No matter if you’re at the beginning of your journey or further along, fundraising can be mystifying. Sure, you’ve heard the advice to raise enough to hit your next big milestones and get your next raise, but what does that mean? How should you actually go about it? There are so many exceptions to any rule about fundraising that it can make the rules themselves seem useless.
As a Series A investor, given the follow-ons of our portfolio companies, IGNIA sees the whole spectrum, and we know what investors look for at each step of the journey. Below we’ve collected some great resources to help you understand how much & when to fundraise, how to structure term sheets, and how to manage the fundraising process effectively. We’ve also added our own thoughts and opinions to contextualize it for Latin America.
How Much & When to Raise?
Honestly, it depends. But here are some of the factors you should consider:
- First, how much do you need to get to the milestones you’ll need to get to your next raise and when will it happen?
- To raise a Seed Round, you’ll need to demonstrate team capability and clear market demand. Investors will be looking to see if you have the right key people on board & a big enough problem people want to pay for.
- To raise your Series A, you’ll need to be hitting product-market fit. The founding team is probably still at the helm of the company, and you’ll need to show 1-2 years of revenue, even if you are still cashflow negative. You’ll need clear evidence of sales traction (at least a high digit monthly sales growth) and viable unit economics. You’ll also need a clear plan to be attractive for a Series B in the next 12 months.
- To raise your Series B, you’ll need to demonstrate predictability and scalability of your business model, roughly 12 months after your Series A. Investors will be looking at 6 – 12m of predictable KPIs to assess your readiness to grow. You’ll need a strong technical footing & CTO.
- Second, adjust your estimates based on the following factors:
- How much dilution you’re willing to take
- Market size
- Competitor readiness
- Cash burn rate / runway
- Feasibility of capital raise (an understanding of how much capital is actually available)
How Should You Structure Term Sheets?
- If you’re getting started, this Founder’s Guide to VC Finance will give you a broad, accessible understanding of how different factors affect your cap table. Remember: it is almost impossible to fix a cap table, so it is important that you get it right day one!
- Brad Feld (of Foundry Group) put together a comprehensive and accessible series of blog posts explaining term sheets and their component parts.
- Here’s a short but deep dive into liquidation preferences, with case studies.
- Here’s a great briefing on preferred shares in Mexico.
- There’s a downside to SAFEs – use these steps to protect yourself. Be crystal clear how much dilution you are taking on and how they will be converted.
- Be wary of capped valuations in a convertible note. If you do one, consider putting it post-money rather than pre-money.
- Here’s how to calculate share price with outstanding convertible notes.
Thinking about how to value your company?
- Here’s a simple rule of thumb valuation method that can help benchmark.
- Here’s Mark Suster on how to talk about valuation with VCs.
- Note that valuations in LatAm are not like those in Silicon Valley – a Series A in Mexico might be roughly equivalent to a Seed in SF or Brazil, or even a Series B in Chile.
Fundraising is a full-time job and must be done by the CEO! Make sure to have a co-founder that can run the business while you fundraise. Remember you are always fundraising meaning every interaction you have is a potential investor.
Tactics for the Raise
- Highly comprehensive Y Combinator Series A Fundraising Guide.
- Comprehensive Emergence VC Fundraising Playbook (100% of portfolio companies have gotten follow-ons).
- Less in-depth Scale VP Series B Guide showing high-level what Series B investors are looking for.
- Fundraising takes time. Start when you need the funding, rather than waiting until it’s “optimal.” In the US this process takes 2-6 months; in Mexico, it can take 6-12 months. So get started early & give yourself enough runway.
- Take the money when it is offered to you. Don’t wait until it is “optimal” (ask those who didn’t take the money before COVID-19). Don’t fall into the trap that it’s better to wait to get a better valuation. If your competition fundraises before you, they will be ahead of you.
- Get organized! TechStars wrote a guide on preparing an investor pipeline spreadsheet. Emergence provides an alternative CRM template. Review the diligence checklists below and prepare your data room before you talk to investors so you can be responsive (see below).
- Talk to the right people. You can waste a lot of time chasing funds that won’t invest or targeting the wrong partner in the firm. Research the firm’s & partner’s priorities to know your audience. Get warm intros (below) and insist on in-person meetings or at least a video call – avoid just phone at all costs. Talk to a partner/decision-maker if you can.
- Be extremely professional and responsive. Investors will see this as a signal of how effective you are at running your business. Show up on time, manage the meeting, send follow-ups immediately afterwards. Prepare answers to likely questions in advance and have your data on-hand.
- Practice, practice, practice. Consider trying out your pitch first on “friendlier” investors already in your network before going to the ones that you only have one shot with. Modify your pitch and materials based on feedback.
- Be a salesperson. Believe in your value proposition – but don’t be arrogant.
- Be politely persistent.
- Remember, you are looking for a partner, not just an investor.
- Be prepared to have an in-depth conversation about valuation.
- It’s not done until money’s in the bank. Deals fall through all the time. Don’t count on anything until it’s done.
