The following process is optimal for early follow-on rounds, i.e. a late seed, or a Series A or B. Most principles apply to later rounds as well.
Approach fundraising with the right mindset
Particularly in the currently very hot funding market, many founders approach fundraising with a transactional mindset: They mostly care about a high valuation and a short time spent on fundraising, so they intend to run a "fast process" and get to a term sheet very quickly.
While this is understandable, it neglects a crucial outcome of fundraising: Your new investors will likely have board seats and therefore influence your company's future in a major way. They will likely stick around for many years. While all is good and nice during fundraising, do you really understand how they are going to react when things get tougher (and they always do in startups sooner or later)?
The best mindset to approach fundraising therefore is:
- Understand that you are not just raising money, you are "hiring" a long-term business partner. Depending on the context, your investors can help you in many ways with introductions, resources, industry expertise, and of course strategic advice. Think early about what you want from an investor.
- Build relationships with relevant investors early. Even if you're not fundraising or if they passed in previous rounds, update them every quarter or so (email is fine, a quick call is better) about your progress. They will get to know you and you will understand their thinking better.
- Think about the outcome you want to achieve for your company. Are you going to be happy with a medium-sized exit after a few years? Or do you have a much higher ambition level, aiming for an IPO? Anything is fine as long as it works for the founding team, but it will guide which kind of investor is best for you.
Define your Ideal Investor Profile
Possible dimensions include:
- Level of industry expertise. This will determine what the nature of the strategic advice is that you can get.
- Geographical footprint: Home market vs. pan-European or even global. If you have plans to internationalize soon, this could be relevant.
- Size of firm and resources for support: Larger VC firms tend to have more resources and often can help with operational tasks such as recruiting. Smaller firms on the other hand are sometimes more specialized and work very closely with their portfolio companies in a more informal way.
- Size of fund and follow-on funds: Larger funds have more money to deploy and can often finance your startup throughout several rounds. However, their business model works only for very large outcomes, so they might put more pressure on their startups to grow very quickly, which changes your risk profile. Smaller, more specialized funds often work with larger firms to arrange follow-on rounds, so that can work as well. Make sure to always ask funds for their follow-on policy and reserves.
- Size and depth of network: Most VC firms are well connected, but the size and particularly depth of their network differs. Some firms (such as btov Partners) work closely with a network of angel investors that have a background in many different industries. This provides a more readily available and trusted network than just having a lot of business acquaintances.
- Brand name and signalling effect: There are a number of VC firms in every market that everybody knows — they either have been around forever or are the hot new shop, and they have a track record with well-known companies. Having a prominent investor at your side can open a lot of doors and potentially make fundraising in the future easier. The downside is that negative developments will be very visible. If such a prominent fund decides not to participate in your next round for whatever reason (could be something that has nothing to do with your company), the negative signalling effect is substantial.
- Stage fit: The trend is going towards VC firms investing at pretty much any round and ticket size, but in reality most are still specialized on certain stages and develop different capabilities and business models depending on this. A pre-seed specialist is very different from a Series A firm and a Series C+ growth fund. Make sure you understand what the sweet spot of investors is and how important this is to you. For example, if you raise a seed round and approach many investors that specialize on later stages, you will hear a lot of "too early for us" declines and waste a lot of time.
Needless to say, all these dimensions are affected by trade-offs. You will not find an investor that is perfect in every dimension, and of course you might need to settle for someone who is less than ideal.
It is therefore important to understand your preferences clearly and align the founding team and existing investors around it. Rank the dimensions above in a clear way and exclude dimensions that you don't think are important for you.
Investor background research
In order to decide which investors you should spend your time on, it is important to do a sufficient amount of background research. Use your Ideal Investor Profile as a guideline and try to substantiate the most important points for every investor that goes onto your long list.
Sources for research:
- VC firm websites
- Crunchbase, Dealroom and similar databases. It might be worth buying a subscription for unlimited use during your fundraise because you will need a lot of this information. These sources help you understand what funds an investor is investing out of, which recent investments they have made (stage, sector, ticket size) and which other investors they work with.
- LinkedIn: Look at the profiles of the individuals that you will potentially pitch and understand their background and topical focus.
- Backchannel references: If you know founders who have raised from a certain firm, it's a good idea to ask them about their experience.
