Running a structured early-stage fundraising process

Tools Used In This Recipe

Before you begin

Before you approach investors to consider your company for funding it’s important to understand how venture capital investors evaluate deals. Ideally you should read this excellent, comprehensive guide from Elizabeth Yin, GP at Hustle Fund, on raising a seed round. At a minimum however you need to review the following:

Is my business venture fundable?

Venture backing is generally limited to companies that are both capital-intensive to start and also have a high risk of failure. Typically, retail, consulting, and other types of local or service businesses are not venture fundable. Nonprofit organizations are also not good candidates for venture funding. Lastly, an individual business such as an Etsy shop, coaching or tutoring business, isn’t likely to be a good candidate for venture funding. Those types of businesses have other sources of funding.

While individuals and some venture firms can invest in an LLC, if you plan to raise money from venture capital firms you really should structure your business as a C-Corp. Many investors have restrictions on funding companies that are structured as an LLC.

What fundraise stage and sector am I?

While many venture capital firms invest at several different stages and in several different industries, knowing your status will help you maximize your changes of getting a meeting and ultimately getting funding. While the fundraising stages in venture capital are informal and not legal definitions, they are used often enough that it’s worthwhile to know them:

• Friends & Family. This is the earliest stage of venture fundraising, and as the name suggest it mainly consists of people in your personal network who are willing to provide you money to get started. This Recipe won’t cover this process since it is very specific to your situation. If you do not have family or friends with the ability to invest at this stage you can consider seeking out and applying to a business incubator. Many of these offer small amounts of funding to companies with promising ideas and they have a structured program of assistance to help the company get to the next stage.
• Pre-seed. Typically at this stage most investment will come from Angels or other high net worth individuals, although it’s possible to engage with an early stage VC here as well. This is the term typically used for a company’s first formal fundraise, although some companies will skip this and go right to Seed stage. Companies in this stage can also consider applying to an Accelerator program, which typically comes with a more significant investment and a structured program of assistance to help the company go to market with its product.
• Seed. Funding at this stage will come from a mix of venture capital firms and individuals. A seed stage fundraise will generally use a SAFE or Convertible Note rather than an equity amount.
• Series A, B, C. These raises are almost always equity investments, where the company exchanges a portion of ownership in exchange for the money invested. These are almost always institutional investors, and may be a mix of venture capital firms, private equity, or other financial institutions.

What financial instrument will I use to raise money?

For early-stage venture-backable businesses there are two types of financial instruments that are commonly used by a company to take on investors; Convertible Note and Structured Agreement for Future Equity(SAFE). You should review these two and consult an attorney before deciding which to use. It’s also worth noting that a company can accept investment on both of these at the same time, although a specific investor will use one or the other.

How much should I raise?

There’s no easy answer to this question. The right amount to raise depends on the type of business, your hiring needs, and growth projections. At any stage your fundraising plan should at a minimum get you to the next stage, if not to profitability. For example, if you’re a pre-seed company you want to raise enough to get to a seed stage. Different investors have different expectations for but this article has a few general guidelines.

Getting started

Start by making a copy of the Startup Recipes companion fundraise tracker, created to accompany this Recipe. This tracker uses Google Sheets, but if you use a CRM such as Close, Streak, or Hubspot you should implement something similar in that tool. Make a copy of the spreadsheet and switch to the Fundraise funnel tab. There are instructions in each column name on what to include and a few example rows to get you started:

Only enter data in the cells with bold outlines - the others are calculated for you. This sheet has rows to calculate 100 investors but you can always copy blank rows at the bottom if you need more.

At the top of the screen you can enter the amount you’re planning to raise in this round. Enter that in the Minimum field. If you have a stretch goal for your raise you can enter that too. As investors agree to fund you, the values for Committed and Committed % will update accordingly.

The rest of the spreadsheet can be used to track your engagement with specific investors. These might be venture capital firms or individual investors (Angels). Start by entering the name of your primary contact (you can make it a hyperlink to their email if/when you have it). Enter the name of the firm in the next column, or Angel if they’re an individual investor. The column Connect through is optional; it’s used to record the name/email of a mutual connection who can introduce you to the company. The Avg check size column is used to track the level of investment the firm typically provides (you can sometimes get this from the firm’s website). As you get closer to a Yes from an investor they will usually indicate the level of investment they are willing to make, so you can update this field with new information when you get it.

