Fundraising is one of the key components in getting a business started, but it can also be one of the most challenging, especially if you’re a first-timer. I raised a $3 million seed round from August Capital in August 2011 and learned a few things along the way:
1) The Investor Deck
Put together a concise investor deck that is no longer than 15 slides. Don’t overstuff slides with small details. Just make sure to get the high-level point across and support it with a few pieces of data. Get a LOT of feedback on your investor deck from friends, advisors, and investors. Make sure it’s perfectly formatted and that you know backup details for every single number in your presentation. If you are pre-launch, make sure you conduct experiments so you have some data to back up your hypothesis. Investors will be impressed that you found cheap, clever ways to test the concept.
2) Terms and Structure of the Deal
Decide how much money you need to raise. Put together a detailed monthly model in Excel and project your cash burn as best you can. Raise enough money to hit meaningful milestones. For my company, the seed round milestones were to take the technology risk off the table by moving from a virtual fitting prototype to a web-based product and to sell 1,000 pairs of glasses. We are behind my initial timeline but, luckily, I heeded the good advice to raise more than you think you need. We are on track to hit our milestones with our existing capital, which sets us up nicely to do a Series A.
I have a few friends who tried to reduce the amount they needed to raise by paying themselves and/or employees only with equity. Of course, equity is a major motivator in a startup, but not having a paycheck can add undue stress to an already stressful situation. Obviously, you’ll be making much less than you would have had you joined a large corporation, but at least make sure you can support your basic life needs. It will help prevent burnout.
When you present your “Ask” slide, tell them how much you are raising, but don’t tell them the valuation. That’s a highly negotiated term that is usually set by an investor. As a rule of thumb, venture capital firms typically want between 25% and 35% of your equity for a multimillion-dollar investment. And although it’s illogical and many investors will deny it, the valuation is oftentimes just 3x the money you are asking to raise. Another reason to raise a little more than you thought! Not surprisingly, valuations higher than this generality are usually directly correlated with the competitiveness of the process. Try to get several investors interested to improve your economics. Also, many investors will tell you they are interested but will sit back for someone else to set the price. It can be a tricky dance to get the first investor to set the valuation.
3) Finding the Right Investor
Once your pitch deck is ready and you know how much you need to raise, do your homework to find the right angel investor or venture capital firm for you. Make sure your investment stage and business model are a good fit for them. For example, most firms invest in “consumer Internet,” but dig a little deeper and see if that firm likes two-sided marketplaces, gaming, private label ecommerce, aggregator ecommerce, etc. Doing your homework on the firms will help you narrow the list and save you (and the investors) lots of precious time.
Don’t ignore the local investors. Many people are mistaken that you need to be in Silicon Valley to raise money. There are great angels and VCs in nearly every major city across the country. Looking locally can be a good way to get your foot in the door.
4) How to Meet the Right Investor and Partner
Work your network to get a warm introduction. Admittedly, attending Stanford Business School opened a lot of doors for fundraising because there are a number of VC firms with ties to Stanford. My current VC investor was a judge at a Stanford business plan competition, and one of my professors is an angel investor. Many of my classmates made introductions or recommendations to firms. Reaching out cold to VCs through their websites often doesn’t get you a response. That said, getting introductions is possible through incubators, business plan competitions, and advisors. Find the people you would want on your advisory board and reach out to them for mentorship. Work your LinkedIn network to find and connect with great people.
Once you find the right firm, make sure you find the right partner within that firm. Just like hiring, make sure the partner is a good fit and can add tangible value to your business. It doesn’t need to be the partner you first got introduced to at the firm, so don’t be shy about asking to meet other partners within the firm. Make sure you pick someone who is both valuable to you and an enthusiastic supporter so you have a champion within the venture firm.
5) The Process
If you are raising venture money, your first meeting will likely be with one representative. If that goes well, you can expect to get called back to meet with 2-3 partners. If that goes well, you will be called back in to do a partner-wide meeting, where they will make the final investment decision. It can be a few weeks between meetings, which is why fundraising requires patience. You’ll need to spend time answering due diligence questions between meetings too, so be ready for that.
Fundraising can definitely be a challenge, but do your homework, trust your gut, and use the feedback and connections you make along the way to improve your business.
Kate Endress is a private equity investor turned entrepreneur and e-commerce pioneer. After graduating from Stanford Business School in 2011, Kate cofounded Ditto.com, an ecommerce site selling designer prescription glasses that features new “try-on” technology.
[Top image credit: Robert Kneschke/Shutterstock]
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