Securing your first round of venture capital funding may not be easy – it will require a lot of hard work, preparation, persistence, and patience. In this blog, we’ll lay out some simple steps you can take to increase your chances of success.
Step 1 – Determine your fundraising goals while keeping investor goals in mind, too.
To start things off, decide how much funding your company needs to achieve meaningful progress, what you’re willing to give up in exchange, and model expected returns for potential investors. Run this analysis with a range of funding levels. Making these decisions and projections requires understanding your potential investors and having an appreciation for their objectives.
Do the research to evaluate the investment landscape and which investors you are targeting, then using that information figure out what other investment opportunities they might be looking at or who they have funded in the past. You’ll also want to investigate how the investor will be comparing and assessing different opportunities, their operating horizon for expected returns, and what type of performance they will be expecting from a portfolio company. Bake this knowledge into your valuation, fundraising goals, and forecasted performance.
Take it a step further and model expected returns for two subsequent rounds of funding that are likely to occur over the coming years. Potential investors will be doing these calculations, so come to the table prepared for that conversation, demonstrate your understanding of their perspective in the deal, and illustrate why your company is a great opportunity.
Step 2 – Create your pitch deck and business plan to grab an investor’s attention, quickly.
The pitch deck is your company’s first impression with potential investors. Make a great first impression. Having a well-designed, on-brand, easy to read, and comprehensive deck can be the differentiator that gets you the funding you need.
Put in the hard work and cover all the necessary topics including a problem statement, addressable market, thorough overview of your solution, team members, company trajectory and predictions, and how the funding will accelerate your business. Again, take your presentation a step further and customize each deck to your audience. Thoughtfully paint a picture that speaks to what potential investors will be looking for and pair your pitch deck with a similarly well-designed, detailed business plan including a solid executive summary. Venture capitalists see many, many business plans and often only read the executive summary, so make it count.
In fact, we have blog posts dedicated to building a pitch deck and nailing your pitch. You can read those here:
Step 3 – Build relationships with potential investors in your space. Take a targeted approach.
Before you officially launch your fundraising campaign, do your research. Consider a wide range of potential investors, then narrow the list down by what stage of investing the company typically engages in, their industry focuses or verticals, whether they could open the door to strategic opportunities, and their location. Although location is less important in today’s digital world, proximity to your business can make it easier to get on an investor’s radar, network with decision makers, and foster a closer relationship between their business and yours.
Look into the past investments made by the venture capitalists you’re targeting and if possible, align your talking points, presentation, and deliverable with their past successful investments., Demonstrate that you understand how their top investments have been successful and how your company also can be successful.
Consider strategic investors – seek out potential partners that can offer connections, buyers, users, and additional valuable resources. As a strategic investor our UPMC Enterprises team works closely with portfolio companies to provide strategic support, introductions, and much more to support and accelerate their successes.
After narrowing down the list of potential investors and refining your pitch, prioritize which funds are most attractive and start outreaching and networking. Participate in events that increase exposure for your company such as pitch competitions and industry conferences and capitalize on opportunities to publicize your successes such as issuing a joint press release with a new partner or highlighting awards your company or employees have won.
Step 4 – Negotiate terms and conditions and work through due diligence, but not alone.
Once you have found a potential investor you will receive a term sheet and can begin negotiations. Term sheets are legal documents that outline the major elements of the funding proposal before the actual, final agreement is signed.
At this point, think about sharing the term sheet with a mentor or trusted advisor who has a lot of experience in this area. There are a lot of components, and some sage advice can make a meaningful impact. Companies will negotiate economic elements such as the pre-money valuation, post-money valuation, investment type, and stock option pool, as well as control elements such as liquidation preferences, antidilution protection, board seats, protection provisions, and expenses incurred by the venture capital firm for doing the deal.
After agreeing to the term sheet, the investor will begin due diligence. During the process it will be critical that team members across your organization collaborate to answer questions relating to internal parts of the business such as the company’s team and culture, finance and HR systems, product development roadmap, sales and marketing plan, and any existing legal contracts. The process will be lengthy and invasive but be patient and rely on advisors and colleagues to keep the process on track and moving forward.
Step 5 – Close the Deal
Like most other large, complicated financial transactions, there will be many legal documents prepared and reviewed by attorneys for both the company receiving the funding as well as the investors. Once the documents have all been signed, your company will receive the money.
Conducting analysis, preparing your materials, researching, and networking with investors, receiving term sheets, going through due diligence, and closing a round of funding can be extraordinarily difficult, time consuming, and move your focus away from running your startup. but securing your first round of VC funds will be an incredibly important milestone for your company. The process can take six months or longer, and you may encounter many obstacles outside of your control, but with the proper preparation, you increase your chances of success.
