investors´ attention and to be able to deliver the numbers/metrics. It’s a juggling effort, but you need to show you can do it.
- 9. Practice your pitches first with unlikely or “friendly” investors. There are investors that either are a long shot or not the perfect fit just yet, but you can practice on getting your pitch right and receiving hard questions and comments while you are doing this. You may not win the investor (but respect them), but you build up practice.
- 10. Draft a next stage pitch deck right after raising a round. It is a continuous battle, make sure you are always revising and adjusting your story/pitch and you ALWAYS have a pitch ready to be delivered.
- 11. Key performance indicators (when available) usually presented: revenue growth, technological breakthrough, potential revenue (signed and live contracts), team references in terms of expertise, enough runway for the fundraising period. Alternatively, always show what was your plan and how you executed to show you deliver what you plan.
- 12. Be prepared. Some of the key elements that are useful to have prepared before starting the process is your Pitch deck and one-pager, company financials and key information about the company – all in a tidy digital data room. The reason for having these elements prepared early on in the process is not to be overwhelmed when several investors ask you to send over data for them to analyze the deal and you need to reply fast, as we all know, investors don´t like to be kept waiting.
- 13. Company valuation. The concepts of pre-money and post-money valuation are required learning for anyone raising capital as it will determine ownership percentages and economics. In general terms analyze your industry and use the ecosystem as a benchmark to understand how much your competitors are valued. It is especially difficult in the first round to use business metrics and valuation techniques on current revenue, and much easier to focus on the future and the opportunity presented while using comparable. Learn the wording and the language. If required ask other founders or your current investor what are the most relevant wording and how they are impactful in the deal.
- 14. Fundraising and ESOPs. More on the financial side of the deal itself, one of the things to consider are the company´s stock option pool. With the aim of giving a general overview of the main figures around ESOPs. best practices show that the size of the stock option pool should be reviewed annually in conjunction with hiring plans (financing rounds also offer good opportunities for this). Typically, after any financing round through Series B, a company should aim to have an unallocated pool of ~7.5%. After Series C, the unallocated pool should represent roughly 5%, but the terms of exercise are fundamental and all this needs to be synced up with the economic terms of the round (pre-money valuation).
- 15. Personality counts. Some of the characteristics you need to have/own with the purpose of creating a stable and fruitful relationship with the contacted Investors from moment one of your interactions, what is called the DON´Ts:
– Don´t Be dishonest in any way
– Don´t Be arrogant or unfriendly
– Don´t Be overly aggressive
– Don´t Seem indecisive – although it is okay to say you don’t know yet
– Don´t Talk so much they cannot get a word in
– Don´t Be slow to follow-up or close a deal
– Don´t Break an agreement, verbal or written
– Don´t Create detailed financials for the very first presentation
– Don´t Use ridiculous / silly market size numbers without clear justification
– Don´t Claim you know something that you don’t or be afraid to say you don’t know
– Don´t Spend time on the obvious
– Don´t get caught up in unimportant details – don’t let the meeting get away from you
– Don´t ask for an NDA unless you have not done your IP protection homework
– Don´t try to play investors off each other when you are not a fundraising ninja
– Don´t over-optimize your valuation or worry too much about dilution
Remember, this is a process with many ups and downs as well as challenges on the way and a lot has change due to the current pandemic.
Investors continue to invest, although the process tends to take more time as uncertainty influences the decision making as the timelines tend to increase an additional 6 months in a more competitive market.