No matter how big your company, there’s one essential skill you need to master as a start-up founder: How to raise funds.
We’re here to help you.
We’ve designed this comprehensive guide to walk you through the whole fundraising process for a growing start-up: From pre-seed funding to closing larger rounds later on in your start-up funding process.
You’ll learn how to prepare yourself and the company for fundraising, find potential investors and make the most out of these valuable meetings.
Let’s not waste time. Jump straight to the section that’s most useful to you:
Start-up funding is the process of obtaining money from external parties to start or grow an existing business.
Speed is crucial for start-ups.
Closing a funding round means an upfront cash infusion to scale your business. Quickly get the resources to hire the right talent, invest in product development or expand into a new market.
When an investor is willing to give you a large sum of money to build your business, it’s a vote of confidence that your start-up is on the right track. Being linked to prominent investors gives you credibility and usually leads to significant media coverage.
Investors come with their professional expertise and networks that can help you grow your business even more beyond the cash injection.
These investors can serve as business advisors, and introduce you to business development or talent acquisition opportunities. They can also make warm introductions to other investors.
Start-up funding rounds typically involve two parties.
“Investors evaluate start-ups the way customers evaluate products, not the way bosses evaluate employees.” Paul Graham.
Let’s have a look at the advantages and disadvantages of some common start-up funding methods.
What: People you know with some money on the side.
Pros: Easy to access
How to find them: Personal introductions
What: Individually rich people
How to find them: Personal introductions, warm introductions, network with other successful founders.
What: Seed firms invest small amounts at early stages. They invest as a company and not as individuals like angel investors. Seed firms are also known as start-up incubators or accelerators.
How to find them: Search for curated lists and databases like Map of the Money and Aspire’s investor glossary.
What: Venture capital funds pool investment money from private investors to invest in high-growth companies.
How to find them: Warm introductions, cold pitching, participating in start-up incubator programs.
Extra funds are always useful but generally, investors aren’t waiting to give you their money. That’s why timing is crucial. Look out for these four indicators to smoothen the fundraising process.
Source: Lenny’s Newsletter
With each funding round, you should aim to raise enough money to get to the next phase of your company’s growth. To figure out how long that’s going to take, think about what company milestones you need to hit before your next funding round. On average, it takes 12-18 months.
Aim for a growth milestone like customer acquisition, or a product development milestone like a product launch in the next six months.
You could also aim to raise enough money to reach profitability. Doing so increases the time between funding rounds to focus on growing your business.
A start-up goes through multiple funding rounds, typically securing more funds as they grow.
Investor type: Angel investors, start-up accelerators, crowdsourcing, friends and family
Product stage: Pre-product
Spend on: Prototyping and minimum value products (MVP).
Investor type: Angel investors, early-stage VCs, start-up accelerators
Product stage: Early signs of traction and product-market fit
TIP: Pick your seed funder carefully. They lay the foundation for future funding rounds by making the proper introductions or steering your business in the correct direction.
Investor type: VCs, super angels
Product stage: Accelerating initial growth and initial product-market fit
Spend on: Improving sales and marketing processes, catering to an ideal customer
Consider going for this round after you’ve found a few key customers in your market and once you’ve demonstrated you have an initial product-market fit.
Investor type: VCs & late-stage VCs
Product stage: Scaling
Spend on: Expensive hires, expanding into other markets and experimenting with different revenue streams
Investor type: VC, banks, private equity firms
Product stage: Large-scale operations
Spend on: Acquisitions, moving into new markets
An average funding round involves about 50 meetings with investors. To increase your chance of success, prepare to reach out to 60 tailored investors and funds with relevant industry backgrounds.
Get ready to hear a lot of “no’s”. If you aren’t ready to hear at least 50 rejections, you should think carefully about whether you’re ready to fundraise.
Fortunately, there are ways to reduce this number. Work on getting to know investors early on in the process, prepare a strong pitch and ensure your business traction excites investors.
Don’t worry, you won’t be doing this forever. Each funding round should be sufficient to help you realise your next business milestone and provide enough financial runway for the next 12-18 months of operation. Every stage of fundraising denotes a new stage of company growth, more capital raised and a more mature organization.
As a startup founder, fundraising successfully gives you a money injection to quickly grow your business. You and your co-founders also have a stake in the company (also known as equity) which dilutes as you bring more investors on board during fundraising.
Besides your ongoing salaries from company profits, you and all other shareholders eventually make a profit when they sell part or all of the ownership in the company.
There are two common scenarios:
Consider how you want to ‘cash out’ on your company and build your company in that direction. For example, if you’re targeting an acquisition, you need to think about building a company that’s a valuable asset to an acquirer.
Now you know why you need the money and where to get it, it’s time to get you ready for some action. First of all, you need to prepare well, because a successful fundraising cycle always starts with thorough preparation.
