As a marketplace for raising capital, we see hundreds of private-market transactions every year and recently raised our own Series A. Suhail Hafiz, VP of Finance & Strategy, was deeply involved in that process. In this primer, he shares fundraising best practices for running an efficient process. What metrics matter? How well do you tell your story? How do you create the all-important pitch deck? You have questions: below, we share some answers.
5 Key Steps – Fundraising Best Practices
Fundraising is a daunting task. Despite the stories of venture capitalists quickly providing term sheets to irresistible opportunities, the process rarely unfolds that way. But there are clear steps a founder can take that will make the process manageable and maximize your odds of success.
Step 1: Create a Comprehensive Plan
What you don’t plan can hurt you. Long before you call the friend of a friend who was on Sarah Tavel’s Harvard rugby team before she joined Benchmark, be sure you and your team have a clear, shared understanding of the following:
- Capital Needs: Do not plan to raise all the money you ever need at one time! Multiple rounds of fundraising will allow you to take advantage of your company’s growing value. You and the team need to focus on the key milestones (also called value accretion events) that will mark the company’s progress, and the money you need to get there. With a biotech company, an overly simplified roadmap might be that you develop the drug, then go through Phase 1, 2, and 3 trials with the FDA. A software company might release a beta version, recruit 100 users, release version 1.0, and reach 1,000 users. Generally, these—or major interim steps toward them—should occur at 12 to 18-month intervals. At each of these milestones, the company has demonstrably created value that translates into a higher pre-money valuation. Your job is to figure out what resources (money, headcount, office space) you will need to reach that point. This information helps determine how much capital you must raise. We can’t give you guidelines about an “average” amount to raise, as it varies by industry, lifestage, and situation. You should be aware of round sizes for similar companies because investors will make comparisons.
- Timeline: You need to have a clear idea of the runway to your “fume date” (the date you’ll be out of capital fuel and operating on fumes). Don’t wait until you can’t meet payroll! Raise money from a position of strength: You have a great company and you’re offering investors an exciting opportunity. Set clear timelines and deliverables for the process and be sure they align with the runway—then add some buffer. The average time for a fundraise is 115 days (3 months), double it, and start the process 6 months from your fume date.
- Target Investors: Just as investors conduct detailed research on startups, you should do diligence on your investors. These resources can help you identify the right type of investors for your company. If possible, dedicate a resource to combing through these lists and creating a target list of investors that fit your strategy. Later, you’ll look through LinkedIn to find connections between your team and an individual or firm. But be sure your company truly is a match! Don’t assume that a friend can get their brother-in-law who is a life sciences investor to consider your SaaS company. Plan to tailor your pitch to each investor.
- Process Management: You will save yourself unending agony if you use a simple CRM tool to organize and manage your fundraising process. It’s perfectly fine to go lower-tech and use simple tools like Excel and Google sheets. (Full disclosure: We at Hum used a Google sheet.) We also like this free fundraising CRM template from Airtable. Whichever tool you choose, organization is key.
Be prepared! It sounds so simple but it’s hard to achieve and too often taken for granted. We create a Google Sheet with our founders that highlights the fund, the partner, and the relationship we have with the target funds. Then we make the intros and add conversation and meeting metrics (intro made, meeting/Zoom held, comments, next steps) to the sheet. It’s up to the founder and his/her team to manage this sheet on a frequent basis so that we are all focused and on the same page.”Mark Mullen, Co-Founder, Bonfire Ventures
Step 2: Prepare your Marketing Materials & Valuation Model
This material is critical for conveying the reasons for investors to back you, both conceptually and financially.
- Pitch Deck: In a pitch deck you need to articulate the company’s strategy and describe how investors will make good returns from investing with you. Your pitch deck also has a life beyond your presentation—it will be stored in the data room, become a leave behind after presentations, and will be sent to bankers, potential partners, and future employees. It has to be top-notch! It should answer the following questions:
- What does your company do?
- What pain point is you company addressing? Why is your team uniquely qualified to address this pain point?
- Who are your competitors and how is your solution better? (Ideally, illustrate this with a 2×2 matrix using axes chosen such that your company is in the upper right quadrant.)
- How much money are you raising, and how will you use it?
A great pitch paints a picture of what this business can look like when it reaches full-scale. In addition, it shows that these founders have a clear vision for the company and are the best people to achieve it, and most importantly–that they’re open and honest about the uncertainties they face.”Mikal Khoso, Investor, Wavemaker Partners
- Valuation Model: The valuation model, as opposed to the pro forma that you’ll create for the pitch deck, shows potential investors your company’s estimated valuation. Because startup valuation is so uncertain, there are a few different ways to model it. The most common method is a discounted cash flow (DCF) model that breaks out the key revenue and cost drivers over 5 or more years. Be prepared to describe your assumptions regarding those drivers. Because the DCF is the most common methodology, we recommend you use it because you won’t have to justify why you used something else. No one expects the actual results to be correct, but it’s very important that you’ve thought hard about the inputs to the model and how they’ll evolve over time.
