How to raise Venture Capital for your Startup
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For many founders, raising funding is an important milestone in their journey. The ability to say you run a Venture-Backed startup can be an important validation that opens doors to customers, mentors and even further investment. For this reason, raising funding is often a competitive process, but it doesn’t have to be. We have spoken to some of the top VCs attending Access All to get their tips on finding the right investor, making a connection, and then blowing them away with your pitch.
Know the landscape
When looking to raise money for your startup, it helps to have an understanding of the different types of investor so you can find the one that best fits your circumstances. VCs will usually have sectors of particular expertise — for example Fintech or Ecommerce- but it’s also crucial to consider the stage your company is at before making an approach. It might be tempting to try to secure investment from a big-brand name VC, but at the outset your company might be too early for them.
“Typically VCs don’t look at startups that don’t yet have a minimum viable product (MVP),” said Sri Ayangar, Investment Associate at Force Over Mass. “At that stage you really want to go for an Angel Investor or bootstrap yourself.”
He explained that where a founder has enough savings to fund their startup themselves, or else some kind of revenue from an early customer, they should typically try to finance themselves while they develop the company. Where they don’t have enough resources, an Angel Investor can provide the support they need.
“Angels are helpful because they really care about the team and the concept, they aren’t as focused on the technological readiness,” he added.
Founders often also struggle to change their mindset from round-to-round, Ayangar said. They can find it difficult to recalibrate their focus to what investors are looking for from their next stage of growth.
“In a Seed round, you’re trying to find product-market-fit, in Series A, you’re trying to scale revenues, in Series B, you’re trying to go for expansion,” he said. “VCs know this game quite well, so they can help you prepare for the next round.”
Beyond this, it is helpful to remember that some kinds of investors may double up as customers, so founders should consider their company and their goals before seeking investment. Jeevan Sunner, Associate at Playfair Capital noted that for consumer businesses hoping to access a large group of potential customers, crowdfunding might be a good approach, while for founders looking to eventually sell their business to an incumbent, a Corporate VC might be best.
Planning for your intended outcome is wise, but you should also consider your potential investors and whether your startup fits in with their goals.
“We’re looking for moonshot bets that can return the whole fund,” said Hector Mason, Investment Associate at Episode 1. “We see a lot of pitches that are really good, really interesting ideas with good teams. They’re going to build good businesses, but it’s just that the market isn’t big enough.”
He added: “If they show that if they execute perfectly they can be doing £10m a year, we’re just not going to look at that because it’s a nice business, but it doesn’t fit into the VC model for us.”
Build your network
Human networks are just as important as technological ones in the world of Venture Capital. This isn’t always a good thing — indeed, our aim with Access All is to break some of these networks open and help more people in — but Mason pointed out that while networks can work against you in the beginning, successful founders must eventually find a way to build their own.
“Doing the networking yourself is a good leading indicator of a good founder because, frankly, if you don’t have a network, you’re going to need to build one at some stage. So, if you can prove that you can reach out to people and make a connection with the people who are going to be able to help you, that’s a really good sign.”
Pitching events are a great place to start, he said, and the benefits will spill over into other parts of your business.
“You’re going to need to convince people to become your customers anyway,” he said. “You need to be able to convince companies to pay for your service, so it’s going to help if you can prove that you can build a network and appeal to people.”
Get to know your investor
Research is critical before pitching an investor. The due diligence process is in-depth and can be time-consuming, so it’s important to make sure you target the right investors. We covered pre-pitch research in our piece on pitching to corporates [link], but there are some considerations worth highlighting that are specific to VCs.
“VCs go through their own fundraising processes, so understand where they are in their fund cycle,” c said. “Year one will look very different from year seven.”
Ayangar warned VC funds can be something of a black box from the outside, but that researching a fund’s partners was a quick way to quickly build up an understanding of their expertise and how they can help.
“You want to see if they can actually provide some sort of expertise, if they have prior experience in the industry, if they’ve helped startups scale in the past,” he said. “You want to understand what kind of differentiating experience they have, and how they can add value to you”.
Expertise is only one part of the equation though. Sunner noted it’s important to be able to relate to your potential investors on a human level, beyond the business logic.
“These have to be people that you feel like you can work with, that you gel with. You want similar things in business, but also in life,” she said.
Of course, it’s difficult to judge personal compatibility from a distance, so Sunner recommends making time in the pitch meeting to focus on your potential investor and where they’re coming from.
“If you have an hour meeting, leave 20 minutes at the end to talk about them and qualify them. What’s your relationship and chemistry like? You should be using that time to show off that you’ve done your research on them and understand if they’re right for you”.
Learn what they look for
Of course, it’s impossible to judge cultural fit if you never get in the room. VCs receive countless pitches every day, so in order to stand out its crucial to understand what they are looking for. For Ayangar, the first thing he tries to gauge when receiving a pitch is the size of the problem it is solving.
“Is it a really big pain point, or a small niche problem?” he said. “Often startups try to just improve observed experience.”
He gave the hypothetical example of a company looking to improve on the AirBnB experience: “That’s not a problem, you’re just trying to innovate something that already exists.”
Besides solving a compelling problem, the other things a VC is looking for will change based on your startup’s maturity, he explained.
“Team is really important at the seed stage, because at that stage the startup hasn’t achieved product-market fit yet,” he said. “To achieve that, you need the right execution, and for that, you need the right team. At Series A, typically the startup has already achieved product market fit, so it’s more about scaling the revenues. In that case I’ll be paying more attention to traction, recurring revenues, cost of acquisition, customer lifetime value. In seed stage these are less important.”
