Raising a round of financing can be one of the most critical—and challenging—steps you will take as an entrepreneur in the early days of your startup. Venture capital money can fuel product development and team growth faster and more efficiently than bootstrapping on your own. However, fundraising is notoriously difficult, particularly for first-time founders. How do you get started? What do you need to do to get the capital you need? And what do you need to know about the strings attached when you accept that money?
Preparing for your round
First, figure out how much you want to raise.
Understanding your fundraising target is both a science and an art. You’ll want to consider everything from market comparables (who else is doing something similar?) and the potential market opportunity to your immediate goals for your business.
For example, you might start with a general benchmark—the average size of a seed round in 2019 was around $2.5 million—and then make adjustments to that number based on the factors above. If you’ve got a working product in an industry with a huge market opportunity but need to hire engineers, product managers, and marketers to scale, you might increase that number to account for the large salaries and marketing spend ahead. If, on the other hand, you just need a small seed round to develop your product, you might want to scale back your initial goal to protect yourself and your investors from unnecessary dilution.
In either case, you should intend to put the money you raise to work. Investors do not want to see their capital sitting idle for a rainy day.
Keep in mind that while your seed round helps you start out, a Series A is often your first big institutional check. As a result, Series A investors are generally more seasoned and demand more of your company in exchange. Your pitch deck is an essential part of this process. (More on that later.) For a real-world example, check out how we raised our Series A.
Second, determine the right financing instrument for your business.
The two common fundraising options for early-stage companies are convertible instruments—like Simple Agreements for Future Equity (SAFEs) and convertible notes—and priced rounds.
A convertible note is debt, which means it includes an interest rate and maturity rate (like a bank loan would). A SAFE is not debt, so it’s usually simpler and shorter and does not have an interest or maturity rate. Essentially, these convertible instruments operate like loans, only instead of being paid back, they convert into priced equity in the future.
At earlier stages, you’ll often see more SAFEs and notes, which experts recommend for their flexibility. If you’re considering a SAFE or convertible note, check out our free calculator to help you understand their future impact on dilution once they convert to equity.
As you continue scaling your company, you may be required to give away some equity in exchange for fundraising dollars. In these priced rounds, an investor gives you money in exchange for preferred stock in your company at a price per share determined by your valuation. Priced rounds can be a great option if you are confident in the worth of your company, are willing to negotiate that worth with investors, and need to raise a lot of capital—recognizing you will need to cede some control.
Third, decide when should you be raising—and with whom.
Realistically, you should always be in pitch mode—ready to jump on opportunities that arise. That being said, investors tend to take meetings at certain points of the year: typically mid-January through mid-summer, and after Labor Day through early November. That doesn’t mean you should ever stop building relationships, networking, or preparing to take meetings.
One of the best ways to find investors is to leverage your network. Build relationships early—and often. Join entrepreneurship communities, attend networking events, and ask for introductions to friends-of-friends in the venture capital community. When you are ready to start fundraising, reach out to investors who offer a strong strategic fit for your business (those focused on your industry, specialty, or geographical location, for example).
When bringing on investors, remember that your company’s cap table matters: you have the ability to enrich and empower a potential investor with your business. Think carefully about the investor you want to bring on. Can they give you the amount you want? Do you align on values? Can they help your brand or build your network? Remember that a big firm may not always be the best option if you want more time and attention as you grow.
Developing your pitch
Whether you’re fundraising in a down economy or a booming one, the process for honing your pitch remains the same: develop a compelling, short pitch and practice, practice, practice. Make sure you have a tight narrative as to why you need this funding now and what that funding will help you accomplish.
Remember: investors don’t want to know what you’ve done in the past—they want to see where you’re going. For your pitch deck, we recommend spending two slides explaining what you do and the opportunity; the next three to eight slides on your business model, competition, and team; and the last two slides conveying why your vision is realistic and the milestones you’ll hit moving forward. Just remember to adjust your flow while pitching based on questions asked (instead of sticking to a rigid structure based on your slides).
At the end of your pitch, make sure you get feedback and leave with action items.
Locking it in
Move quickly (but don’t rush).
If you decide to go with notes or SAFEs versus a priced round, the process is slightly different. Notes and SAFEs are usually logistically easier—and quicker—to execute, and you can usually close them individually. Priced rounds require term sheets, additional due diligence, long-form documents, and a formal closing between multiple investors. Given the lengthiness of that process, they’re usually more expensive to execute (especially with legal fees).
If you pursue a priced round, remember that time can kill deals. Drive toward closing, and make sure your attorneys are equipped to move as quickly as possible. But it’s also important to stay vigilant: this first priced round term sheet will impact your future funding. Make sure you look for terms that indicate economics and control. Be aware of red flags, including anything above a 1x liquidation multiplier and participating preferred stock. Make sure you understand how your voting rights will change under the new arrangement as well.
Be prepared to facilitate a due diligence process.
Investors begin due diligence by looking at your cap table’s structure, rights and preferences, and promised grants. For a simple way to manage the administrative part of the diligence process, check out Carta’s data room. If you have 25 or fewer stakeholders and have raised up to $1 million, Carta Launch can help you maintain an accurate cap table that updates with every transaction for free.
Once you’ve signed the deal, you’re now in a long-term relationship with your investor. All that’s left to do is use the funds you’ve raised to create value for everyone—your customers, employees, and investors alike.