Raising your first VC round: The Top 14 Things You’ll Need To Know
We held a power hour where our investors offered 100% transparency about how to successfully raise VC capital.
After great feedback from our first event...
"It was to-the-point. No nonsense."
"Very specific and granular insights"
"The answers were honest!"
...we held our second ‘Ask Me Anything’ event at the end of January where our investors Louise Rix and Luke Smith were on hand to answer any and all of your questions about pitching VC’s.
In case you missed it, check out the top 14 questions that were on the mind of fellow early-stage founders. Luke and Louise covered everything from what metrics are needed for a pre-seed round to whether an investor can pull out their money if they get cold feet.
Find out all the answers below and watch the full recording HERE
Let’s dive right in…
#1 How early is it appropriate to start speaking to VCs in the startup process?
The path for each company will be different, as will be when is the most appropriate time to start seeking for funding. For early stage VCs, we would recommend pretty early.
At Forward, we invest early, often into solo founders with just an idea - a perfect fit for our Founders Programme which is tailored to help early stage founders to build and develop their idea.
We recommend speaking to investors before you absolutely need the money because it takes a while to build up the relationship.
#2 What makes a successful versus unsuccessful pitch?
For us, unsuccessful pitches are the ones that don't have a clear view of the problem that the company is trying to solve, but it can also be that there is not a good connection between us, and the founder. It can be a case of the founder(s) coming across as being unwilling to listen, being unable to question their own views - anything that gives a sense that it's going to be difficult to work together.
- A compelling story and real life samples
- Data points to back up your story
- Being an expert in your field
- Let investors speak at the meetings to ask you questions
- Be open to receive feedback
Have a look: Five Best Pitch Decks of All Time. A successful pitch will typically be able to articulate the pain point in a very strong and clear way - show that they really understand the customer pain points.
#3 How much time do you spend at Forward looking at decks received without a warm intro?
Our team looks at every deck we receive and how much time we spend on each depends how relevant they are to us as investors. For the companies that are a fit for us, we spend as much time as needed to establish conviction.
We are a UK focused fund that invests in applied AI, e-commerce and marketplace businesses so if we are getting a deck outside those remits, we would spend less time looking at them.
Read more from Luke’s article: How to Pitch to VCs
#4 Your advice on how to approach a valuation slide in a pre-seed deck?
We would not recommend putting a valuation slide in your pre-seed deck. It’s best to work out the capital you need to raise, include this in the deck and the valuation can be set when you have offers on the table.
What can happen:
- Your valuation is too low - you might be leaving money on the table
- Your valuation is out of market - it can make you look naive and can result with investor not taking the meeting
#5 What are the metrics you are looking for at the pre-seed and seed stage?
At pre-seed, we don’t look for key metrics. At this stage we invest purely based on the idea, without revenue or an actual product. If the business has some form of validation i.e. customer interviews and feedback or they have tested the hypotheses with a waitlist or a survey - this will be helpful but required.
At the seed stage, it gets a little more complex and the answer really depends on the sector the business is operating in. For example, if you are an ecommerce or marketplace business, we would expect to see more in the way of metrics compared to if you are an AI or SaaS business.
Find out more: How to pick the right metrics
#6 What is the ideal exit timeline for Forward Partners?
Forward Partners is a £60m fund and we're looking at businesses that can return that £60m. This means we’ll be seeking investment opportunities in businesses that we think have considerable growth potential.
We don’t have a set timeline for when we are looking for the exit to happen as we are more interested in seeing the business Achieving incremental growth and hitting their full potential.
And one thing to say is at the pre-seed stage, focusing on exits in the deck can be seen as a bit of a red flag, because it's just too early.
#7 How much ESOP equities can founders block and when should that happen? Before seed or after seed?
We would say a minimum of 10% and more if you need to make senior hires. And it’s typically when the first institutional investors come on board or even with an Angel investment round.
#8 If a company's initial focus is to target a specific audience that is smaller than what you'd expect for VC returns but have plans to expand - can this be a problem?
This is something that we would recommend in most cases. With possible limited time and resources you can have a smaller number of users who are homogenous enough to help you establish the pain point. This is often referred to as a beachhead market.
In order to prove there is a need for your product you will need to know How to estimate your potential audience. One thing to bear in mind is if there are structural differences in the market you are planning to expand into, it can get harder.
#9 If pre-seed round legals include a clause about using third-party investors in the future?
When you take an investment you enter into a long term relationship with your investor.The legals will set out a structure so you both will be fully aligned and part of that will be making sure that they have a say in what you do down the line and how that could impact their shareholding.
At Forward Partners, we don’t have a habit of blocking third-party investments as ultimately we want the businesses to succeed and grow. Coming to terms with your terms.
We would recommend being careful with this clause embedded in your legals with any kind of strategic investor where they might have non-financial motives and might not be fully
aligned with you building a great business.
#10 Can an investor pull their money out of a deal if they get cold feet?
Our legals are written in such a straightforward way that when we have committed to invest - there is no way to draw back the money. It's possible that some people will try to put legals in place that will allow that, but we are very firmly against it.
#11 How does an investor perceive a pre-seed company where a co-founder has left after a year with 10% and how would this affect the deal?
We’d recommend getting the co-founders and all other employees on a reverse vesting schedule. What that means is if they leave before typically four years, then you can get back the equity that they would have owned.
How would that affect the deal - it would depend on how favorably your investor views it but
it would not work in your favour, unfortunately.
Finding and hiring the right co-founder can be tricky. We have outlined a couple of the main criteria and as well few tips on how to navigate such situations in our Hiring a co-founder blog.
#12 What VCs think about fundraising brokers?
At early stages it can be hard to get the right value out of using a broker. There is as well a big signaling risk as typically the companies that struggle to raise directly go to brokers, so therefore the investors can see this as a bit of a negative flag of being associated with a broker.
Using brokers makes more sense in the later stages of fundraising as the rounds get more complicated and data room requirements become pretty onerous. And therefore it would be worth having someone who can help the founders manage that.
#13 What is the recommended minimum amount of consumer research to help to validate the business concept?
You will have to speak to your customers to build the best products that solve their problems.
We would say that an absolute minimum would be 20 focused interviews with customers.. There’s no hard and fast rule for the upper limit.The best way to understand the most relevant number for you is when you start hearing the same information over and over again and you’re not learning anything new from your customers, then you’ve done enough.
How 30 timeline interviews can minimise your startup risk - a great insight on how to conduct timeline interviews to understand your customer pain points.
- The Mom Test by Rob Fitzpatrick
- When Coffee and Kale Compete by Alan Klement
#14 What would be the expected and recommended competitive analysis for businesses looking for late seed investment?
At this level we would expect to see that you have a good handle on the major competitors in your industry.
You need to know all your competitors, you will need to live and breathe the industry - you don’t want us to find out about them as it will look bad.
Important to us is that you are able to articulate to us a really compelling source of differentiation that will give us confidence that you can win!
AMA event from Dec 2020 can be watched here: VC Fundraising: 22 Frequently Asked Founder Questions (and Answers)
Find more about our Office Hours here, the next event is taking place on the 18th February.
Find out more useful information from the Path Forward hub: The Path Forward: Startup Help, Startup Content
Stay tuned for more ‘Ask me anything’ events announcements!