I do a significant amount of startup mentoring and I’m often asked about fundraising. Like many things, I’ve tried to develop a process and decision making criteria. There will always be exceptions to every rule and the odd startup that can raise a round without much preparation, but the vast majority will require focus and discipline to get it done. Here’s what I recommend.
1. Pick the right time – In my opinion, there are only 2 good times of the year to raise money, spring (February-June) and fall (September-November). For the other times of the year, most people who have money (angels and VCs) are off vacationing in fancy places, and getting them to make decisions or coming to consensus is really hard. So, decide when you will be ready to raise money. Your story and pitch should be ready in early February or September depending on which window you’re targeting. Redpoint’s Tomasz Tunguz has some data to support this and suggest the fall is the best window. Work your plan backwards from this timeframe.
2. Pick the right amount - early stage funding tends to come in 3 flavors: angel, seed or Series A. Angel rounds tend to be $250-500k, seed 500k-1M and Series A 2-5M. There is some variance depending on the stage of the company and the specific investor, but for plannings sake, decide on an amount. How much you should raise depends on a few key things: what you need to take the business to the next level (usually 12-18 months runway) and your overall progress compared to all the other things the investors can fund. You can also check out Tomasz’s post (can you see I am a fan of his) which describes the right amount to prepare you for a Series A. Most good angel or seed stage companies have some working product, a small, but growing amount of users, maybe some revenue, a solid founding team… and if you don’t have these, it will be hard to raise a round.
3. Find the right investors (before you need to raise money) – once you’ve picked a timeframe and a general amount, you can start building a list of prospective investors. Focus on; a) Geography – Depending on where you’re based, there are likely investors in your geography who are active (at least 4 investments/year). Look at other companies in your area that have recently been funded (at the same stage) and who invested in them. b) Domain – every company has a “category” they’re working in and it can often be expanded to fit into two or three categories. For example, Rival IQ, which provides competitive analysis for companies (my current company) is a b2b company focused on “marketing tools”, “analytics”, “social media” ,“business intelligence” and “competitive intelligence”. With the categories, start listing all the companies who’ve been funded and by whom (investors). Crunchbase and AngelList (which share data) are great for this work. You should end up with a list of companies, their current investors, locations of the investor, amounts invested, and timing of the investments. Combine the lists (geography, category, comparables), and you will end up with a solid list of investors who are likely to invest in your space, in your area and at your stage. Rank them by who you like best, who has best success and/or where you have connections or history with the particular firm or partner. Separate into “A” (guys you really want) and “B”(people would be fine, but not the best). The B list will be your pitch practice guinea pigs. I tend to have groups of 10-15 investors in A and B.
4. Understand the marketplace – this involves knowing the competition and market comparables. I tend to use a combination of Rival IQ (quick and easy competitive analysis on positioning, seo, social stats…), a MindMap and a spreadsheet for this work. I basically want to compare a) who’s in the space that directly competes with me, b) who might as we grow and c) who might if we get really big (or who would buy us or the competitors along the way). This will give you another list of companies and investors and start to arm you with; “we are similar to X (recently acquired company where investor did well), but unique in these ways…” Investors are great at pattern matching and you need to illuminate the relevant pattern that you fit in. This list will also inform you of the level of acquisition and metrics you might need to move from level to level. Below is a snapshot of a MindMap I did for my recent Rival IQ fundraising.
5. Draft your “story” – considering the timing, the amount, the investors, the marketspace and your own plan of what and how you want to attack the market, you can determine what kind of story you might want to tell. There are various levels and different kinds of progress that can support an investment, and different investors will care about different things in these early days depending on the kind of business you have. For example, when I was raising money for Gist (my last company), we had some investors who were deeply interested in the product (Brad Feld/Foundry), and some others who were more interested in our monetization, and still others more interested in our viral growth of users. All of these are reasonable, just different, and would have required a different story (and proof) of our progress. For Rival IQ, we wanted to tell a story about “validated customer demand” so we targeted >30 paying customers by Sept 15. We also wanted to keep showing customer growth and breadth in demand (verticals, geography…) and, while our story included a strong team, a big market, a cool product, we led with “validated customers” with reasonable $ and $/customer and targeted people who liked that story. Pick your own story and start building supporting data, metrics, comparables… to support it.
