Starting to raise: Here are 14 tips you’ll need to succeed.
Last Thursday, we held our 4th edition of the VC Investor Ask Me Anything power hour. A 60-minute session held by the Forward investment team, to offer advice in a safe space - answering the burning questions founders have going into a first fundraise. In this session, the group covered topics from how to keep focus through the early stages, to considering margins and financial projections that VCs really want to see.
We all have busy schedules and we know that sometimes things come up, so in case you missed the event - here are the 14 topics that were asked and answered live by our investors, Katie Kim and Luke Smith.
Keep reading for their answers, or watch the full session HERE.
What are your expectations for financial projections?
Being pre-seed and seed stage investors, we're not looking to see complex financial models. We will want to see management accounts and if you already have them, monthly historicals.
From this, we should understand when you are ready to start generating revenues and what the projection for the next 1-3-5 years will look like. The main focus at this stage is on the first 12 to 24 months - what you aim to achieve and how much it will cost you to get there.
How does Forward’s Studio work factor into your funding terms?
We invest cash for equity, the same as any other fund. When we write the term sheet, we don’t include the Studio team. All Forward’s portfolio companies will have access to the Studio team and it's entirely up to them how much they want to use the studio team’s services.
When is the right time to discuss a term sheet with potential investors?
A term sheet is presented by your investor after they've agreed to invest in your company. At Forward, we aim to get to the term sheet within 30 days. Within those 30 days, there will be three main meetings - the first meeting with the lead investor, the second with one of the partners of the investment team, and the third with our whole investment team.
You can ask your investor at any point about the typical terms they tend to agree with their portfolio companies. This will give you a good idea of what a term sheet might look like. It’s also good to bear in mind that there is negotiation room to make sure both sides are happy. Learn more about terms sheets here - Coming to terms with your terms
Do you assist with the preparation of financial projections?
It depends on the stage of the business. If you are a pre-seed founder, at a very early stage, then your investors might offer more support. At the later stage, it is expected that the founder will be leading with the financial projections.
In any stage, as a founder, you should have a good understanding of the business and the levers that make a big difference. It's crucial to investors that a founder is able to understand financials and build a plan they can execute to drive the business forward. Laying the financial foundations for your business
Do you charge a fee for using the Forward Studio?
Yes, our Studio team usually works on a day rate. The recruitment service fee is based on results. The Studio is there to assist the founders in the best way possible, we don’t make a margin. We're incented to do good work that's going to grow value in the businesses we invest in.
Is it worth it for founders to start building relationships with potential investors early? Even before having a developed minimum viable product (MVP)?
Yes, reaching out early can be worthwhile. It’s easier to have a meaningful investment discussion with an investor who already has an idea of what you're doing and what problem you are looking to solve.
It is worth noting that early stage investors are busy and have limited time. If you decide to reach out to build a relationship early, then be prepared, choose what you want to communicate carefully, as you won’t have a great deal of their time.
Tip: If you do meet potential investors during the development stage and before starting your raise, remember the conversation and promises you’re making. They’ll remember what you have said. For instance, if you're promising really rapid growth for your product, then expect them to ask you about that really rapid growth when you meet them for an investment meeting
How would you recommend a founder keep focused in the early stages of a company?
Being an early stage founder can be a very isolating experience. It’s difficult to give an overarching answer to this question because it’s fairly subjective.
What can help:
- Build your entrepreneur network and chat with other founders from the same sector you are selling into. Learn from them - what has helped them survive and kept them afloat through the early days?
- Connect as well with founders who are further along in their journey. You’ll find most founders very keen to help and share learnings.
- If it continues to feel a bit overwhelming, it can help
How important is a good team versus a good idea and structure?
Very important, especially early stages. If you have a really good idea, an interesting market and great structure, but don't have the right team to execute it’s not likely that you'll achieve your goals.
For example, if you have a killer team with repeat entrepreneurs who have done it before and know the market really well, this will work to your benefit. Let’s say that if your current product is mediocre then this team with the right vision and knowledge will know how to pivot that business.
It’s not vital that you or the team are repeat entrepreneurs though. Above is just an example of why early stage investors tend to over index on having a really strong founding team.
How much equity does Forward usually take?
We're hands on investors. This means that we can't go lower than 5%. Forward’s whole model is based around not making too many investments and being very active with the companies we invest in. That means we need meaningful exposure to the upside.
Normally, our target is 10% to 20%. If it's a very early stage business, raising a lot of cash we'll go above this.
How do you look at the valuation of a startup?
In the Series A stage, when you have revenues, and more traction and data around how the business is doing, then most commonly, you'll see a revenue multiple.
For SaaS business valuation multiples have increased over the years. At the moment it’s anywhere from 10x to 15x. Sometimes it’s more, depending on the founder, or how defensible the business is and how you're doing against competitors.
If you're looking at a service business, you're typically looking at 1x to 5x. For hardware, again, because margins are a bit lower it’s 3x to 6x.
At the pre seed stage it will be a price round. It’s typically a negotiation and agreement between an investor and a business on how much of their business they're willing to give away and how much money an investor is willing to give you for the right amount of equity. At the pre seed stage that can be anywhere from 5% to 30%. We would say that you should be aiming for between 10% to 20%
How important are margins to a VC?
Reason why VCs really like SaaS and software businesses is you'll see margins between 80% to 95%. And then you'll get the repeatable sale over and over again every month/quarter/year. That's quite attractive to both the business and VCs. Hardware margins are a little bit lower, because you have a lot more expenses of building the hardware.
It’s expected that the margins will always be thinner in the early days until you can scale. Margins are important to VCs but we know that at scale you should be able to reach higher margins but want to be sure that your plan is feasible and realistic. It will be a metric that VCs will pay attention to. But I wouldn't be too worried if you're an early stage business, as long as you can prove that you can get there with scale.
What would you find attractive on a pitch deck? What information are you hoping to see?
Beside the content itself, it's important to make sure that you are telling a story visually. Don’t add too many block paragraphs onto a slide deck.
You have to be able to catch our attention fast. Why is your business interesting? Why is the market interesting? What is the potential opportunity?
Your pitch and your deck together should paint a compelling picture. The Day Zero Pitch Deck
Seed decks are usually 10-15 slides.
What investors want to see:
- Problem and solution
- Business model
- How large is the market and how much of that can you capture?
- The bottom-up approach and the top-down approach
- Your USP and your competitors
- How much money you are looking to fundraise
What's the biggest similarity you find between successful pitch decks?
Accrding to DocuSign, it’s the ‘who we are’ slide. Or team slides. As investors, we want to know who you are and why you're the right people to be leading this business. What gives you your unfair advantage?
How many slides do you really read from the deck?
Also from that same report mentioned above - on an average, investors take three minutes and 44 seconds to read your decks. That's why it’s important not to include too many slides, especially at the seed stage, when everything is quite speculative.
Previous three AMA events can be watched here: Getting Ready to Raise Your First Round: Here Are 16 Top Tips To Help You Along The Way; VC Fundraising: 22 Frequently Asked Founder Questions (and Answers) and Raising your first VC round: The Top 14 Things You’ll Need To Know
Find more about our Office Hours here, the next event is taking place on Wednesday, 16h June.
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!