How long it takes for you to get funding, depends on how well-prepared you are. Below, you’ll find some of the items you should take care of before you start reaching out to potential investors.
Why do you want to move to the next funding round? How will the investment help your business capitalise on its current growth?
Having a compelling reason behind your fundraising campaign will put you in a stronger position.
TIP: Look at the typical ways start-ups spend their funding round money according to the stages above to get inspired.
To have a clear idea of what you want to achieve with each funding round, ask yourself these three questions:
Assuming your next fundable milestone is in 12-18 months time, look at your average monthly burn rate, or how much you’re spending to stay in business. Include six months as a buffer for unexpected costs and marketing costs to both grow your business and close the funding round.
Also think about how much you need to spend to achieve your next business growth milestone. Include costs for hiring, research and other operational needs.
Use the development stage valuation approach as a quick and easy way to give yourself a target valuation. This model assesses your business’s valuation based on your progress.
The typical start-up fundraising process takes about three to six months. But depending on the round you’re raising, add extra time to sort out paperwork, legal agreements and other documents. Set a timeline based on your available financial runway, internal priorities and the time you have for fundraising.
When trying to raise more funds, it’s not just about your business and product, it’s also about you. During your pitch, potential investors look for specific features. Be aware of the energy you’re projecting during all communications with potential investors.
Certain qualities indicate a start-up’s future success for investors:
Can you communicate your business model to your employees, customers, partners, and investors? Are you capable of fielding challenging questions while being respectful?
Serial entrepreneur and investor Nick Grouf acknowledges achieving this conciseness is difficult. But achieving this clarity helps you identify potential challenges and avoid million-dollar mistakes later in your company’s life cycle.
Investor Marc Andreessen wants to understand why the founder created the product.
“Usually the first question I ask is "What inspired you to create this product?"—I’m hoping that it’s based on a personal problem that that founder had and this product is the solution to that personal problem.”
(Source: How To Raise Money)
Nick Grouf also looks for academic integrity and self-awareness. He prizes people who can introspect, understand their strengths and weaknesses, and aren’t afraid to be vulnerable in professional situations.
Yes, your vision, product and personality are crucial. But investors also care about numbers. They invest in a start-up’s potential, and the best way to gauge that is with metrics.
Find data points that will get your investors excited about your business.
You’ll want to continue showing business traction during the fundraising process as investors can ask you for updated numbers towards the end, and you want to avoid shaking their confidence.
As we’ve seen, the chances of receiving a round of funding are pretty slim. There’s a good reason for this.Each partner at a fund only makes 1 to 3 early-stage investments per year.
Their career is tied to how well these investments perform. That’s why investors are typically skittish about any start-up that comes to them asking for funding. You need to show that you’re confident about using their money to bring your business to a new level.
Pitches delivered as stories can be up to 22 times more memorable than just facts.
When pitching, your audience doesn’t remember data and figures, especially when presented with cold data points multiple times a day. They do, however, recall a compelling story with critical characters, drama, and emotion. Use the materials you’ve prepared to weave storytelling elements into your pitch.
Explains what your product does in one sentence to help the investor picture the product in their mind
A great example structure from The Founder Institute:
“My company, name of the company, is developing a defined offering to help a defined audience solve a problem with secret sauce.”
Start a conversation about your company in three sentences:
The 2-minute pitch is similar to the 30-second pitch but with a few additional components:
Other things you want to mention here:
1. How many founders your team has.
2. How long you and your founders have known each other.
3. What’s your ask? How much money are you raising, and what form does that money take? Are you raising on a convertible note or a simple agreement for future equity (SAFE)? Do you know your minimum check size?
Spend at least a month building out your presentation deck and supporting materials. You will need time to tweak your start-up’s narrative and let your points materialise.
Include the one-line summary of what your business does and highlight your crucial impact metrics in a clear, bold manner that shows your business is doing well.
Send this to your potential investor ahead of a meeting. Be careful not to share everything with your VC before meeting your lead partner.
Use this as your main deck for in-person or virtual meetings.
What happens when you do get the money? Show your business projections post-fundraise for your potential investor.
Investor Lenny Rachitsky recommends you take time to test your pitch with live audiences. Prepare your materials to 70% completeness, then find people to practice your pitch.
Speak to fellow entrepreneurs, friendly investors or other people in your network to test your materials and pitch. It’ll build your confidence and provide helpful feedback on how to improve your pitch before going into real meetings. You may also get introductions to relevant funds.
These are the appendixes to your high-level pitch deck. Investors may or may not ask for this information, but it’s a good sign when they do.
The first document you’ll need is a two-to-three page summary of your business for your investor to share with others in their firm.
If you’re a tech company, investors may ask for more information on your technology. Prepare your documentation, workflows, and diagrams.