6. Connect and test, refine, test – start making connections with funded founders (who know investors) and with the targeted investors (from your list), and testing your story/hypothesis. Unfortunately, this is the hard work of finding ways to get introduced by people who know the investors and will vouch for you. This is a major value of accelerators like Techstars. I would start with the “B” group and test the story. Get short meetings with something like “I am doing X, plan to raise money in the (fall) and wanted to start building a relationship with you now. Given that you have so much experience in this space having invested in A, B and C, I wanted to get your take on Z (very succinct problem you are wrestling with).” Be very tight, very narrow on your questions and listen. What did you think of the response? Was it helpful, specific, logical…and did it help you make a hard decision? If you like the feedback, say thanks and ask if they want to receive updates on your progress. If not (and you will get lots of weak and non-specific answers or advice), say “thanks, that’s valuable input and I will consider that as we move forward” (whether you will or not). In any case, try to limit the first meetings to 30 minutes and let them ask you to stay longer, otherwise you both can get back to your email. If there is strong interest, ask what specific kinds of progress (metrics, growth, product, team…) they have seen from their last 2-3 similar investments at your stage. Try to quantify what you should look like in the future and then you know what to work towards and how likely it is to achieve.
Side note: good investors will not likely invest in you if they are already invested in one of the other players in the space. If you contact them, be very upfront if you think there might be a conflict.
7. Send regular updates – I suggest sending a monthly investor (or prospective) investor update. Bcc people on the list. This is likely to be about one page long (email) and include key items like major wins, product updates, key metrics growth, team additions… It should also provide simple ways for these investors to help, like “looking for an intro to X guy at Twitter” or “looking for great blog posts on SaaS metrics or growth hacking…” Good investors want to help, but you need to make it really easy for them at this stage. Listen and respond quickly if/when they engage. Keep doing these even when you think nobody is listening as it shows commitment, communication skills, ability to build a tribe… You can send these to advisors you meet along the way too as they will often be your conduit to investors. I get about 15 of these every month from companies I’m helping.
8. Assemble the investor puzzle – when you are finally ready to raise the round, you should have a good idea of the potential investors. This may include the skills or domain expertise you really need to help the business get to the next level, and/or the people who have added lots of value along the way. Focus first on getting a lead investor, who will likely take 25-50% of the round. You can gather the followers later, but focus more on the lead as they will dictate terms, structure, timing…and you don’t want to need to go back to the followers over and over as things change. Secure the lead, collect a few followers and target 75% of the full round you want to raise. With this in hand, outline the specific areas where you are still lacking. For example, at Rival IQ we had our VC lead (Vulcan), our solid seed/CEO people (who can help us better run a SaaS company) (David Cohen, Startup Studio) and some people representing our customers (social marketers like Jay Baer and TerraLever) – that got us to about 85% of the round. We wanted more social platform players so we got someone from Facebook and then added the founder of Hootsuite, who has a trifecta of deep Twitter understanding, deep social and SaaS experience and agency background. Boom!! We have 2-3 small spots left and we are being very targeted about who we want and why. The latter investors often come quickly once the leads are in place and fill out the overall puzzle for a great round.
Generally speaking, the round will take you 3-4 months if all goes well and will take the CEO 50-75% of his time. If done well you will end up with a collection of people who complement the business and the founding team. From there, your job is inform and activate them to help grow the business. Good luck. And, once you get a live one, here are few things you might need to be prepared - http://www.tamccann.com/raising-startup-funding-7-things-you-need-to-be-prepared/