OUR GUIDE TO FUNDRAISING:
Humble Suggestions for New Entrepreneurs
Raising capital is a critical step in the entrepreneurial journey, and it’s essential to approach it with the same level of professionalism as building your product and team. The ability to raise money is one of the core capabilities of a startup CEO, and we hope our perspective on the matter will help you navigate the process of planning and running a successful fundraising round.
In our opinion, choosing investors is the second most important decision in your entrepreneurial journey after choosing your co-founders. Make sure you choose investors you trust and want to work with, and try to get to know them as best you can before making a decision. Then consider the potential added value the investors can bring, and only then consider the financial and legal terms of the deal.
We recommend that you start with defining your fundraising Goals
How much money do you really need? Start by determining the actual amount you need to raise. This should be based on many specific factors - sector benchmarks, the level of technological (and other) resources needed, the existing competition and what it takes to beat it, etc.
As a general guideline - we recommend that you start with the minimum funds necessary. This is important in so many ways - from building the company with the right lean DNA from day one, through choosing the right investors for the stage (angels, micro VCs, VCs) to avoiding the inability to get to the KPIs for the next round if the size and valuation of the first round were exaggerated.
Try to be as accurate as you can (things will surely change along the way:) on your business plan, including projected costs for product development, marketing, hiring, and operational expenses. Clearly outline the purpose of the funds. Investors want to know how their money will be used.
Seasoned financial figures from firms such as the Big 4 (EY as the most significant one in the Hi-tech sector in Israel) will be happy to help you voluntarily at this stage, counting on your collaboration with them once you manage to raise your round.
Choosing the right stage and timing for your fundraising round
The next step we recommend is to decide about the right stage and timing of the round. Do you want to raise based on your resume alone? Have you conducted actual validation and come with a prepared agenda? Or alternatively do you only want to raise once you’ve built something tangible and/or gained your first customers?
As opposed to what you might think - this is not necessarily related to how experienced the team is. We’ve met successful second timers who insisted on starting their fundraising only after extensive validation and meticulous preparation, and have met first timers who just left the army with no real-life experience and decided to raise based on their credentials only.
This decision is important both for your own conviction in your idea, but also for choosing the right investors. While an idea alone might be great for many angels and micro VCs, larger VCs will differ significantly due to their ideology and methodology. We highly recommend that no matter what you choose, you’ll approach the right investors to accommodate your stage.
Understanding the market
We recommend that you research the current market conditions for fundraising, including trends in investment amounts, popular sectors, and active investors. This will help you set realistic expectations. You can use sources such as IVC, Crunchbase, Pitchbook CB Insights for benchmarking (most of them cost money, so we recommend you try and find friends who have access to them and use them when you know what questions you’re trying to answer). More importantly, we highly recommend consulting with other founders, preferably a few ones representing different stages and perspectives of companies from the same domain. In addition, friends and colleagues who work in the VC ecosystem might be a great source as well, and they are usually happy to meet potential founders.
Identifying your ideal investors
Once you’ve understood how much you want to raise and at what stage, and feel you have a good enough grasp of your specific ecosystem, you can move to identifying your Ideal Investors. In addition to the above (amount needed, your stage and the market), we recommend that you look for investors who could potentially bring you significant added value. This can come in the form of specific domain expertise, unique capabilities relevant to your needs, access to a relevant network of connections, reputation etc.
Many times a good fundraising round would be composed of a few investors who bring different attributes to the table.
Once you have targeted the desired list of potential investors, conduct another step in your research and try to understand as many details as you can about them -
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Are they still active and have enough money as “dry powder”? (search for the total size of the current fund, how much money was already deployed and how old is the fund, how many investments have they made recently etc)
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Have they invested in similar companies? And when? Do they have competing portfolio companies who might cause a conflict of interest?
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If you can, try to already speak with existing portfolio founders of theirs.
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More specifically, try to understand who would be the best or most relevant partner in the fund to try and reach out to.
Prioritize your list of potential investors. Start with those who are most aligned with your goals and have a proven interest in your industry. Consider the value they can bring beyond money, such as industry connections or mentorship.
We highly recommend that you manage this process professionally, determining the order and pace of approaching different investors and keeping track of all meetings, including the summary of each meeting and an on-going “breathing” Q&A document summarizing all the questions that you’ve been asked and your best answers for them.
We usually recommend starting with trying to bring on-board relevant angels, who are not only a source of money but are significant figures in the domain of your venture, bringing both credibility and actual potential value.