Sunner also said the quality of the team and the size of the problem were the first things she looked at, along with market size. She added active user numbers were crucial when looking at B2C companies, while for business-to-business (B2B) metrics such as sales cycle length, customer churn, and revenue growth.
Getting the pitch right
Sunner recommends startups create two pitch decks for approaching investors with: one that is sent via email, designed to anticipate and answer the questions a VC might have prior to meeting with a company (such as those covered above). The aim of this first pitch deck is to give the VC enough information to want to book a meeting.
The second deck is the in-person deck, designed for when you are speaking directly to VCs face-to-face (or over Zoom).
“Your in-person deck should be maximum 12–15 slides, minimal text, lots of engaging visual content,” she said. “It’s an aid for you to stimulate conversation. You don’t want an investor getting distracted by what’s on the deck, you want them to be excited about what you’re saying.”
Likewise, you should be able to speak about your business without relying on the pitch deck. Sunner said it was a red flag if a founder just reads off their deck in a meeting.
“You’re trying to get me excited about your company. The best way to do that is a natural, engaging conversation,” she said.
Mason added that founders often overlooked design elements when putting their pitch deck together. Making it user friendly can pay outsized rewards.
“We all like opening up a deck that looks really nice, is well designed, has a clear and coherent flow and takes the investor through the story of the business,” he said. “It should clearly show where they are now, what the vision is and how they achieve it.”
Ayangar noted pitches that came from a referral were most likely to lead to an investment, followed by those that came from accelerator events and demo days, followed by cold emails. However, he added companies that VCs come across through desktop research — proactively searching for companies to reach out to — also had a high rate of conversion. This opens up another route to investment from founders who are able to effectively communicate online.
Floww — the technology platform that is underpinning Access All, has also recently launched FlowwConnect — Floww’s team of accountants and content writers make sure you are pitch perfect. To get your startup in front of the right VCs, sign up here.
“The more out there you are on the news and the more activity that you do online, whether it’s on Linkedin, TechCrunch, whatever, the more presence you have,” he said. “Then you can catch the eye of multiple VCs because when they see an interesting startup they think ‘this looks good, let me reach out to them’”.you want a lin
Nail down the legal side
Fundraising isn’t all about pitching. Founders must also be familiar with the legal side of the process to ensure their interests are aligned with their investor’s. Nicholas Richards, Head of Investor Partnerships at SeedLegals, has broken down the key things founders need to know:
What are the key legal concepts founders need to know before looking to raise a round?
Before you enter negotiations with investors, or even propose terms to investors, the key concepts are not so much legal but commercial concepts. The legal aspect is simply the legal language (or “legal-ese”) that articulate and govern how those commercial terms operate. And the key concepts here every time for founders are (i) economics and (ii) control. That’s what every clause of your term sheet and investment agreement will relate to. Understand that and you’re good.
Which are most commonly overlooked?
The most significant and commonly overlooked things are cap tables and the legal governance which outlines how the company is run.
First, cap tables — founders really need to understand the importance of this and really consider very carefully every time they give away any equity. Give away too much too early, and you could be really hindering yourself in further equity raises. Good investors don’t want to invest in companies where they don’t believe the founder has a big enough equity stake to be incentivised. Keep your cap table in good order as well, keep it up-to-date, keep on top of your filings — good investors will want to see this before investing. The cap table is a window to some of the key fundamentals of the business — Who and how many exercise control in the company ? Who are the key holders of economic value in the company? — all incredibly important points to an investor when considering whether or not to invest.
Secondly — basic governance. This is a common thing first-time founders or pre-seed companies tend to overlook. What happens if the founder leaves or (if there’s more than one founder) one of the founders leave? What happens to the departing founder’s equity? Who will own the IP? These are critical questions which founders either don’t think about or don’t address early on, and they can be simply addressed by drawing up a founder service agreement and an IP assignment (which you can do for free on SeedLegals). Any diligent investor will want to see evidence of these when looking to invest. If a company doesn’t have them, no decent investor will invest.
What are the best resources for startups trying to get to grips with the legal side of fundraising?
SeedLegals has all the legal resources for start-ups to prepare for their raise, including both the documents to sort before you close investment and then all the commercial and legal docs to close your round. Anyone who signs up to SeedLegals also gets the unlimited commercial and legal support of its team, who have closed hundreds and hundreds of funding rounds.
How do the legal considerations change as a startup moves from pre-seed, to seed, to series A etc?
At the pre-seed stage, most negotiation boils down to valuation (i.e. economics) as the investors are mostly angels, who aren’t generally looking to exercise much control over the company.
As you move to seed and Series A, the economics and control provisions become more onerous. This is because the money stakes are higher and the investors are funds investing other people’s money — and thus there is a natural desire to exercise more protection over their investment. Raising at seed and Series A, companies should expect to see investors wanting board seats, rights to veto key business decisions, liquidation preferences (i.e. the right for the investor to get their money back before other shareholders) and when you get to Series A, complex anti-dilution provisions to protect their equity stake in the event of a down-round.
VCs strive to be ‘value-add’ investors — beyond investing money, they want to invest time and expertise to help you on your journey to building an incredible company. But, different VCs have different areas of expertise, so it’s crucial to find the team that fits best with yours, then do everything you can to ensure your pitch has the best possible chance of success. Follow the advice from our experts, however, and you’ll be well on your way. Good luck!