Managing your investor process and funnel
A helpful way to think about this process is to use a funnel — again, similar to any normal marketing and sales process.
For a follow-on fundraise, the funnel stages might be:
- Prospect, no interaction yet (these would be firms you would like to talk to but haven't)
- Initial informal calls (these are investors you had an initial discussion with, maybe based on their own outreach, but not pitched formally)
- Formal reach out (investors you reached out to with a clear "we're fundraising" message)
- First call (initial pitch, typically to 1-2 people at the VC firm, including a partner)
- Second call (often with additional people from the VC firm and from your side)
- Initial due diligence (the VC firm is conducting reference calls etc.)
- Investment Committee/Partner/Management Meeting (you present to the entire partnership, which is typically the final decision point)
- Term Sheet
- Full due diligence (the VC firm is analyzing your business and negotiating contracts)
- Declined (the VC firm was not interested)
- Not interested (you were not interested in working with the VC firm)
The best way to manage this funnel is to either use your existing CRM system or have a separate lightweight system, such as a Kanban board in a tool like Notion or Trello. It is important to give transparency to your core team and ideally also to your board so that everybody is on the same page at any time.
Decide on the narrative
Fundraising is about storytelling as much as it is about hard facts. Your future investors need to buy in on a shared understanding about what you believe the future of your company will look like. Communicating this vision clearly is one of the most important factors in successful fundraising.
But a successful narrative doesn't just consist of a desirable future state, but also of proof points that illustrate why your company will achieve it.
The key elements of a narrative are:
- The one-sentence company purpose: This should be a single sentence that defines why your startup exists and what it wants to achieve. Getting to this level of clarity is very hard, and you should expect to spend a decent amount of time on it.
- Are the problem and market large and relevant enough to build a huge company?
- Why is this opportunity here now? It is very rare to have an entirely new idea, so most likely similar things have been tried before. Why is now the right time?
- Why are we the right company/team to capture it?
- What have we proven so far? (in terms of traction, building a product, etc.) to show that we are the right team? Some short data points ("we increased our MRR by a factor of 5x") work best.
- Why we are raising now and how will the capital help us grow?
All these elements will go into a pitch deck in more detail later, but you should be able to explain the points above in just a short elevator pitch to investors.
Define the desired parameters
Before you go out to the market, you need to understand what the desired parameters are in terms of round size, valuation expectations, round constellation and other terms.
- Round size: Take a typical round size for your stage in your industry and geography as the starting point. Note that there are huge differences between similar companies depending on location and industry, so make sure you compare yourself with a relevant set. Decide in your business plan what you would do with this amount of capital and how much of a runway it would give you.
- Round size upper/lower bounds: It is not unusual that investors will push you to raise more money once they're interested. It's also possible that investors will tell you that you're not quite ready for your intended number and offer a smaller check. Think in advance about what that would mean for the development of the business and set minimum and maximum numbers that you would be willing to discuss.
- Valuation and dilution: By now, the market standard is that you are going to dilute 20% in an early (pre Series C) funding round. This value of course implies the valuation that you are able to get. Depending on how the company is doing, how competitive the round is, and how much leverage the investor has, this value might go up and down a bit, but don't expect fundamental deviations from this anchor point. It has turned out to be a successful pattern over many years, so few investors are willing to discuss very different terms. It is a frequent mistake of less experienced founder teams to optimize purely for valuation. Of course dilution hurts, but a particularly high valuation doesn't just have advantages. Your company will have to grow in to this valuation to raise the next round of funding. As a rule of thumb, a startup should grow to about 3x the valuation of the previous round to raise another round, so imagine what this means for your operational business. Also, the best investors are not necessarily forced to pay the highest valuation, so this is another trade-off to be aware of.
- Round constellation: Before starting the fundraise, you should ask existing investors if they are willing to join the round and at what size. It's fairly customary for investors to at least execute their pro-rata rights, and some might have even more appetite. Others might prefer to get out and be open to a secondary transaction where another investor buys their shares. In any case it's useful to understand your existing investors’ preferences. Another consideration is if you want to work with a single VC firm or if you are open for a syndicate of 2 or more firms. Generally speaking, syndicates can be powerful because you get more smart people and their networks at the table, but it can also complicate things. Finally, sometimes additional angel investors with a strategic impact might want to join the round with small tickets. Decide if you are open for that. In most cases, a lead investor will have their own plans for what the round will look like, so be aware that this is going to be a point of negotiation.