This is the meat behind your high-level financial forecasts. Investors keen on investing will want to do their due diligence by examining your plans for expenses across your business functions.
Further market research should support your points and validate your initial market research on your market size and competition.
Ok, your business is ready, your pitches are ready and you’re feeling confident. Time to meet some founders. But first, you need to find them.
Treat the process of finding investors like going through the sales funnel. It’s a mix of carefully nurturing connections, finding out whom your network knows, and putting yourself in a solid position to meet people who invest and are interested in partnering with you on your business.
A meticulous organisation of every step is critical, so start at least 6-12 months before the fundraising process.
Approach this like a project manager, planning each step intentionally and methodically.
First, you want to prepare a tailored list of investors who are potential lead investors before you start reaching out to them.
Where to meet investors
Avoid summer holiday periods and mid-November towards the end of the year. This is when venture capitalist firms typically start to slow down. So make sure you start well before these periods. Finishing your fundraising process at those times shouldn’t be a problem.
Aim to make a comprehensive list of potential lead investors. Remember you’ll need about 60 meetings, but don’t just add anyone, take this into account:
Once you’ve got a list of about 60 funds, identify the partner you’d like to work with at these funds.
Don’t be afraid to get specific here. You want people with relevant industry backgrounds and who can make an investment decision about your company.
Once you have your list, go through your personal and professional network to see if you know people who can make warm introductions to these target partners. Look out for fellow founders within that fund’s existing start-up portfolio who are doing well.
What is a warm introduction, and why is this important?
A warm introduction is when the founder has an existing relationship with an investor or when someone with a current relationship makes an introduction. Potential investors come with more interest and excitement if they are referred by someone they already have a solid pre-existing relationship with.
Warm introductions to a VC make a significant difference in your chances of getting funding. Data from VentuRank shows companies with a friendly introduction to a VC had a 26% chance of getting to an investment committee and a 4.6% chance of getting funding.
Companies with cold introductions, in comparison, only had a 1.19% chance of getting to an investment committee and a 0.38% chance of getting funding.
Image source: VentuRank
Warm introductions give you a big boost but you still need to do most of the work yourself. Write a concise email introducing yourself and your company for your contact to forward to your person of interest. This email helps your reference provide context for your target investor on why a meeting would benefit both of you.
What if you don’t have any potential connections who can introduce you to potential investors?
It’s still possible to raise funds without any start-up connections.
How to write effective cold emails to investors
1. Keep it short: Your email should take no more than 60 seconds to read.
2. Include your pitch elements into your cold email: For example, your solution, the problem you’re solving, your competitive advantage, information on your team growth and traction.
3. Avoid immediately asking for an in-person meeting: focus on sparking the investor’s interest, so they want more information from you.
4. Don’t send multiple follow up emails: use tracked opens to gauge their interest.
5. Describe what your company does and show traction: Even if you’re cold-emailing them, investors will be more excited to meet with you if you can showcase your business wins and milestones.
What if you’re preparing for a fundraising round in the long run but don’t know enough potential investors?
Pick a series of three to five investors with whom you want to build relationships and ask them to meet casually. Avoid sharing everything about your business during these meetings, but share an overview of your revenue and growth numbers organically.
Here, you want to focus on keeping these relationships warm and supply them with updates on your progress so your potential investors can keep you top-of-mind when fundraising season rolls around again.
Tip: After the meeting, put your discussion items in writing and send a summary to the potential investor.
Does the start-up funding experience change when you’re a female founder?
Unfortunately, yes, it does.
Yet, the scene isn’t all doom and gloom for female start-up founders. Data from PitchBook shows that United States venture-backed companies with a female founder or co-founder took in $25.12 billion in the first six months of 2021, surpassing other years.
While the investment space is currently in flux, this means that as a female founder, your experience fundraising may differ from men. So what can you do about it?
Now that you’ve got all your materials ready, it’s time to prepare you for dealing with investors face to face. We’ll also explain how to coordinate your outreach for maximum effectiveness.
Aim to have first meetings with all your shortlisted investors within a 2-3 week period.
Keeping this tight timeframe is crucial as you want all your funds to navigate the outreach process along a similar timeline for information and completing due diligence. This will help you evaluate your funds evenly, when they are keen and come back with a term sheet.
Note: Due diligence can happen either before or after participating in partner meetings, but it’s done before you and your investors agree to terms and close the deal
Fundraising is a gruelling process, during which you’ll question yourself and the value your company is creating.
Raising money can take up the majority of your time. It can also take longer than expected. But you still have a company to run. One of the risks with fundraising is that you start neglecting your business which will ultimately harm your fundraising process too.
Prioritise your company over investors. If you have a co-founder, you can discuss a temporary handover of your operational responsibilities for you to focus on fundraising. Prioritise business success and keep your company moving while fundraising.
If you keep growing the company during your investor outreach process, it will increase your attractiveness to potential investors, and you’re more likely to have productive conversations.
