During the fundraising process, failure to act decisively could turn some investors away — or at least convince them to park their money elsewhere. However, expediency can be costly, especially if you partner with an investor who mismatches your values and pushes you to settle on non-amenable terms. We’ve all heard stories of founders who raised funds from the wrong people. They never end well.
Unfortunately, due to the fast-paced nature of startups, founders don’t always have the luxury of taking their time when pitching potential VCs. So, how do you balance the components of speed and diligence while fundraising? Here are four tips to help you find the right investors quickly and secure the funds you need to scale so you can go back to building your business:
1. Run an Intentional Process
If you use a more sporadic, “spray and pray” approach to fundraising—with no outreach list, no consistent narrative, and no sense of a timeframe—you might end up with disappointing terms. Or, no investors at all.
Therefore, you want to think of fundraising as a series of sprints to find the right investor(s), get offers, and evaluate them to secure the best terms for your company. Even if you are already in conversation with a few firms interested in investing, you must decide whether you will fundraise formally or not.
If you are, creating a “recipe” will help you amplify your efforts. In high-level terms, this is what a process looks like:
You create your deck, a summary of your company, and a list of investors you want to connect with.
You secure the first meeting with those investors to discuss your company to see if it makes sense for them to dig in more.
If successful, you move toward a partner meeting to pitch your company. Depending on the investor’s degree of commitment, they may also request you have a data room ready for them to perform deeper due diligence on your company.
You provide answers to any outstanding questions investors have and, if appropriate, reference checks. Reference checks can come from other founders, existing customers, advisors, and investors.
Finally, you are given a term sheet to review, redline, and—if appropriate—sign.
Savvy founders will use the term sheet to galvanize other investors to get conviction faster. Having a term sheet allows you to pressure the investors at the top of your funnel, forcing them to move down your funnel (more on this below).
2. Keep Your Top of Funnel Full
Even if you have the best idea in the world, not every investor will want to fund you. For example, some VCs only invest in certain categories (e.g., SaaS). If you’re in a different space, pursuing them will almost certainly be a waste of time.
Start thinking about who the right investors are. In most cases, these will be folks who are actively investing and have invested in companies similar to yours in the past. There are few exceptions to the rule, of course. If in doubt, soundboard it with an advisor, an angel investor, or someone in your network who knows more about that specific VC.
In an ideal world, founders would spend minimal time on fundraising and more time building their company and serving their customers. We have heard founders hope that just a shortlist of 10 investors will do. Keep in mind that you can batch your outreach, too, of course (e.g., batch 1, batch 2, batch 3, etc.).
Unfortunately, in most cases, you will need to take more meetings than you think to secure a term sheet. Furthermore, even if some investors seem “promising” and have verbally said they want to get to terms, you can’t bank on anything until terms are signed, and money is in the bank. That’s why it is better to have a larger funnel to work with.
Therefore, as a rule of thumb, if a potential investor in your funnel drops out (e.g., gives you a hard pass)— outreach to a new investor to top up your funnel. Pick a maximum amount of conversations you can handle at once—respecting your other company-building priorities— and try to maintain that equilibrium until you get to a close. Always keep your funnel flowing!
3. Get Help to Create Your Fundraising Assets
Needless to say, it isn’t easy to convince an investor to give you a huge 7 or 8-figure check unless you show up prepared for every step of the process. Before sitting down with a VC, get your assets to make the process as easy as possible for the other side to evaluate your opportunity. These assets include (but are not limited to):
A pitch snippet, which is a short paragraph that summarizes the product, the market opportunity, key team members, and traction and helps you secure the first meeting;
A pitch deck, which is a more comprehensive version of the pitch snippet;
Relevant investment documents (e.g., a convertible note); and, if your startup is further along,
Diligence documents such as a financial model, customer contracts, real estate leases, cap table, and FAQs, for example.
If you are a small team, which is likely, you will need to create the aforementioned assets yourself. This is a useful exercise as it will help you take a step back from building your company to evaluating your company. When done right, this process helps you achieve an even clearer, more refined understanding of your business as an asset.
Common mistake: Many founders get too caught up in trying to explain how their business works from out of the gate versus what their business is and why now is a good time to build it. If the what isn’t clear, then investors won’t be interested in finding out about the how.
Quick tip: if you are a larger team, getting perspectives from others— the leadership team, investors, and external advisors—can help you present your company in the right light for investors.
4. Create FOMO-mentum
Investors don’t want to miss out on promising opportunities. There are many ways to make sure they don’t miss out on yours, and here are two:
Updates about growth during the process. Since fundraising can take a few months, your business might grow rapidly during that time. Giving investors updates about progress can inspire them to move faster.
Once you’ve completed the hardest part of the fundraising process—getting a term sheet—create FOMO (the fear of missing out) to encourage other investors to reach into their wallets. Be sure that you obtain an investor-commitment in writing before you try to drum up FOMO. The last thing you want is to appear to be making false claims in the event a verbal commitment fell through.Updates about significant partnerships within your market. It could be a channel partnership or a strategic collaboration, for example.
There are many ways to build “FOMO-mentum.” But the first principle is this: share any news that signals to investors your company will achieve great things. Once you have some investors on board, follow up with folks who never responded to your initial request: 1) Those who were ambivalent about whether to invest in you, and 2) Those who can invest in later rounds. Maybe you can activate some latent ‘FOMO’ with these individuals and move them to the bottom of your funnel.
In Summary
Close fast and don’t dwell too much on ‘promising’ investors. Fundraising requires full-time effort in short bursts and specific chunks of time. Whatever you do, make sure not to drag the process out any longer than it needs to be. When your meeting is over, be clear about the next steps. If an investor passes, don’t dwell. Take useful feedback and move on to the next VC.
The fundraising process is difficult for many founders. By putting a process in place and letting it guide you until a check is in your hand, it becomes that much easier. Here’s to your successful round!