- Other terms: Most term sheets nowadays are fairly standardized regarding key terms such as liquidation preferences, control rights and founder vesting. You should understand what these standard terms are and decide if there are any terms that would be a no-go for your team. This is always subject to negotiation once an investor is ready to issue a term sheet, but it's important to understand your own desired outcome.
Preparing the materials
It will also send a strongly positive signal to investors if you come well prepared. Execution risk (is the team able to pull this off?) is a major consideration in any investor decision, so if you demonstrate that you are on top of things, it helps a lot.
For a typical raise you will need at least
- Pitch deck: There are plenty of resources on how to build an ideal deck. Ideally you should have a short version (10-15 pages) for initial pitches and send-outs and a longer version (up to 40 pages) with supporting materials for in-depth discussions.
- Financial model: VCs will want to see a financial model in order to understand how you structure your business and what your financial assumptions are, including such crucial things as unit costs and CAC/LTV ratios. A financial model should at least cover the current and next two years, sometimes it can go out up to five years. It is important to understand that investors don't expect you to predict the future. Of course the real numbers will look different in reality. But they need this perspective to understand your thinking from a quantitative point of view.
- Cap table: VCs want to understand the current ownership, so be prepared with a clean and correct cap table. Using a tool such as Ledgy makes this easier.
- Pipeline excerpt or funnel metrics: If you're a B2B business, investors will want to understand who is currently in your sales funnel. In B2C, they will want to understand what your funnel metrics (conversion rates etc.) look like.
- Investor FAQ: Investor questions tend to be quite similar, so it is often a good idea to write down concise answers for the most frequently asked questions. You will still be asked these questions in calls, but having prepared a clear answer will always help.
- Product Demo Videos: Many investors will want to try the product themselves (always a positive sign), but for others a short video will help.
- Detailed product roadmap
- Detailed competitive differentiation: A crucial investor question is "how are you different and better than your competition"? You should have a short one-slide answer in your pitch deck, but providing more detailed information for advanced discussions will help.
- Customer personas: Illustrates how you think about your target market.
- Org chart and hiring plan: Also demonstrates ability to think ahead about an important next step
You should be prepared before your first investor calls with a virtual data room that contains these documents. Traditionally, a well-structured shared folder on GDrive or Dropbox works well, but you can go the extra mile and provide a more easily navigatable page on a tool such as Notion. VCs have to look at a lot of startup materials, so the easier you make it for them, the better.
This is also a good time to find a lawyer you can work with during the process if you don't have one already. Very often the process moves quickly once an investor gets excited about your company, and you don't want to slow it down trying to find a good lawyer.
Prepare for pitching
You should therefore reserve enough time to build and refine the pitch deck and to optimize your delivery.
- Do a couple iterations with your internal team to get to a point where you as a team feel that you're communicating your company's advantages really well.
- Involve your board members and other investors for feedback. Be prepared for very direct feedback. Investors look at pitch decks differently and they will probably give you a lot of hints for how to improve it.
- Once you have iterated a few times, show the deck to somebody who is not familiar with your business. This could ideally be a person at one of you existing investors' firms who is not close to you, but has the specialized view of an investor.
- Do mock pitches, presenting the deck to somebody else. This might feel a bit silly initially, but it will help you tremendously with clarity. It will also help you decide who on the team should present which materials.
- Do mock Q&As with your investors. Ask a board member or other investor to "grill" you in a pretend investor deep-dive. They know what investors typically ask, and it's an ideal way to optimize your responses.
It is important to be clear internally about who does what in the fundraising process.
Some companies let somebody else, e.g. the CFO or even an external consultant, lead the fundraise, but particularly for early-stage companies this comes across as too much overhead and a potential weakness on the part of the CEO. Startup CEOs have to be great sellers, and if you can't or won't pitch investors, this raises an orange flag.
Expect the fundraise to consume most of the CEO's attention and time while it is going on, presumably a period of weeks or months. A first step is therefore to distribute the CEO's other responsibilities temporarily to other team members.
A typical line-up of tasks looks like this:
- Investor background research can be done by any team member, but the CEO has to be aware of the results on a detailed level.
