09 Mar 2020
So, in the first part of my fundraising tips series, here are some thoughts on important things to do before kicking off the process:
1. Build the relationship — If you only remember one thing from this post, let it be this: both sides benefit from ample time spent getting to know each other, since fundraising starts long before you “actually start fundraising”. Make a list of the investors you’re targeting and get to know them well in advance of your round. VCs get a lot of cold inbounds, but we prioritize warm intros, so try to get introduced by a connected founder. Then, introduce yourself in a relaxed setting and use the time to get to know each other, tell your story, get some perspective on your business, and see if your world views align. Once you’re ready to run a process, invite your preferred investors to your (generous) timetable, do try to create a little FOMO (a VC’s achilles heel), and be transparent with everyone if things are advancing.
Tempted to turn it into a game? Well, if your first fundraising meeting includes telling a VC that you’ve got one or multiple term sheets on the table, you’re off to an awkward start. Firstly, they’ll wonder skeptically, why you didn’t invite them in earlier (have your real preferred investors passed?) Secondly, they’ll think you’re bluffing — which often gets exposed (and isn’t great for trust). Thirdly, they simply might not have the current bandwidth to catch up or — worst of all — they may be unimpressed with how you navigate the ecosystem.
2. Plan your fundraising cadence around milestones and then get in front of them — Identify turning points, inflection points, in your business; these are your milestones. Then, build a milestone-based fundraising strategy spanning at least one round into the future. Finally, fundraise based on having just reached milestones — don’t fundraise to fund them.
Why is getting in front of milestones so important? Milestones are small proof points that de-risk the round. They mark an end to a current chapter where it may otherwise be difficult for a new investor to know how much more time (read: money) will be needed until the next fundable milestone is reached. Ever heard of a “desert walking” period? Avoid those if you can; few VCs really want to back long periods of development or very slow sales cycles. Reaching milestones, however, can be proof that something is working on a small scale and justifies putting more money into the business at that point in time to accelerate progress. Examples of milestones vary depending on what stage you’re in, but can be anything from hiring the core team to completing a minimal viable product (MVP), reaching positive unit metrics, closing new categories of B2B customers, seeing cohorts start to improve, seeing retention stabilization, or achieving net negative churn, etc.
Fundraising once you’ve passed these points can translate into a higher valuation, competing term sheets, lower founder dilution, or make the difference between closing your round and not. So focus and prioritize to meet your milestones, track your activities with (tons of) data so your data can objectively illustrate your progress and, if you’re not there yet but cash is running low, bootstrap — it’ll be worth it.
Bonus: Presenting your milestone-based fundraising strategy while you build VC relationships can lead to valuable conversations on overall strategy, priorities, tactics, trade offs, etc.
3. Add diversity in your team — If your management team lacks diversity (let’s be honest, odds are it does), do something about it in advance of the round. Times have changed. If you’re an all-male management team, I will ask you where the women are, and so will my male colleagues. Obviously, gender diversity is only one of many dimensions of diversity you should be incorporating and you should have a strategy around this. Diverse teams do perform better. And, if that’s not enough, having a diverse team and showing conscious efforts to build in diversity will impress VCs.
4. Read up on VC math — Only a small fraction of businesses fit the return profile VCs are looking for and many tremendously successful companies will be out of scope for a VC investor. So before reaching out to any investor, know if your stage and end-game vision are in line with their required return. Also, even within VC there are nuances — so find out the fund’s size, stage in its lifecycle, preferred ticket, and required return. As a general rule, a VC’s target return profile will mainly be based on the fund’s size — so the bigger the fund the more they’ll be looking for moonshot cases. Also remember, a VC’s feedback will likely be colored by their fund’s required returns, so make sure to calibrate comments before taking feedback to heart.
5. Think twice about valuation -VCs expect to see healthy up-rounds as a signal that you’ve met the goals of your previous round. So the higher your previous valuation the bigger the expected delta for your next round. Today’s valuation sets the bar, and a very high bar can become a very big burden, even if things have gone very well but still not exactly as planned for the next round (think downround, aggressive convertible note terms, additional dilution, etc.). When in the heat of the round negotiations, both sides tend to focus on the balance between the round size, valuation, and dilution, and some on a symbolic valuation (for street cred?? or tempting secondaries?!) and its easy to forget that bar. The more uncertain the timeline or cash need required to reach the next round’s milestones, the more you may appreciate that valuation buffer later.
Ashley Lundstrom, EQT Ventures