Getting Ready to Raise Your First Round: Here Are 16 Top Tips To Help You Along The Way
Last week, we held our power hour, where our investors offered fully transparent advice on all you need to know about approaching VCs. From preparing for a pitch through to the steps and timescales of the negotiation process.
Our March edition of 'Ask Me Anything’ took place last week. Our investors Katie Kim and Luke Smith were on hand to answer questions from founders keen to know about pitching to VCs and raising funds. It was an amazing session.
We know that sometimes things come up so in case you missed the event - here are the top 16 questions that were asked and answered live.
Seek out the answer below and watch the full session HERE to find out if VC funds tend to sign NDAs?
Let’s dive right in…
#1 What do investors want to see and what documentation do they need during a due diligence (DD) process?
When evaluating a new potential investment we need to review businesses across three key areas;
- Market - how large is your market, is your business in a potentially fast-growing market, how well will your product fit into your market?
- Strong team - do you have a strong team that gives you a unique advantage to solve a problem in your sector?
- Differentiated and Scalable product - is your product unique within the space you are operating in, can your product’s differentiators scale with your business?
Due diligence process: During the pre-seed stage, it’s unlikely you will have a financial model in place, however, we will take a look at your financial and management accounts, cap table, conduct customer and reference calls, and finally get to negotiating the term sheet and drafting up your deal documents. We will also do technical diligence which involves a deep dive into your product.
Want to know how to get started on your financial model? Check out our post - Make financial modelling great again
#2 What is a cap-table?
Cap table is short for Capitalisation Table. It is a spreadsheet or chart detailing all the shareholders in a company, including their ownership by percentage and number of shares. VCs need to review cap tables in order to understand what their equity stake would be with any given investment, what dilution they might face in future rounds and which stakeholders will get paid out first in a liquidation event--therefore the cap table is essential for any financing decisions.
#3 What is the best way to send a pitch deck to a VC?
The best way to pitch to Forward Partners is by email. When emailing us please add the following detail: a brief introduction to your business, a paragraph explaining why we should be interested in your business and your pitch deck.
We respond to each and every cold inbound lead, however in order to increase your chances of getting a first meeting with a VC, we suggest that you do some homework on the fund before reaching out.Identify the funds that invest in the sectors and stages with which your business is in. It's more effective and efficient for you to shortlist your top funds and focus on those whose investment criteria are a match with your business and raise, rather than email blasting every VC you’ve ever heard of. Think sector focus, investment stage, check size range, geographical focus, and maybe even have a look at the companies within their portfolio that would either be complimentary to you or indicate that the VC is experienced in your space. These alignments will make for a smoother fundraising process and successful partnership.
#4 How often are liquidation preferences required at the pre-seed and seed stage?
Not very often. It is not considered market standard in the pre-seed and seed stage. If investors are asking for this in the early funding rounds I would question the investor’s desire for downside protection at such an early stage.
#5 What are the steps entrepreneurs and startups should follow to secure investments?
We wish we could tell you that there is one golden rule to secure investments but the truth is that everyone’s journey will be different. Here are a few areas to consider when planning to secure investment;
- Identify funds that are relevant to your business, good fit for your investment stage, sector and geography
- Try to secure a warm introduction or referral before reaching out cold
- Nail your pitch and make sure you know your numbers
- Keep the process as smooth as possible: be timely yet professional with follow-ups and responses
- Remember that if it’s not a fit, investors can still make referrals to other funds
Check out Katie’s blog which gives more detail on this process - Using Communication To Supercharge Your Fundraise.
#6 Can VCs ask you about the other funds you are talking to?
It’s natural for VCs to be curious about the other VCs you may be talking to. However, it’s not an industry standard to push founders to disclose their conversations with other funds. It is entirely up to you if you wish to reveal this information.
Most VCs should be making their decision based on their conviction but if you think that disclosing this information might help your case, feel free to let them know.
#7 Are businesses with solo founders more attractive to investors?
All funds are different but at Forward, we do not have a preference to either one or more founders. At the pre-seed stage, you might want to have a technical co-founder to balance commercial skills, but it is not required by default. We have our own in-house Studio team that can assist and fill in many of the gaps in the early days until you build a team around you.
The main thing to remember when you are a solo founder is to make sure that you can cover all of the essential skills for your start-up
Read more about building a team in this Path Forward article - Building the right founding team
#8 How much detail do VCs want to see in the route to market slides?
If your business plans to spend heavily on marketing, then the ability to show a return on marketing spend is going to be crucial for success. We want to see that you have a really good grasp and knowledge of that side of the business.