- The CEO does an initial outreach to potentially interested investors. This can be supported by other staff (e.g. to maintain the CRM), but emails should always come from the CEO's account.
- The CEO does an initial call. It sometimes makes sense to involve another team member in early calls. For example, if you are talking to a more technically minded investor, having the CTO on the first call might make sense.
- On a second and further calls, the CEO should ideally be joined by the entire founding team, maybe even other relevant executives such as the head of sales.
- Expect investors at an advanced stage of discussions to come up with very specific questions, often of a financial or KPI nature. The CFO (or other finance person) should therefore be ready to run additional models and prepare materials.
- Once a term sheet is issued and an investor starts a detailed due diligence, the process of digging into the details is often led by the CFO/Head of Finance. Other due diligence elements (technical, customer references, etc.) should be supported by the respective department head.
- Contract negotiations should be lead by the CEO with the help of an external lawyer
Run the process
Once the preparation work is done, you can start with formal outreaches. This is the point in time when you officially communicate to the market that you are now fundraising.
- Define your reach-out sequence: It is rarely a good idea to reach out to the most desirable investors first. Your pitch might still be a bit rough around the edges, and you want to talk to the top investors when you already can show some momentum. Start with the 2nd tier of investors — those who you would love to work with, but who might not be absolute top notch. This will give you initial market feedback and potentially go into advanced discussions rapidly, which is something you can use to signal a certain level of urgency to other investors.
- Get introductions: If you have informally spoken with an investor before, you should reach out directly. For new contacts, try to get an intro from one of your existing investors or other contacts. If you know other founders who have raised from one of your targets, having them intro you to one of your investors is often one of the most powerful referrals you can get.
- Involve your board: Your existing investors will be able to help with additional intros and also valuable tactical advice. Keep them posted about your progress on a weekly basis and don't be shy to ask for help. For example, if you produce additional materials, have them take a look at it. They will give you feedback from an investor's perspective.
- Schedule meetings tightly: Your process should not drag out too long, so you should step on the gas from the very beginning. Having 5-10 initial meetings per week in the first 2-3 weeks is often a good number, assuming investors get back to you quickly enough. When investors ask for a second meeting, be sure to schedule it quickly as well, within a couple of days ideally.
- Expect additional inbound interest: The VC world is tightly connected and people will start talking about you. You will likely get inbound requests of the type "I heard you guys are raising, can we talk?". If the investor is not entirely outside of your ideal profile, make sure to take these calls because these investors are highly motivated.
- Share information about your status selectively: Most VCs will ask you where you stand in your process, and it's best to give them a truthful answer without disclosing too much information. If you just started, say that but also point out that you're getting a lot of inbound interest. If you are further ahead in the process with several firms, say that, but don't oversell it. If a VC gets the impression that you are already close to a term sheet with other top funds, they might not want to invest the time to do all the research about you, just to lose the deal a few days later. It is therefore absolutely OK to be fairly vague about your status. But whatever you do, don't lie. Pretending to have a term sheet if you don't have one will backfire. This is an industry with very close feedback loops.
- Be quick with additional information: If an investor asks for more information about a topic, make sure you can react quickly and accurately.
- Follow up, but don't get overeager: If a VC doesn't get back to you with feedback within a few days (or by the time they promised to) it's OK to ask what they think. Suggest that you're in discussions with other funds and want to make sure you can continue the conversation with this fund. If you can, share a new data point (e.g. your MRR just increased by x%) to get their interest. But don't seem desperate because this will signal that your process isn't going well.
- Prepare and share references: Most investors will want to talk with a couple of your customers before making a term sheet decision. Be sure to ask some of your key customers in advance if they would be willing to take a few short calls to help you with your raise (most are happy to do it). Share these references selectively with VCs who are further along in the process.
- Get your own references on the investor: As mentioned above, signing a term sheet means entering into a close multi-year business partnership, so it's legitimate to do your own diligence on the investor. Most VCs will be happy to make introductions to their existing portfolio companies to give you a perspective on how they are as an investor and board member.
