Demystifying Raising Venture Capital
We failed, the company shut down, and people lost their jobs. I was completely devastated by my first experience trying to raise early stage venture capital.
18 months later I got a second chance when I joined Full Harvest. In my first few weeks with the company I built the financial model, pitch deck and launched our Series A fundraise. Three months later we had a fresh $8.5M in the bank from fantastic investors. Since then, we’ve expanded the business, created dozens of jobs, and raised a Series B.
What were the keys to success vs. failure? Every startup’s journey is different, but the following principles are universal, will speed up the fundraising process, and increase your chance of success.
Know Your Business, Customers, and Market
You’d be shocked at how many founders fumble over basic questions such as “what was your revenue last year?” and “how large is your target market?”. You should be able to clearly articulate how the product works, how it drives value for customers, and how the company makes revenue AND profit. Articulate a vision for how your company gets from where it is today to hundreds of millions or billions in revenue, what segments you will attack, and target market penetration (Understanding of your TAM, SAM, and SOM). High quality investors will ask for all of this and much more. Having well articulated answers will attract the best investors.
Get to Know Investors BEFORE Fundraising
Would you marry someone after the first date? Most people would say no, and most good investors believe that about entrepreneurs. For every large investment that I’ve made, I’ve known the founding team for many months, if not years, prior to writing a check.
Investors want to see lines not dots, they want to get to know you over the course of multiple meetings, see how you think and evolve, see how you execute versus your goals, see how you deal with the inevitable adversity, and see if you are willing to be real with them even before they invest. They want to see lines not dots, so choose a few investors that you are interested in and get to know them well prior to fundraising.
Metrics - Now and Later
It is critical to understand where investors expect you to be today, what are the metrics you should have achieved relative to your business model and the fundraising round.
Know where you need to go. If the money is going to last you 18 months until your Series A, you should know what metrics you will need for that round and be able to articulate a path to get there.
“Today we have 3 paying customers and $100k in ARR and we plan to get to 30 paying customers and $1M in ARR in 18 months, which will require us to spend $250k on marketing, $500k on engineering…”
Create Momentum
Throughout the fundraise process, you should strive for the following four things to create momentum and drive interest in your company, which will attract more/better investors for you to choose from and help close the round quickly.
Scarcity -Demonstrate why you are the only company doing X in Y way and NOW is the time for your company to dominate.
Urgency - Create deadlines and milestones. Investors are evaluating dozens of deals, if they believe that they have 6 months to make a decision they will take 6 months. Have a target close date and milestones leading up to that.
Social Proof (unless you are in stealth) - Social proof is external validation of your company. Early on this typically comes from good (ideally free) press, participation in renowned accelerators (YC), impressive advisors, notable hires / co-founders, and notable investors.
Herd Mentality - Investors hate missing out on a hot deal, tell them that other investors are moving fast, term sheets are imminent, and you may move up the close date. If another investor thinks a term sheet is coming, they may jump first and you can now leverage that term sheet to push others.
Pitch Deck and Model
VCs spend 30 seconds skimming a pitch deck before deciding to move on or keep reading. The decks that make it past that first filter are short (10-15 slides), well designed (examples and templates here), and get them excited about the business and team.
Additionally, you should have a 5 year financial forecast (with historic financials if relevant). The level of detail of the model should align with the complexity of your business. A fintech business with complex financial products should have a more complex model. A B2B SaaS company with 3 employees can have a relatively simple model.
Feedback and Iterate
When it comes to the pitch, practice with your team, your co-founders, your partner, your friends in VC, your friends at other startups, and the mirror before going in front of real investors.
Once you start pitching to investors, get candid feedback from your co-founders (if you have them) and/or record the pitches, watch them back, and share with others (if you are solo). I’ve witnessed iterative feedback drive a 10x improvement from the first to the last pitch.
Create Leverage with a Memo and Demo
Your time is incredibly valuable and there are two key things you can create to gain tremendous leverage and speed up the fundraising process: (1) an investment memo and (2) a recorded demo. The AirBase example speaks for itself, they raised $60M in 10 days. The demo should be a voiced-over screen share - highlighting the existing product, demonstrating your knowledge of the customer, and sharing the product roadmap.
Celebrate and Align
Once the fundraise is over, celebrate your “win” and don’t forget to align with your new investors - how they will help, how you will work together, and what information they need to help them help you.
That is all, for now…I’ll be back with more tips and to dive into the weeds of many of the areas outlined above.