VC Fundraising: 22 Frequently Asked Founder Questions (and Answers)

Let's not sugar-coat it: for many founders, VC fundraising can be a bit of a black box. Do I need a co-founder? Can I apply without a referral? How much runway should I have?

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I've heard of entrepreneurs who raised their first VC investment using second-hand info, simply because they didn't have founder friends or VC connections to turn to. So we decided we wanted to help make the challenging journey from bootstrap to investment a bit clearer for you. Last week we hosted 100+ of you for an AMA on VC Fundraising.

You asked the questions. Investors Katie Kim and Louise Rix gave you their answers.

"It was honestly a really helpful and insightful event. I hadn't had an experience of talking directly to investors this way." - Pre-seed founder

Based on your feedback, it seems like you'd like us to put on more AMAs in 2021, so stay tuned for updates on our next events in the New Year.

For now, here are 22 key questions and answers for you to learn from.

Prefer to watch the full AMA video with Katie and Louise? Click here.

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#1 - Forward is an idea & early-stage fund. What are you looking for most?

We assess companies on their market, team and product (and probably in that order).

Market: the market size needs be venture-scale, which translates to £1bn in the UK. That said, an initial market of £300-400m is OK.

In a crowded market with well-funded competitors, you'll need to tell us what your differentiators are and how you'll win customers from competitors.

In a less crowded market, you’ll need to convince us the market is large enough, that it’s growing, and why now is the right time.

Team: you can have a great product in a huge and underserved market, but the company isn’t likely to succeed without the right team to execute.

We don’t need you to have gone to Harvard, but you need to have obvious unique advantages for building and growing your business.

Tell us why you and your co-founders are the right people to be solving the problem. That could be your network, your background or your domain expertise. What's your edge?

Product: tell us the pain points you’re solving and what’s unique in the value you’re providing. Are you first to market? Are you doing something better? Do you have IP? What’s your unfair advantage? Do you benefit from network effects? Is your product scalable?

Read Louise's article for how we break down these three key criteria.

#2 - How can I work out which VCs are most likely to be interested in my company?

Targeting VCs is very important. Start by looking for funds that invest in your startup stage. Don’t waste time on a Series B fund when you’re at pre-seed! After that, drill-down by sector.

You can look for their criteria on VC websites. Or look at their portfolio and see if your startup is aligned to their current investments.

You might find this Techstars investor database useful too: it breaks VCs down by stage, location and activity.

#3 - Which sectors do you focus on at Forward?

Our 3 core investment sectors are Applied AI, Marketplaces and E-Commerce, but we also invest in SaaS businesses too.

The charts below show

(1) the proportion of Office Hours applications by sector and

(2) the proportion of successful Office Hours applications by sector.

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Fig 1: Office Hours applications by sector

Successful Office Hours applications.png

Fig 2: Successful Office Hours applications by sector

You can see that our acceptance rate for applications from Applied AI businesses is very high: more than a third of the founders we meet are in this sector, even when only 13% of applications come from Applied AI startups.

For marketplace and ecommerce businesses, the ratio of successful applications to the number of applications is fairly stable (24% to 19% and 13% to 9%.)

Read Katie's guide on acing your Office Hours application.

#4 - What differentiates Forward from similar early-stage funds?

In 2018, we ran the numbers against Crunchbase’s averages and found proof in our brand promise: we move founders forward. Forward-backed companies:

  • Raised 26% faster
  • Were 4x more likely to raise a Series A round
  • Had a 55% uplift in valuations across pre-seed to Series A

Unlike other early-stage funds, every Forward founder is backed by our 20-person studio team. The studio helps you build, launch and grow your company from day zero – from back-of-the-napkin to product and beyond. You get operational support spanning the 4 core business areas: product, engineering, growth/marketing and talent.

#5 - How many months of runway should I leave to raise a seed round?

We typically see 12-24 months, and the rule of thumb is 18 months.

Don’t underestimate how long and how much of your day-to-day it takes to fundraise. It can almost feel like a separate job.

Another reason to start early is investors will look at your financials and know when you’re running low on cash. They could use that against you in your valuation.

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"Don't leave it too late to fundraise - it's almost a separate job"

#6 - What are the risks of an early-stage startup fundraising too soon?

Bearing in mind our answer above, the risks of fundraising too early are:

  • You don’t manage to raise at all because you don’t have the right metrics.
  • You give away too much equity in the early days because your business is still small.
  • You raise at a valuation that’s too high: by the time you run out of money and need to raise again, you haven’t grown enough to warrant your next higher valuation. You then raise a flat round or a round lower than your last one i.e. a “down round” and undermine your team's and your investors' confidence.
  • If you’re far away from finding product-market fit, you put yourself under more time pressure.

But successfully fundraising early has its advantages too:

  • You can grow much faster.
  • You can survive against other well-funded competitors.
  • With the right advisors, smart capital can offer you more than just money. VCs can introduce you to their network and help you decide what to do next.

The fundraising winners are those who time it carefully. The challenge is starting the fundraising journey and having enough time to grow your company to the metrics you need.

#7 - What’s your end-to-end fundraising process?

In 2018, we committed to taking founders from first meeting to term sheet within 30 days, and have sometimes got founders’ deals closed in 2 weeks. Once you’ve applied to us, our process after that is:

  • You have a first meeting with your main investor
  • A second meeting with one of the VC partners
  • A third meeting with the whole investment team, including our Managing Partner, Nic Brisbourne
  • We both agree and sign the term sheet
  • We run due diligence checks e.g. financials, customer calls, reference calls
  • Lastly, we sign the legal documents.

It then take a little bit longer to get the funds in your bank account.

#8 - Do I need a warm intro?