This means you will have to demonstrate a good sense of what the channels you will be using, a demonstration of a good strategy and ideally being able to show some kind of differentiation. The more differentiating, defensible and detailed your route to market strategy is, the more attractive your business will be for a potential investor.
Check out this blog which captures the key points of startup marketing - Startup marketing doesn’t operate in this comfortable, fixed, luxurious environment. This is not only concerning burn rates and cash runways but also in the way, you will have to work to develop your understanding of your customer, your available marketing channels and everything in between.and everything in between.
#9 What value-add can founders expect when receiving investment from Forward Partners?
We are a traditional VC fund with an in-house Studio team offering great operational support to our portfolio companies.
Our Studio offers:
- Expertise in product and tech to help you build, launch and iterate on your product
- Expertise in growth marketing, branding and communication
- People team support and recruitment to help grow your team
- Free office space for our pre-seed companies
We can offer fully operational support to your business throughout your lifetime at Forward. As and if you need it.
#10 At the pre-seed stage, do VCs usually require additional investors as part of the round, or are they comfortable with being the only investor?
Each investor will have their own preferences and it is worth confirming this up-front when starting a conversation. Some investors will prefer to lead or take a whole round while others prefer to co-invest with another fund alongside them. At Forward Partners we tend to lead but are also open to alternative options as mentioned above.
At the pre-seed stage, it might ultimately come down to how much ownership of the business an investor can get to make the the resources and effort worth the investment.
#11 What does a typical negotiation process look like, and how many sessions or meetings do you have from pitch to investment?
At Forward, our investment team aims for 30 days from the first meeting till we get to a term sheetWithin this period, there are three main meetings:
- Your first meeting with the lead investor
- A second meeting with the Partner of our investment team
- A third meeting with the whole investment team, including our Managing Partner
Most VCs have a weekly internal meeting where they discuss hot deals in the pipeline. We field questions and comments on whether the deal opportunity is a fit for the fund, why this company is exciting, how big the opportunity could be and what the risks are. If there is interest around the table, we’d move forward with scheduling the second and third meetings with the founder, deliberating again with the team at each week in between. At Forward, there is an opportunity for us to get a member or two of the Studio Team to join follow-up meetings with the founders or have those scheduled in addition.
Once we’ve been successfully convinced of the business and its future potential and have found alignment with the founders, we get to negotiating the term sheet. Signing the term sheet is followed by due diligence checks e.g. financials, customer calls, reference calls. The last step of the journey is drafting up and signing legals.
#12 What length of runway do you advise and has this been extended because of the pandemic?
The typical runway is anywhere between 12-24 months. We wouldn't recommend raising funds on anything that gives you less than 12 months. During the pandemic, we have noticed founders being a little more cautious and making sure that they have at least 18 months of runway.
#13 What stage do you usually exit, future round or acquisition/IPO?
VCs look to invest in companies to exit via an acquisition or IPO. It would be rare for investors to invest with the intention of existing before that may happen due to a specific circumstance but that would not have been the assumed strategy pre-investment.
A thought: VC funds traditionally have a 10-year vintage, meaning that the fund’s lifecycle is 10 years long. Ie. if they invest in a company in Year 1 of the fund, they have 10 years to exit that company, but if they invest in year 6, they will only have 4 years to exit that company. It’s worth asking VCs where they are in the fund when you meet with them to understand where you sit in the fund’s lifecycle.
#14 If the investment is primarily for tech and/or development, will the VC want to see a detailed tech road map?
Investors will need the comfort of knowing that you can carry out the development you are planning and they are investing in. They will want to meet the key members of the team who will be working on your product. They will be reviewing the roadmap to understand that you have a good grasp of the skills and understand the process needed to create the product.
This will probably be at the DD stage where we are reviewing the processes, team and the suitability of the product to date and if the product can be built on top of, to get you where you need to be.
It’s worth mentioning that at the pre-seed stage when you have not built your product and therefore have no market share, a technical roadmap is one of the few things inventors will dig into thoroughly.
#15 If you're invited to pitch, does it typically take the format of the founder doing a pitch for X mins followed by a Q&A or it's a more interactive presentation?
Investors and founders will have their own preferences but we tend to have more interactive and conversational pitch meetings.
We like to ask questions throughout the pitch rather than a Q&A session at the end. Most investors will have already seen the pitch deck before the meeting and therefore may prefer to just have a conversation.
#16 Should the deck you send be more text light and visual?
We suggest focusing on less text. The ability to explain your business in a few words is a good indication that you really understand what you are talking about and doing. Your deck needs to stand alone with investors understanding your business easily. On top of this, it’s not fun to see a word-heavy document on a presentation.
AMA events from Dec 2020 and January 2021 can be watched here: 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 the 21st April.
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!