- Once a term sheet lands, decide quickly with your board: Once you get the commitment of one or several investors in the form of a term sheet, it is essential to involve your board to decide collectively if and which term sheets you should accept. There might still be some small iterations on specific terms, but in general not much will change in substance. If you are not perfectly happy with the term sheet(s) you got, it's absolutely fine to continue the process, particularly if you are close to a term sheet with other VCs. But make sure you understand if and when an issued term sheet expires (many do), and by all means respect the confidentiality of the term sheet. Telling confidential details to other VCs will not reflect well on you and can kill a deal.
- Sign the term sheet and consider your communication strategy: Once you sign the term sheet (congratulations!) it is important to inform other involved parties in the right sequence. Term sheets are confidential, so avoid spreading the information beyond a need-to-know basis. Legally and pragmatically you have to inform existing investors quickly because they have to make up their minds if they want to join the round. You should of course inform your executive team if they are not aware of the status. If you should already inform the broader team at the company will depend on company size and other factors, but consider that a term sheet is not a done deal and people might be very disappointed (to the point of losing trust in management) if the investment doesn't happen after all. These are factors to balance. Make sure to mention to everybody very specifically that this information is strictly confidential. Under no circumstances should you mention anything publicly or to journalists. Word spreads very quickly anyway, and major leaks can still sink deals. Furthermore, many top journalists prefer to get an "exclusive" once you announce your funding, but that's of course not possible if the information is already public.
- Negotiate the round structure: Assuming that existing investors will want to participate and you have 1-3 new VC firms and potentially some new angels joining the round, there will be a brief phase of structuring the round, specifically allocating who gets to invest how much for what percentage of ownership. This will be mostly a negotiation between the founders and the lead investor, but expect other parties to lobby you for allocation if it is an oversubscribed deal. The goal is to accommodate everybody's interest as well as you can, but in most cases nobody will get their preferred goal perfectly. Everybody having to compromise is a sign of well structured deal.
- Run an efficient due diligence process: After signing a term sheet, the lead investor will conduct a deeper due diligence. This should normally not take more than 2 weeks or so, but if complications arise it can take longer. Make sure that you provide all the resources needed. A drawn-out due diligence can hurt deal momentum and adds risk.
- Negotiate and sign contracts: Most rounds will need an investment agreement and shareholder's agreement. These will be longer contracts that detail the terms of the term sheet. Expect this process to take anywhere from a a couple of weeks to a 2-3 months, depending on complexity. As always, quicker is better, so make sure to keep the parties involved (including lawyers) focused on the goal.
- Receive the money: Once the money is in the bank, it's now really time to celebrate!
Frequently asked questions
- Should I even talk to associates or just partners? There's a preconceived notion that only partners can make decisions and therefore are the only people worth talking to. In today's market with its much larger dealflow density that's not really a helpful strategy anymore. Associates or principals are often tasked with identifying the most interesting opportunities and will take you to a partner very quickly if you are a match for the fund's strategy. VC has become a lot more competitive in recent years and most funds will move quickly.
- Should I ask for an NDA from investors? No.
- How do I deal with rejection? Even the best fundraisers will get a lot of No's. That's just part of the game. It's not unusual to pitch 30-50 VC firms before you get a term sheet. Getting rejected is always hard, but think of it as another step that takes you toward the ideal investor. If the rejecting VCs don't give you specific feedback, it's legitimate to ask. You will learn a lot from their reasons to reject you and can adapt your strategy accordingly.
- How should I interpret feedback in rejections? The feedback from VCs that reject you has to be taken with a grain of salt. Most will express some of the reasons they didn't like your pitch, but not get very specific. In some cases, they might not give you the real reasons because they are difficult to talk about — examples would include concerns about the founder team dynamics, the impression that the product is not very good, or doubts about the founders' ambition level. These concerns are hard to express without offending people, so most investors will refrain from mentioning them. If you start hearing the same specific feedback points from several investors, it's worth taking a step back and asking yourself if this might be a real weakness in you strategy. But you should avoid changing your strategy or messaging based on just a few weak data points. Investors have all kinds of perspectives, and not everybody might be familiar with your market.
- What if I run out of options on my list? It can happen that you pitched pretty much everybody on your list of desirable investors and everybody rejected you. If that happens, it's time to get creative. Can you find investors in other countries who might be interested in investing in your country? How about corporate VCs and strategic investors? Some family offices invest directly in startups and might have an affinity to your topic.
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