You don’t need a warm intro to apply to us, but if you can get a referral it will help. Remember that many VCs don’t accept cold applications, so do your research.

If you don’t manage to get a referral to us, we’ve designed our fundraising applications for open access. We run two Founders Programmes each year, Office Hours pitch meetings once a month for pre-seed businesses and a similar, separate process for seed businesses.

#9 - What sort of revenue would you expect from a startup before an investment meeting?

When we invest in founders at pre-seed stage, you still might not have a product. We don’t expect you to be bringing in any revenue at this point.

At seed stage, the general trend among VCs is to expect your company to be revenue-generating.

If you’re growing very quickly, you could get away with lower revenues. In our investment focus areas, we’d expect an ecommerce business to have higher revenues than a SaaS or applied AI business. But it’s hard to put a number on this because the revenue will depend on how fast you’re growing and what sector you’re in.

#10 - Do you prefer investing in solo founders or co-founders?

We invest in both but the majority of our pre-seed founders are actually solo founders.

The studio team is the main reason we can do that: they’ve helped lots of solo founders find their co-founder, e.g. their CTO, and then continue expanding the initial team.

#11 - As a pre-seed business, how can I prove I’ve validated my business hypothesis?

Anything you can do to show there’s customer demand is very useful. We recommend founders get creative.

For example, a health business founder might not be able to produce an MVP because of data protection. But they can run consumer surveys and working groups to show engagement.

Process the research you do to find interesting insights that speak to your solution.

If you’d like more suggestions on validating your startup idea, read our guide here.

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#12 - How do you decide on an early-stage company valuation?

To work out how much you expect to get for your company valuation, ask yourself how much equity you’re prepared to give to your VC.

Then ask how much funding you need to get to your next funding milestone. So if you’re a pre-seed company, work out how much investment you need to get you to your seed metrics. If you’re a seed company, calculate how much you need to reach your Series A metrics.

If you reverse the equity and funding numbers, you’ll get your valuation.

For more in-depth info on how to value an early-stage business, check out these two guides: Valuing a business for fundraising and Value your business like you’ve never done before.

#13 - How do I persuade a VC to invest less than they’ve offered?

It’s difficult to do this. Speaking generally, most VCs will set a level of investment that makes sense for their fund.

We usually only invest in 8-10 businesses per year and we typically put the same amount of work into each startup – whether we invest £300,000 or £3 million - so we want to make sure we make the biggest impact.

If we’re deciding between investing 5% in one company and 25% in another, the potential difference in returns set against the amount of impact we can have makes it hard to choose the smaller investment.

However, if you want a VC to change the deals they usually like to do, make your offer as exciting as possible. Have you got a strong team, a penetrable market and a strong product?

#14 - Who decides who the lead investor is?

An investor decides for themselves if they want to be the lead in a deal. Some investors prefer to lead, some never lead. We tend to lead at Forward, but we are happy to follow as well.

Quick definition: a lead investor is a new investor who sets the valuation and the terms of the fundraise deal. Any other investors (“syndicate investors”) follow the terms set by the lead.

#15 - What percentage of Office Hours applicants get a place? Do you go back through the declined applications later?

We get an average of 120 applications per month and invite about 20 founders to meet us - that's about a 15% success rate.

We don’t go back through old applications we've already declined, but we do accept repeat applications: several founders have updated and improved their applications to Office Hours and then got a meeting with us.

Read Louise's article on getting a spot at Office Hours

#16 - Do I need to have EIS or SEIS in place before applying?

We don’t invest through EIS or SEIS.

#17 - What kind of returns do you look for on your investment?

The industry standard is to aim for a 10x return on investments.

VCs typically want an investment to return the original fund value. For example, our Fund II is £60 million. So if we owned 10% of your business at exit, we’d want your company to exit at £600 million and return £60 million.

#18 - What is the timeline you expect to get your 10x return?

Typically a VC fund’s lifecycle is 10 years.

It’s a smart question to ask a VC when you meet: where are you in your lifecycle? If it’s early on, you might have 8 or 9 years to exit, but if it’s later on your timeline to exit will be shorter.

If there’s not much time to exit, ask the VC when they’re raising their next fund. Ask if the terms of the new fund will let them re-invest in your company.

#19 - What are your views on founders using funds to pay themselves salaries?

We actively encourage this! We want you to be financially comfortable so you can do your best work and focus on growing your business.

All of our founders (except one, briefly) have used our investment to pay themselves a salary, and can start earning from day one. Founders in our portfolio often leave their day job on Friday and start taking their startup salary the next Monday.

In all VC legals, investors will set a threshold for salaries but we take a pragmatic approach - we don’t want you worrying about paying for your food and rent.

#20 - Do you invest in companies with co-founders based in different countries? Would you advise founders to be co-located?

We invest in UK-based businesses. Since our studio team works so closely with early-stage founders, we’d expect at least half the management team to be based in the UK – it makes sense for all of us to be geographically close.

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#21 - Are there similarities among the founders you invest in?

We weigh up a lot of factors when we make our initial investments and our follow-on investments. For us, it’s not just about which university you went to or your domain expertise. Personality and character count for a lot.

More specifically, we use an evaluation framework to assess founders. The broad criteria are

  • Analytical rigour
  • Relevant experience
  • Product and technical strengths
  • Leadership skills
  • Entrepreneurial flair
  • Perseverance, commitment and proactivity

#22 - What are the main reasons the companies you back don't end up succeeding?

The most common reason across the industry is there’s insufficient market need: people don’t want what you’re selling.

If you want to catch up on last week's AMA in full, you can watch it here.


Don't miss these essential fundraising resources

As Brand and Content Associate, James strategises and produces problem-solving content for early-stage founders. Before Forward, James worked at one of Forward's portfolio companies, Lexoo, a legal project management startup.

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