Releasing new features, signing and onboarding new customers, and getting more outreach done means more growth for your company, and it will help with morale.
Consider adjusting your schedule to free up more time for fundraising and communicate this to the rest of your team.
Can you delegate some responsibilities to another team member so you can focus on other priorities? Encourage your direct reports to gather all the help requests they need and raise them at your one-on-one meetings.
You’ve done the hard work, pitched the investors on your list, and you’ve shortlisted a bunch of potential investors that you’re keen to work with. Which one is the right one for you?
Choosing your investors is a crucial decision, as they will be with you and your business as partners throughout the rollercoaster ride that is building a start-up. You want someone you can trust, respect, and work with.
Bringing a lead investor on board, especially when you’re past the Series A and B stage, marks the beginning of a 10-year relationship with them. During those ten years, they will have a say in how you run your company. Take the time to get to know them seriously.
While you’re speaking to potential investors, form some pre-qualification criteria for your ideal investor.
“The choice of key investors, of particular investors who are going to be on the board for a company is just as important as who you get married to. These are people you are going to be living with, partnering with, relying on, and dealing with in positions, in conditions of great stress and anxiety for a long period.” - Marc Andreessen
You’re now in the last stage of start-up fundraising.
First, pat yourself on the back. You should now have built some relationships with potential partners who are serious about investing in your start-up.
At this stage, your primary contact or fund partner likely wants to complete the deal. But they need to convince the rest of their partnership first.
This is where the relationship with your fund partner changes.
They switch from someone you need to convince to someone championing the effort to invest in your business. Recognise this change in dynamic and treat your partner like you’re on the same side because you are. Openly discuss strategies to convince their partnership or agree on timelines for a term sheet or what terms they’ll agree to.
Partner meetings are arguably the most critical interaction for closing the deal, and investment decisions are made almost immediately after you meet with them. Ask your fund partner for tips on how to navigate this meeting.
Your aim here is to go for the direct ask for funding and push for a clear decision from them. A positive outcome at the partner meeting leads to the presentation of a term sheet.
What is a term sheet?
A term sheet summarises the terms and conditions of an investment deal. It’s a non-binding document but serves as a basis for more detailed, legally binding records (also known as the stock purchase agreement).
Usually presented by a VC, a partner meeting is their opportunity to talk about their firm and talk through terms. By accepting a term sheet, you agree to reject other VCs for some time until the firm completes the due diligence process required for the deal.
If you’ve got a term sheet, congratulations! Here’s how to bring the process to a smooth close.
Once you receive a term sheet, you have a tight deadline to accept, reject or renegotiate. Timelines to make a decision may range from 24-48 hours to a week maximum.
If you need more time to decide, inform your investor how much time you need.
Understand that your potential investor may withdraw the timesheet if you don’t decide within this time. You can ask to speak to references for a fund to help you make a more informed decision.
Read the terms of the offer and ensure you know what they’re asking for. Consult a more experienced advisor or your legal team to get a second or third opinion.
It’s best to keep the firm’s name who offered you the term sheet confidential as investors will talk to each other. If your term sheet is from a top-tier fund you’re keen on working with, informing additional funds may influence the process by forcing them to make a snap decision or passing on your investment opportunity within 24-48 hours.
Be prepared to answer questions about which funds are still involved with your fundraising process, your valuation of the business, and how much equity you’re willing to sell.
Hurray! You’re now looking at the post-term sheet diligence process, which is essentially a checklist of reference checks for both the business and legal sides. This includes examining your business metrics, confirming customer references, or founder background checks. If you’ve prepared all your documents well, this process should be smooth.
Expect this process of due diligence to take about 4-5 weeks after signing the term sheet. Be aligned with your investors on urgency if you have a shorter timeline to meet.
Once all these processes are done, your funds should arrive in your bank. If your investor joined your board of directors as part of negotiations, their tenure begins here.
You can then celebrate your massive accomplishment with your team and make media announcements about your new funding round.
A successful funding round will give your company a fresh burst of energy and build more momentum to ensure your continued success.
Tip: For pre-Series A funding rounds, investors may give you a verbal agreement. It’s best to continue pursuing alternatives until you have a term sheet or agreement ready to sign.
Unfortunately, the world of start-up funding is risky. A good deal with an investor can fall through, whether by change of heart or something off during the due diligence process. So don’t overcommit yourself to any investor or deal structure until actual paperwork is signed and funds are in the bank.
If this happened to you during your search for funding, it’s normal to be disappointed, even discouraged. But don’t give up just yet. Take a moment to catch your breath and recover, then revisit the other parts of the funding process in this guide.
Start-up funding is a dreadful but rewarding process for all founders. Prepare well and be patient. You are now equipped with all the tools and techniques you need to succeed in your start-up funding journey.