Step 3: Prepare a Data Room
Fundraising involves sharing data—a lot of data. For a streamlined process, you should set up a secure data room and be prepared to customize it for each investor. Here’s how to accomplish that easily:
- Select Software: Select the right type of software for managing the data room. During our fundraise at Hum, we used Docsend, because it’s secure, easy to use, and provides analytics about how investors are using the material. Furthermore, it ensures you’re sending the current version of a document. There are other options, though, so shop around for the best fit.
- Prepare Two Data Rooms: Once you’ve decided on your software, create two versions of the data room—one for pre-term sheet diligence and one for post-term sheet diligence. Be very clear on these!
- Pre-term sheet: This material is useful and more than you’d post on your website. We suggest it should include your pitch deck, financial model, summary cap table, and product information.
- Post-term sheet: After an investor submits a term sheet, they get access to greater detail, such as company documents, securities-related documents, legal contracts, detailed financials, staff information, and more. The term sheet may be revised based on this information.
- Customize the Data Rooms: Different investors will ask different questions, so we found it was best to create different post-term sheet data rooms for each. That way, you can customize the information you provide without annoying someone who hadn’t asked for deep product specifics and instead wanted customer order histories. With the right software, you can easily provide exactly the right data for a potential investor.
Step 4: Reach Out to Investors
Until now, you’ve been researching potential investors and preparing to present to them. Now, with your pitch deck, valuation models, and information ready to share in your data room, you need to find the right investors. Below are some key tips to refine the list of investors you created in Step 1.
- Dig Deep: Very few deals are made through cold calls. Leverage your network and your team’s for introductions to the firms/individuals in your target list from Step 1. If you dig deep enough, you can often find a connection based on membership in similar industry groups, mutual acquaintances, or education experiences. If you can’t find a connection, but you’re convinced this person or firm is perfect for your company, build a relationship. Don’t stalk them, but follow them on Twitter and LinkedIn, attend the same conferences, and learn more about them and their interests. It should become easier to articulate why they’re a perfect fit for your company over time – and that crisp articulation will make a great opening line when you finally introduce yourself.
- Find Champions: Approach industry leaders who can assess and vouch for your ideas. Thought-leaders are always looking for the “next big thing.” You must make the best use of that hour and have a concise, coherent, and compelling (but humble) presentation.
- Track Industry Dynamics: Be aware of what’s going on in the industry. Free daily newsletters like Axios’ Pro Rata and PE Hub Wire provide a list of VC transactions, allowing you to determine which firms are active in your domain. Research your competitors and identify the firms that have invested in them. Firms often pursue industry vertical strategies to leverage their domain expertise and they’ll post that information on their websites.
- Start Early: If this sounds like a lot of work, you’re right — it is. Creating a network is a multi-faceted process, where you offer and receive help over time. Hum’s Intelligent Capital Market (ICM) can help foster these connections, but the personal touch is always the most effective method. As you get to know firms or individuals, reach out. Send them congratulatory notes when they close a fund or have an IPO.
Step 5: Practice your Pitch
So you’ve got it all together. You may even have some presentations scheduled with investors. Now you need to practice until you have your deck practically memorized. By the time you get in front of the VCs, you shouldn’t really even need to look at the slides. And please, please don’t read the slides! You can be pretty sure that your audience can read. So while you have important information on the slides (see Step 2, this is your leave-behind), you’ll enhance it in your presentation. But first, do this!
- Practice Responding to Questions: After you’re comfortable with the pitch in front of a friendly audience, do it in front of your team. Your audience will ask questions, and if they’re any good, they’ll ask hard ones. So, have your team ask you the hardest questions they can develop. Then come back the next day and have them ask you more questions. In general, don’t focus on technical details (“Why is the wingdoodle connected to the dingblat?”) but strategic ones, like “What will prevent Microsoft from getting into this vertical?” Good startup CEOs do not discount this possibility but instead say, “I worry about that every day. Here’s our strategy.”
- Save the Best for Last: Your first presentation is always the worst. Practice your pitch on lower-tier VCs and angels before you approach the “dream VCs” from the list you created in Step 1.
- Keep Going: Many companies that were eventually successful struggled to raise their first rounds. Many top-tier VC firms turned down eventual household names. Be sure your materials are as compelling as possible, your VC targets are well-chosen, and keep the faith!
Fundraising isn’t easy. But neither is starting a company, and look where you are! You must be organized and able to respond quickly to investors’ questions and requests. Be sure you communicate effectively across the team or you’ll look inept—and no investor wants to back ineptitude. During Hum’s fundraise, we had weekly catch-ups to keep everyone on track, and daily interactions over Teams, Slack, and email.
You’ve got this. Just follow these five steps for fundraising best practices. If you need help, contact us at Hum Capital, where we specialize in helping high-growth companies raise the right type of capital for their needs.