Plan the order in which you approach investors. Most would argue that you should start with those investors who are most likely to invest, followed by others who may need more convincing or bring less value. However, there’s also benefit in actually starting with the ones who can potentially “cause less damage”, on which you can practice and perfect your pitch. Should you choose this method, make sure you start with investors who are as possibly detached from the rest of the ecosystem and the investors you actually want to convince. Remember that investors talk with other investors, and that unfortunately there’s a significant psychological element in the investment process. Investors who understand that you've been trying to raise from others and received negative responses will take this into consideration as another factor in their decision. They might also challenge your fundraising strategy, questioning your decision to first approach investors who are not the right fit or are not considered to be good investors.
Some entrepreneurs choose the approach of condensing the fundraising round into a few weeks, approaching all relevant investors at the same time. While this has the potential to create the image of a “hot lead”, bring FOMO (Fear of missing out) and increase competition between investors, maximizing both the potential to close the round faster and to create better terms for you, it can cause the opposite effect if a few weeks have passed and nothing closes, causing the effect of a “cold lead” and bringing investors to “sit on the fence” and wait for others to decide. We wouldn’t recommend this approach unless you are highly confident in your ability to convince investors (which is usually the case mostly with second-time or serial entrepreneurs).
In the link below are some maps that may help you to better understand the investor ecosystem:
Approaching the investors
Whenever possible, seek warm introductions to investors. A referral from a trusted source increases the likelihood of getting a meeting and being seriously considered.
We recommend that you avoid “finders” who work for a “finder’s fee”. Although many of them are great guys on a personal level, for us the fact that an early-stage founder chose to approach us that way put this founder in a negative starting point. We believe that the fundraising process is the CEO’s job - from planning the strategy, to finding a smart path to reach us, and all the way to the pitching and to organizing the data needed.
We always prefer hot intros through someone we know and trust, and who do not have a clear financial incentive for making the intro. Should you have no such options, we prefer cold outreach over “finders”.
Prepare to pitch
Craft a compelling story: your pitch should tell a story that resonates with investors. Clearly communicate your vision, the problem you’re solving, the size of the opportunity, and why your team is uniquely positioned to succeed.
Perfect your pitch deck: your pitch deck is a critical tool in fundraising. It should be concise, visually appealing, and cover key areas such as market opportunity, product, business model, traction, team, and financial projections. We highly recommend treating this as any other important skill, and having someone who is an expert in this area to help you could be critical. The major challenge is that the market is full of “noise” and many “wannabe experts” who presume to be pitching or story-telling experts. As a rule of thumb - avoid people who promise to make your pitch perfect in one or two meetings! The perfect pitch is a combination of so many things and depends on so many specific factors that crafting it is bound to be a significant process. We recommend that you only choose who you want to work with after careful consideration and personal recommendations from people or organizations you trust. Should you need recommendations, we’d be happy to provide some.
Since the good ones are highly expensive and as we explained this is not a “one-time” thing, this is an expensive process which might not be an option for many young founders. One way around this is to try and join one of the top accelerators (YC, TechStars, 8200 etc) if they offer someone you believe to be tier 1 in this area.
Practice and rehearse
In any case, whether you manage to work with an expert or not, we highly recommend that you practice and rehearse your pitch multiple times until you can deliver it smoothly. Anticipate questions and prepare thoughtful responses. The more you practice, the more confident you’ll be during actual investor meetings.
We recommend that you conduct designated simulations with your other co-founders, friends from the industry or even professionals from the VC ecosystem who can be found in platforms such as Fiverr and Upwork (where you can hire someone for a meeting and practice in front of strangers who have some level of understating of the industry).
Professionalism is Key
Due Diligence Preparation: Be prepared to provide detailed information during the due diligence process. This includes financial statements, legal documents, and detailed explanations of your business model and market strategy. See our data-room example here.
Follow-Up: After pitching, always follow up with investors in a timely manner. This shows professionalism and keeps the momentum going. No less important, make sure you answer reasonable investors' requests in a timely manner.
In addition, we highly recommend that you don’t try to rush investors into making a decision too fast - it’s your mutual goal to get to know each other as well as possible before you marry.
Negotiate wisely
When it comes to terms, be prepared to negotiate. Understand what you’re willing to compromise on and what you aren’t. It’s crucial to find a balance between securing the funds you need and maintaining control over your company.