As you can see in the chart below, not only valuations took a hit over the last year, but also the total number of overall deals made. At this time it is evermore important to seize whatever advantage you can find to give you an edge in fundraising.
Apart from a great product, great company, and great timing (which involves a lot of luck), there are a few things in your control that you can leverage to create fomo whilst fundraising. The following will touch on the things that are within your control and provide you with some best practices to help you optimize your process.
The idea about creating fomo is not to pick the next best investor, or rush the process, but to run a tight and concentrated fundraising approach, creating momentum and ideally receiving multiple termsheets, providing you with more negotiating power and enabling you to pick the best possible investor for your company, personality, and current stage.
Speak to the right investors.
- Create a longlist and a shortlist
Create a longlist and shortlist of funds you want to talk to and that you think are a good fit for your company (your existing investors can help with this), this will help prioritize the process.
- If you are less confident you will want to start with the long list to gain experience, build out your materials, prepare answers to questions etc before addressing your shortlist.
- If you have more confidence in your fundraising abilities, you want to start with the shortlist, avoiding the dilemma of receiving a termsheet from a long-list fund that you need to decline before you have proven interest from your desired investors.
2. Research access
Find out what kind of access and at what level in the hierarchy you have to your desired investors. If you and your existing investors have no link to a relevant person, search for common connections on LinkedIn and see if they can make the introduction, otherwise write a short cold message on LinkedIn.
3. Understand your ‘customer’
Understand the strategy of the investors from your shortlist, for things such as investment phase, ticket size, position (are they a lead investor or a follow-on investor), how their investment process works (each fund has its own process and timelines), their preferred industry etc. The better the investor fit, the easier and faster the process will be as they understand your industry, stage and have a strong network in your field.
4. Check the investor’s portfolio for
- a potential conflict of interest (if an existing portfolio company has too much overlap with what you are currently doing or planning to build, they won’t invest)
- look a like’s (e.g. a company within your industry or with the same customer that could create synergies)
- a better understanding of the investor’s appetite and what companies and founders they are looking for
- to call references on the fund and/or to receive a warm intro if you have no direct/indirect access
I advise against a spray-and-pray approach, e.g. addressing every person of a fund and doing so multiple times. This will make you look desperate, look like you are incapable of controlling your CRM system, and is simply bad form.
Use the right tools.
- Prepare your material
You want to have a focused fundraising process. The more material you have prepared upfront, the less speed you are going to lose in reacting to ad-hoc requests. This includes but is not limited to a short deck, long deck, financial model, product demo (e.g. video recording via loom or live in session), product roadmap, and deep dives to various FAQ topics. If slides are not your thing, build a notion board.
2. Setup a fundraising CRM
Fundraising is not too different from sales. You want to track the progress you are making with individual investors, what questions they asked, what material they requested (and was sent to them), and who you spoke to in case you will be in contact with multiple stakeholders.
3. Setup a data room for each investor
- Best use a file-sharing platform like google drive that allows investors to download the files. Most investors want to document the files in their own systems — having repeat data requests that you will then need to re-upload/share will slow you down.
- Only share documents that were requested, nothing kills momentum faster than an uncurated data dump. The less information an investor requires to come to a decision, the better for you (although I would strongly suggest picking an investor that understands your business model).
- When uploading models, always upload the models with all formulas intact, Investors will want to understand your line of thinking and the calculations behind your numbers.
- Avoid going for tools like Dropbox Docsend, I know you want to track views, but good investors use tools to download the data anyways and you pay a premium plan for nothing.
Know who you’re selling to and what you need to do to convince them.
In the end, an investment comes down to building up positive conviction. Can you convince the investment professional to convince the partner to convince the partnership to make the investment?
Understand what the person you are talking to requires to achieve conviction themselves and what ‘ammunition’ you can provide them with to convince the next person. Proactively manage your counterpart, and provide the required information asap. Again, avoid oversharing, e.g. dumping a ton of files on your counterpart — just provide the information necessary.
Maintain relationships and keep the most promising investors in the loop.
Build relationships with the investors from your shortlist (~10 investors). Keep close contact and have a touchpoint every 2–3 months, if possible per video/in person, to keep them informed of what you are doing. If the investor knows you, your company, and trusts in your abilities then the due diligence process leading up to the investment becomes more of a pro forma and will be super quick.
Additionally, this will help you make a better choice when choosing the best possible investor.
Work with a fundraising schedule.
1. Ensure you have enough time
Set a tight but realistic schedule and clearly communicate it with the funds you are talking to, e.g. 2–3 weeks initial calls, 2–3 weeks deep dives, 2 weeks Investment Committees (times will vary based on your stage, shorter for early stage, longer for growth stage). A sense of urgency will help you create momentum. Still, allow for flexibility if investors are faster/slower.
Plan in enough time, you will want to start with your fundraising 6–9 months prior to you running out of cash. The fundraising process will usually take at least 3 months until cash hits the accounts, but can always take longer.
2. Time it
If you have the luxury, try to time for Q1 or Q2. Especially in Europe you will want to avoid the summer months if you can. Processes will get super messy if you raise across July/August, as a lot of people will be on vacation, and decision-making processes will get messy.
3. Communicate progress
If requested, inform the investors you are talking to objectively about where you are standing in the process with other funds. Avoid bragging, false facts/improved reality, name dropping — it is a small scene, and everyone talks with each other…
However, you should allow other investors enough time to speed up the process in order to match a potentially existing offer.
If you are closing in on a termsheet, ensure that you communicate a buffer of up to two weeks of decision time to the termsheet provider, this allows you to inform the other investors and ensures they can produce a counteroffer. But ensure not to overplay your hand — time kills all deals.
Don’t be greedy — more money/valuation ≠ the best deal. In the end, you should choose who you want to work with. Best/worst case you will be working with your investor for +10 years.
This is part 3/4 of the summary of our fundraising workshop. Follow me and stay tuned for more, next up, part 4:
How to tell your equity story?
Did you miss part 2? No worries - here you go.