The Invested? column is a dropdown. Leave it blank until you get a firm yes or no/pass response. Changing this field to YES will update the fundraise target with the value you entered in the corresponding Avg check size field.

The Next step and Notes fields are available for you to keep track of the process. Getting a yes from an investor often involves multiple meetings as well as due diligence, so you can use the Next step field to keep track of the process to make sure you don’t forget to follow up. Notes can be used to track whatever you want, but as you can see from the example rows a helpful way to use it is to track the reasons investors give you when they say no. Make a point to review these periodically, because you might see a pattern. If you see a lot of firms passing because they say you are too early that could mean that you are targeting too many firms who invest at later fundraise stages, but it could also mean that they are giving you a ‘soft no’ - saying you are too early means they don’t believe in some aspect of the business, but could be convinced to reconsider if you show growth in revenue, customers, users, or some other traction metric.

Filling your funnel

Once you’ve got your tracker set up, the next step is to build a list of prospective investors. You will have a far greater chance of getting to a yes if your potential investor:

• Invests in companies at your fundraise stage and sector. Often a firm’s website will list their areas of focus. Angels are really only viable for pre-seed and seed fundraising because their check sizes are smaller. They also don’t necessarily focus on specific sectors, although if an Angel investor has worked in your startup’s target market they’re more likely to be a good investment fit.
• Invests in your location. Angel investors (outside of deal flow platforms like AngelList) tend to invest locally, and even VC firms tend to have a regional focus.
• Hasn’t already invested in a competitor. Most firms will list their portfolio companies on their Website, so before reaching out you should check that there aren’t any potential conflicts with competitors. However if a firm has invested in a company in your market and that company has sold (the firm might describe it as ‘exited’), that’s actually an encouraging sign because it suggests that they both have experience in the space and have a positive experience with investments in it.

Add all of the investors you already have direct and indirect contacts with to the tracker. You’ll want to get to at least 100 firms to start (and likely closer to 500 firms to fill out a seed round), so your next step will be to go through several databases of VC firms listed in the Startup Recipes Fundraising page (and also linked above). We’ll use Signal by NFX as an example here, but all of them work similarly.

Using Signal by NFX to build an investor list

Start by visiting the Signal home page. Halfway down the page are columns for the fundraising stages we listed above.

Find the column that corresponds to your fundraise stage, then scroll down to find your sector and click the link to view the list of investors. For the purpose of this Recipe we’ll use a Cybersecurity startup raising a Seed round. Clicking on that link brings up investors who match that stage and sector.

Note that Signal also has investors grouped by region, so in addition to stage and sector you should review the list of investors that target your region.

With a free Signal account you can use the site’s functionality to build a list of investors, but since the data is public you can also copy the name and firm name to your tracker. Clicking on an investor will show more information about them.

Signal does not include email addresses for investors but it does usually include LinkedIn and AngelList profiles, and if you can’t get a warm intro you can generally use those platforms to connect. You can sometimes find email addresses on the firm’s website too.

Continue down the list of investors on Signal. When you have added all of the potential investors in your stage, sector, and region, go back and check to see if any of them are members of the same VC firm. You’ll want to pick one of them to contact because the decision to invest will come from the firm, not specific members.

Wrapping up

When you are finished with Signal, move on to the next list of investors, following the same general process. When you’ve gone through all of the databases linked in this Recipe you can share the list with your network of supporters and ask them to identify any investors they can help connect you to. Once you have the list filled out, it’s time to send your emails. If you have a warm intro you can use that to follow up with your prospective investor, but if you do need to make a cold email, review the information here and here to help you structure your email.

The contents of this Recipe are © Innovation Works, Inc. and are licensed under CC-BY-SA 4.0 . Contact us with questions or feedback, or to learn more about our structured program in Entrepreneurism based on Startup Recipes.