Startup Fundraising Process 101
The workflow of a fundraising process varies from company to company. There is no standard set of stages.
Yet, there is a typical flow, an investment funnel, which is the basis of the fundraising process for most startups:
- A coffee meeting and first introduction
- A formal meeting with partners
- An offer
- Closing of the deal
But again, each fund or investor operates in its own way. It is better to clarify all the issues before starting to work towards the fundraising materials. It will give you full control over the situation and the thorough understanding of where you are in their funnel.
The timing of the whole process also may vary. Usually, the entire process for seed rounds takes about 1 month. 1 week for a coffee meeting, next week for a formal meeting, the next two weeks or more — an offer and closing of the deal.
Coffee meetings usually have a person-to-person format. However, if there is a group of investors, or a single investor, who needs a second opinion, the rules may be changed. In this case, there can be two partners to listen to your pitch and company description.
A formal meeting is a more severe pitch and presentation of your company to investors. If you deal with accelerators, there will be lots of investors, that would listen to your presentation.
In the end, there might be a single coffee meeting or a few meetings just to introduce yourself. And only after that, a process of fundraising starts.
And of course, there is no guarantee that you’ll succeed at the first attempt. But each round of negotiations will give you a good lesson. Most likely, you’ll hear questions that you’ll be unable to answer. Use an investor’s feedback to improve your pitch in each round of negotiations.
The next chapter is about how to prepare and act while fundraising:
- How to prepare for negotiations?
- How to negotiate?
- How to choose an investor if you have a few options?
How to Prepare for Negotiations with Investors?
The key to a successful presentation is warming-up the relationships with a pool of relevant investors. Let’s find out why it is vital and how to establish such contacts.
Angel Capital Association Report states that in 2019 angel investors invested a total of $228 million. Angel Investment Network in the US has further reported that there are 250,000 of active investors in the country. And the capital of these investors allows more than 30,000 startups to thrive.
You can either find local investors in nearby business incubators and business schools or check online platforms like AngelList and others. But you need to make a list of all the approachable investors first.
You aim to shortlist the investors who have previously invested in a startup like yours.
Aim for shortlisting 30-50 investors whom you can approach and who are a good fit for your startup. Then, ask your fellow startup founders who cooperated with them for feedback.
Ask them what to add and what not to add in your pitch. You can use the online startup communities like AngelList, MicroVentures, Linkedin, TechCrunch, InvestorList, or InvestorScout to look for fellow startup founders.
Such methods will help you to make a well-designed list of all the investors who can benefit your project. Once you do this, you will be able to study the selected investors and prepare a corresponding pitch deck.
But for now, let’s find out how to make your own list.
Remember that if you are making a list of investors, you should aim to achieve the highest ROI on your efforts. Understand that attracting the investors to your startup is only a slight share of your responsibility. So, make sure that you make smart decisions.
Things to consider while making your list:
- Value: Look for investors who can bring value to your startup. It is not only about money, but investors’ experience and insights. It should be the investors who specialize in startups like yours or the ones who have invested in startups in a similar industry.
- Industry: Investors also have preferences and their own set of choices. While creating your list, make sure to add only those investors who have a desire to invest in your startup industry. It is something that will bring you a lot of value in the future.
- Location of Startup: Some venture capitalists and angel investors prefer local startups as they are easier to approach and follow through. Hence, these investors may advise you to relocate to be near them. Moreover, the extent of support and help they would be willing to provide will also depend on their proximity to your startup.Along with this, pitching your startup in Silicon Valley or other prominent startup fundraising capitals may get you a higher valuation compared to pitching in other locations that are not so popular.
- Investment Potential: Avoid adding to the list those investors who cannot fund your startup in accordance to your requirements. It is better to pitch to those investors who can draw bigger cheques.
- Investor’s Vision: The investor’s personality is also essential. Some investors tend to put a lot of pressure on the founders. Their vision and attitude may not match with your personality and working style.Incompatibility between the investor and the founder can make fundraising for your startup a nightmare. So pay attention to the background of the person you’ll talk to.
- Specialist Field of the Investor: Don’t always focus on the money when you are making a list. Aim to include those investors who will take you to the next startup funding rounds.You should try to find out what benefits and privileges you would get from your investor. Check his or her experience, sales potential, outreach, and the network.Can this investor get you contracts of mature businesses that would benefit from your product or service? Ask these questions before including their names on your list.
- Previous Track: How the investor treats the founders? Does he or she help in forwarding the startup to the next funding rounds? And what about the exits?Try to figure out how the investors behave when they have hard times. You can find it out from other founders who cooperated with these investors during the past several years.
Now you know how to make a list of investors. The next thing you should learn is what information to include in the list:
- Email Address
- Phone Number
- Links to Profiles in Social Media
To obtain this information, you can rely on a few authentic sources:
- Asking within the startup communities or expanding your network
- From Startup Accelerators
- From websites like LinkedIn, Crunchbase, CB Insights, and others.
- The lists of Angel investors and Venture Capitalists published on online platforms, including Angellists, Seedrs, Syndicate Room.
How to Negotiate With Investors
The process of negotiations goes over the pitch sessions. In this part, we’d like to talk about the entire investment flow from the moment you reach out to your investors to the moment when you sign the documents.
So, let’s take a look at general, yet essential tips on how to build your communication:
- Set up mutual expectations. In other words, know what you want and make sure you understand what investors want. It may sound too obvious, but very often, people can’t draw up clearly what they expect to receive. In terms of fundraising, it may have serious consequences. Hence, it’s better to ask a few additional questions rather than assume that you are both on the same page.
- Understand the terms. It is relevant to all documented terms since documents will define the terms and conditions of your cooperation. If you face any unclear issues, especially in areas of financing or legislation, it’s better to contact your lawyer. It will help to ensure that you understand what you are going to sign.
- Do not leave blank spots. It’s the most complicated part since, as an inexperienced founder, you may miss something essential during negotiations. Especially if it is a friendly talk with an experienced investor. The only tip here – check everything twice before signing any documents.
- Don’t mix friendship and business. It doesn’t refer to investors as your family and friends. But not every startup has such a possibility. That’s why it is essential to document everything clearly to avoid misunderstandings.
- Be polite. You won’t get anything being rude. Politeness would be much more beneficial for building strong relationships. Remember that negotiations are the first step in establishing your reputation in a startup world. Plus, you may need help from this investor in the future, so what’s the reason for making a bad showing?
The main tip – your investor is likely to have a portfolio of startup investments. Thus, he or she has better negotiation skills than you. To avoid any issues in the future, you can find an experienced consultant to guide you.
Our guide aims to make your startup an investment goal. Hence, let’s consider the case when a startup has a few attractive offers from investors.
How to Choose an Investor
It may seem strange, but choosing a single option when there is plenty of them is painless.
Just take a step back to your shortlist of investors and check it once more. Define what you were looking for while marked those people as potential investors.
Remember that your investor is not a money-bag. It is a mentor and adviser with an extensive network.
Ask yourself, would you be happy to create a company with such a person on board. It is vital since your first investor will be with you at every stage of business development.
Check out the social and professional background of each candidate once more. Try to find out feedback on previous cooperations. It’s necessary to ensure that the investor would react on bad times adequately as well as be happy for your success.
Another aspect you should pay attention to is the investor’s belief in your startup. Usually, if the investor is excited about your idea, team, and company, he or she will react quickly and provide you with the required funds.
So, build your company fast, but make decisions wisely.