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How to raise venture capital as a first-time founder

© Javier Quiroga

The times when venture capital was rare are over. Based on the number of VCs in Germany alone, you can see there has never been as much capital to invest in startups as there is today. However, this does not mean that your company is going to attract funding. Of the total 605,000 startup foundations in Germany in 2019, 149,000 were so-called growth startups (Wachstumsgründungen). Growth startups are companies that aim to become “as big as possible”. In order to get there, you can assume that these companies plan to raise venture capital. But according to the Startup Barometer Germany by Ernst & Young, there were only 704 startup financing rounds in 2019. This means that only just under every two hundredth startup closes a financing round. So, how can you as an entrepreneur increase the probability that your company will be financed?

As we at Capnamic Ventures, an early stage VC firm with a focus on the German-speaking region, see around 2,000 deals per year, we get to analyze a good amount of pitches and fundraising processes. Based on these observations, I am compiling seven steps for first-time founders to show how to increase the chances of raising a successful seed round:

1. Do or Do Not; There Is No Try

This instruction that Yoda gave Luke Skywalker before he attempted to raise his fighter from the swamp in Star Wars is also true for fundraising.

Fundraising is not a process that can be done casually. “Check out what’s in” or “trying out” will not bring success. You as a first-time founder must have the mindset that you will be successful in your fundraising. You need to be fully focused on the process. If you are not, investors will notice this attitude and might stop the process. Only entrepreneurs who show full commitment have a chance for successful funding rounds. As the statistic above shows, not all entrepreneurs will be successful. Failure is an important part of entrepreneurship; but as with many things in life, attitude affects the outcome.

2. Shape your Vision

Investors always think big. They need to get the impression early in the process that your company can grow a minimum of ten times in the coming years. To do this, it is important that you clearly articulate and explain your vision of the company. In preparation for your meeting with investors, first answer the question: What will the company look like in 3, in 5 and in 10 years?

Your vision needs to be a good mix of ambitions and realism. It should not be absolutely impossible, but certainly challenging. Think out of the box, evaluate up-sell and cross-sell potentials, explain how you increase your ticket size per customer, how you make sure to keep your customers (lock-in effect) and show blueprints of other companies that have already succeeded on a similar trajectory. This will make your big vision believable and tangible.

3. Inform yourself about the investor, the investment focus and the portfolio

Every venture capital fund has a specific investment focus. The focus can be expressed in at least three dimensions.

  1. thematic focus (sectors, industries, business models)
  2. investment stage & ticket size (pre-seed / seed / Series A etc.)
  3. geographical investment focus

For an efficient and promising fundraising, you should focus on those funds whose investment focus best fits your company. This saves you time, resources and rejections. In addition to the investment focus, you should also look at which companies the fund has invested in so far and check whether your company competes with a portfolio company of the fund. If so, think twice whether it makes sense to approach the fund or not.

4. Define your capital demand

It is becoming more and more common for young companies to indicate their capital requirements using a range, for example 3 to 5 million. Such a range provokes an immediate question of clarification from potential investors: “How much money exactly are you looking for: 3 or 5 million? What capital requirement does your financial plan determine for the next 18–24 months?”. You should answer all these questions yourself in advance and start fundraising with a concrete capital requirement. The stated amount should be coherent with the underlying financial plan, the growth strategy, the associated marketing and sales costs and the hiring plan. Again, the mindset described in paragraph 1 is key. You should be able to calculate a concrete capital requirement based on your data sets. A rough range quickly suggests an uncertainty.

5. Prepare your data and documents

Probably one of the most important factors within the fundraising preparation is the collection and analysis of data and documents. Investors love solid data, facts and figures. A good story alone is not enough in most cases. The documents and KPIs (Key Performance Indicators) that almost every new investor usually wants to see are quickly identified. The following overview gives you a good feeling about which documents and numbers are mostly asked for:

Last but not least, you might wonder what the process with a VC looks like. After getting in touch with the VC and a first intro call with your pitch, a commercial due diligence based on the documents listed in paragraph 4 is done. This — in the best case — leads to a term sheet. Following the commercial agreement between company and investor, further due diligence streams usually follow. The type and scope of these are dependent on the maturity of the company as well as the fund requirements. Often, in addition to the commercial due diligence, a financial, a legal and a technical due diligence are conducted. Within the scope of these follow-up audits, further documents are often requested. Unfortunately, it is not possible to provide an overview of all documents, as these are highly dependent on the phase of the company and the respective investor.

6. Build up a personal relationship between startup and investor

For an investment decision, the previously mentioned data and documents are usually just the basis. Maybe even more important is the team behind the company. In earlier phases it is usually the founding team, later it is the extended management team that is crucial for the investor.

Due to the high importance of the team in the decision-making process, it is important for you to establish a personal relationship with the potential investor. In addition to the typical things like the education and professional experience of the team, investors want to understand how you and your fellow co-founders approach complex matters, how he or she thinks and reacts, what his or her management style is and what personal interests he or she has besides the job. Putting it casually, a partnership with an investor can be compared to a marriage. A startup is on average between 5–7 years in the portfolio of a venture capital fund before it is sold (average 5 years) or goes public (average 7 years).

In order to build up this personal bond, you should not only provide a data room in the first evaluation phase, but have all the necessary documents prepared, so that they can be supplied immediately on request by the investor. This helps keeping regular and high interactivity between entrepreneur and investor. High engagement strengthens trust and increases the chances of a term sheet.

7. Train your pitch and create FOMO

After the first meetings, various deep-dive sessions and review of all submitted documents, you usually face management presentations. These can take place in person or digitally. On the investor side, normally the deal team will participate, i.e. those from the fund who have been intensively involved in previous discussions and evaluating the deal, as well as decision-makers of the fund. These meetings are often called investment committee meetings.

In addition to the facts, investors would like to get to know the entrepreneurs in person and look at their soft skills and personalities in such situations. These are also comparable with an important on-site meeting at a promising prospect that showed interest in becoming a customer. That is why investors are interested in the sales and presentation skills of your team, to understand how your team interacts with another and how you deal with questions. As described in paragraph 5, your team plays a crucial role, which is why this meeting is one of the most important milestones in a funding round. I therefore recommend training these types of meetings both internally and with the help of external parties. You should define a clear division of roles and topics so that the discussion part does not rest with just one person. Consultants, existing investors or other entrepreneurs can provide you valuable tips on content or methodical focus in the course of a so-called ‘dry run’. For a successful pitch, including a Q&A session, you should plan between 90 and 120 minutes, in which the first half is reserved for the presentation and the second half for questions and deep-dives.

Lastly, create FOMO (Fear Of Missing Out). In the course of your pitch, try to captivate your audience with proven figures. The goal must be to create fear. Fear of missing out if they do not invest. Make clear that the problem you are solving with your company is an essentially big problem to a large number of potential customers.

In summary:

Preparation is key! All successful funding rounds have in common that founders and their fundraising teams take their time and meticulously prepare and plan their financing round. If you take this into account and maybe follow some of the learnings discussed above, I am sure you will nail your first financing round!

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