- First, ask “how much time do you have?” and adapt accordingly.
- In the first 5 minutes explain what problem you are solving, the size of the opportunity, why you are the best person and team to solve it, and your unit economics.
- Try to develop a relationship with the fund before needing the money.
- Over time, before you fundraise, go over the following dynamic: promise a specific KPI and come back to show you achieved it (repeat).
- Have a one-pager to distribute (monthly or quarterly) with major KPIs and milestones achieved – be consistent.
- Be responsive with your emails (immediate response if possible).
- Make sure you bring business cards to the meeting, and if you don’t (or the meeting is via video), send an email with your contact details immediately after.
- Do your homework, know who you are talking to, know the fund, their portfolio, their expertise, and bring questions.
- Be prepared to answer what the valuation is and why.
- Keep your investors informed – reporting should include clear, consistent KPIs
- Promise & deliver – reports should begin with summaries of highlights and lowlights
- Make sure your budget is achievable.
- Meet your budget.
- Stay focused.
- Be out there, but not too much. There is such a thing as over-exposure and the day only has 24 hours. If you are on every panel in every conference, that means you are not taking care of the business.
- Shit floats! Do not try to hide problems or mistakes. Be proactive about timely communication of significant issues that arise.
- Your investors and your team must understand that the CEO is always fundraising, and the whole team must be aware (we know… it sucks). But be careful of not continuously trying to sell your story to your current investors.
- Ask your investor along the way if they plan to do a follow-on round. Have that dialogue.
- Be proactive. If you need help, chances are your investors can provide strategic advice, introductions, etc. Raise your hand.
- Identify your risks, accept them, and have a plan to mitigate them.
- Understand which instrument is the best for your fundraising strategy. Do not go into a negotiation waiting for a VC to propose the terms.
- Send messages of big and small wins.
- Do not just report good news – it does not generate trust.
The best fundraisers are the ones that are successful at making the market believe that the train is leaving. Set a clear timeframe for your fundraise and communicate it to the market and try to meet that timeframe – I know, it always takes longer than you think…
Get a Warm Introduction (through networks)
- BEST is from a successful entrepreneur within their portfolio.
- Next is from a co-investor in an upcoming round who wants to create the best group of investors.
- Next is from a previous investor who is not joining this round.
- LAST is from someone that didn’t invest.
- Check out this list of VC’s in LatAm
Nail the Intro Email
- The “Forwardable Email”: How to Tee Up a Warm Introduction
- If you want to nail an email introduction to a busy person, here’s how, by Chris Fralic of First Round Capital.
- How to get busy people to take action when you send an email, by Mark Suster.
The Due Diligence Process
We’ve tried to demystify the diligence process below:
- 30 questions investors ask during fundraising, by Startup Hacks / Alex Iskold.
- YC’s Series A Diligence Checklist, by Y Combinator.
- Here is a sample template for your data deck by Emergence. Also look at this template for Data Room Financials (Series A/B) by ScaleVP.
- Prepare yourself with this Sample Investor Diligence Request List, this Legal & Financial Diligence Request, and this Reference Sheet Template.
- AirTree put together a diligence checklist for your investors.
- Questions to ask your prospective lead VC.
Your Data Room
Always have a good data room and have it ready before you begin fundraising.
- It must be child proof to understand and navigate.
- Data rooms must have your financial model (simple and error free!) that incorporates income statement (at least down to EBITDA) and cash flow.
- Some good sections for a data room are:
- Industry and market size
- Competitive landscape
- Business model
- Financial information and KPIs
- Team and Key people
- Customer engagement
A Word Of Advice From A Fellow Entrepreneur
One of our portfolio companies’ CEO, shared what he considers to be the key problems with fundraising:
- Time consuming: Fundraising is a significant time sunk for founding CEOs. It will take 100% of the CEO’s time for 3 to 6 months.
- Relations, relations, relations: Founders can only contact investors via intros, so fundraising depends on WHO you know, not how well you do.
- Diversity: Wall Street and MBA programs have institutionalized diversity into their recruiting, Silicon Valley has yet to start. Hispanic represent 16% of the US population, but 1% of venture capital investments.
- Mental health: There is no psychological safety net when sh#t hits the fan (i.e.: your US$20 MM term sheet gets pulled last minute, you get 50 No’s). There is no TalkSpace for founders who seek and need help. Overall, there can be a steep psychological price to pay
- There is no Yelp for VCs: Yelp is great because it creates an ecosystem of self-enforced accountability amongst restaurants. If you’re a restaurant you have to do well by your patrons or else they will voice their opinions. There is no such thing for VCs.
- Keeping track of investors: Founders have to track which investors to contact via spreadsheet. This goes often outdated when going from round to round (A to B).
- Process: It’s not abundantly clear how to run a proper process for fundraising. Most early stage founders approach this ad hoc, with no clear strategy, so they fail to create a competitive and scarcity driven process. There’s a few rules of thumb (i.e.: fundraising will take 100% of your energy, only talk to partners, fundraising is like dating) that are not quite obvious to everyone.