It is always hard to fundraise, and every founder has their own way. But the process may get a bit less tedious if you know how it typically happens.
Step 1. Deciding to raise money
Startups don't always need to raise money to grow and scale. Some companies bootstrap for a long time till they decide to raise their first round.
It isn’t worth raising money just to get attention from the media. Raising a round can be huge news, but PR itself isn’t a proper reason to look for investment.
There is also no need to attract investments if a startup just needs money to pay off the debts or founders are curious to find out their startup’s valuation.
If your startup can grow with your own money, consider doing it as long as possible. Startups that raise investments often become dependent on their investors — at least to some extent.
This “dependence” can be a good thing if the founder lacks expertise, network or capital to fuel the growth of the business, as investors can help with these things. But it can also demotivate founders.
Step 2. Preparing to fundraise
Before talking to investors, it’s helpful to do these 4 steps:
1. Data room.
2. A list of references.
3. A list of target investors.
4. A startup presentation, or a pitch deck.
Collecting all the data about the startup in one place (often called Data Room) is a good start. Investors will ask you to share the info about the startup anyway, so it’s best to have it prepared.
Read more: Build your ‘data room’.
Another document that helps at this stage is a list of people who can provide the reference about the startup and its founders. The list can include clients, former colleagues, and previous investors.
Another handy list — a list of 50-100 target investors with notes about your previous communication with them. Otherwise, it will be hard to remember the details and stage of negotiations with each investor.
And, perhaps, the most important thing to fuel the first conversation with an investor is a pitch deck. According to a recent study, investors spend 2:42 minutes on average to read a deck. This means the presentation must be short — 15 slides max.
A pitch deck should contain only the most important info: problem and how the startup solves it; business model and approach to sales; growth metrics; founders and first employees; a summary.
Read more: Here’s how to make a 5-slide pitch deck.
There’s one more thing a founder can do to prepare — memorize the basic business numbers, such as monthly revenue growth and LTV to CAC ratio. It shows that the founder analyzes their key metrics and uses a data-driven approach to running a company.
Step 3. Meeting VCs
To meet potential investors, startup founders can use their own network and open databases, take part in industry events, and be active in PR or SMM.
The most common ways a founder meets a VC:
Sending a cold email or texting on social media. Use this email template to pitch your startup to investors.
Getting an introduction. It helps to be an active member of the tech community and visit networking events like conferences and workshops.
Getting noticed at pitch competitions (especially those held at big-name events like Web Summit or Slush).
Getting noticed because of your PR and social media activities.
Get on investors’ radar through databases (Crunchbase, Tracxn, OpenVC).
4. Raising a round
According to a recent study, a solo founder goes through about 50 meetings with investors to attract funding at a pre-seed round. For 60% of startups, the process takes 12 weeks, while for the rest — over three months.
After the first meeting, VCs would usually ask to send them a pitch deck to understand if your company fits their investment thesis. If all goes well, you will set the first video call and start talking about the company, product, team, and market in detail.
VCs will then analyze the data and organize an investment committee. If everything is OK, the VC arranges a call for the startup with fund partners and some other team members.
If all’s good at this stage too, the VC makes an investment offer and negotiations begin.
This column is based on the lecture by Elena Mazhuha, investment director at Flyer One Ventures, as part of the 3-week Startup Academy course by Google.