How to Raise Funding for your Startup Part 1: Initial Research + Outreach [Guest]
How to Raise Funding for your Startup Part 1: Initial Research + Outreach [Guest]
How to identify potential investors, how to make contact and how to communicate before you start fundraising.
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Rubén Domínguez Ibar is an investor with Mudi Ventures, a global Venture Capital firm that invests in early and growth stage technology ventures. He regularly shares the latest trends, news, and resources in the world of venture capital in his newsletter- The VC Corner. The following article is part of a new series he’s doing on raising funding for his startups, which is a godsend for me since I’m in the process of fund-raising for my AI for Lawyers startup IQIDIS. Given how many entrepreneurs and startup founders we have in our community, I’m sure it help y’all too.
Less than 1% of American small businesses raise venture capital funding; that percentage is much lower worldwide. Assuming you are not Adam Neuman, founders going out to raise should acknowledge that the odds of landing a term sheet are not in their favour. Spending countless months fundraising is a major distraction for the business, even if you do manage to get funded. This is why you must be thoughtful and deliberate before you start your raise. This article will show how you can streamline your fundraising process and increase your likelihood of landing a term sheet from dream investors.
For some, fundraising comes easily. Investors are looking for startups with the potential to quickly grow into industry leaders. The strength of the founding team is one of their most important cues. This is why when they believe they have identified a founder or a team that they believe in, they will quickly move mountains to back them. This is why well-known figures such as Ilya Sutskever, Travis Kalanick, and Adam Neumann can raise hundreds of millions or billions of dollars before a single line of code is written.
They are unfortunately the exception, and not the rule. Their celebrity-like status within their respective verticals, mean they are known to every investor and don’t need to put as much effort into looking for investors. For everybody else, finding the right pool of investors requires a lot more diligence.
In this article and a subsequent post, we will cover the following:
Identifying potential investors
Making contact
Communication before the fundraising process
Preparing for the fundraise
What to include in your pitch deck
Structuring your Virtual Data Room (VDR)
Running the fundraise process
Staying connected after the fundraise
1. Identifying potential investors:
OpenAI co-founder Ilya Sutskever, who left OpenAI in May 2024, has raised $1 billion from investors for his new AI company, Safe Superintelligence, or SSI at a reported valuation of $5 billion dollars. (Reuters, September 4th 2024)
There are tens of thousands of investment firms, family offices, syndicates, and corporates that invest in early stage companies (See The Ultimate Investors List of Lists). Despite the total pool of inventors being very large, only a small percentage can be a potential investor in your company. This is similar to the difference between TAM and SOM that we covered in the Market Sizing 101 article. To avoid wasting time and energy, you want to focus on investors where your company falls within their investment criteria.
The investment criteria are the parameters that define an investor’s potential investment targets and they typically are broken down by:
Stage: (Seed, Series A-B, Growth Stage)
Geography: (US only, North America, Europe, Global)
Industry Vertical: (B2B Saas, AI, Consumer, Crypto, Marketplaces)
Revenue: (>$100K ARR, >$1M, >$10M, >$20M etc.)
Some investors will explicitly list this criteria on their website but if not, you can usually get an idea by looking at their portfolio companies to see if there is a common theme across their investments. If an investor normally invests in large established fintech companies based in the US, they are unlikely to invest in an early stage European Health Tech startup.
This is why before speaking with an investor, you should know if you fit within their criteria and whether they could be a candidate to invest in your next round. You should not turn down the opportunity to speak to funds that invest at later stages since they can offer helpful feedback or introductions to other investors, just don’t count on them to write a check at this stage.
Each investor might have a different definition of what they consider seed, series A, etc. Their firm’s appetite can also change over time, which is why despite what they announce on their website, it’s worth meeting to validate if you could be a fit.
While there is a qualitative aspect to it, here are the approximate revenue ranges for each funding stage:
Seed: Pre-Revenue up to $1M ARR
Series A: $1–5M
Series B: $10–15M
Series C: $20M+
2. Making contact:
Before raising their first round of funding from Sequoia Capital and Y Combinator, Airbnb was rejected by countless investors for more over a year. To stay afloat, they created and sold limited edition presidential election cereal boxes to stay afloat until they could secure funding.
“We pitched to hundreds of investors, getting rejected time and time again . . . I was quite literally living on my brother’s floor,” Canva founder, Melanie Perkins
Once you have identified a list of investors you believe could be interested, you should go to your network to see if you have any mutual connections. Although only 1% of companies ever raise venture capital, many more try. This results in prominent VCs getting inundated with inbound deal flow but not having enough time to meet with all of them. If you are introduced to them by a respected contact, ideally another well regarded founder, they are far more likely to give you their attention compared to an unsolicited cold email.
If your network is strong, this might happen easily; this is partially why you see so many fundraising announcements from PayPal, Facebook, Stripe, or Uber alumni. Even if you never worked at a large prominent tech firm, you might have friends or former classmates that can introduce you. If not, there are many investor conferences such as Techcrunch Disrupt, Slush, SaaStr etc. where you can meet investors or other entrepreneurs. Whether you have a strong network or not, the more people in your industry you meet, the easier it will be to get in front of your wish list VCs. If despite your efforts, you can’t find a connection to an investor, you can fire off cold emails but you should temper your expectations.
When connecting with these VCs, your goal should be to meet with somebody with the authority to invest: Partners. If you can’t find any connection to the firm, your cold outreach email to an investment partner will likely be forwarded to a junior VC. Just because a junior lacks investment decision authority, doesn’t mean they aren’t worth speaking to. Junior VCs are eager to prove themselves and generally perform the due diligence if their firm is interested. If you can’t get in front of a partner for the initial discussion, it’s fine to speak with whomever you can. If you do a good job of getting them excited about your company, they will try to get you to meet with one of their partners eventually. They will do this because if you manage to convince them that you have the potential to be a breakout company, the dynamic will shift and they will suddenly try to sell you on why they are the best firm to work with. If you have been speaking with a junior VC for a while but when you ask them to bring a partner to a future meeting and they don’t, it tells you that the firm isn’t seriously interested.
You should expect this to happen regularly, especially if you don’t do a good job identifying VCs where you fit their criteria. Even if you fit within their criteria, many VCs won’t be interested for all kinds of reasons, which is why you need to meet with many of them. Since these meetings are time consuming, you manage these types of conversations differently depending on how close you are to your next fundraising process. Hence why you should not maintain a fully up to date VDR year round, when you are not fully committed to raising.
A good practice is to maintain an Excel or Google Sheets file keeping track of all the investors you meet with. This tracker should include the investors you met with from each firm, their emails, their investment criteria, what you perceive their level of interest to be and their desired way to stay in touch (Download our template here). If you keep this up to date, when gear up for a raise, you will already know how many firms might want to participate.
3. Communication before the fundraising process
Raising a round usually takes between 3–6 months, but can sometimes extend beyond a year. The way you meet with investors and what you share during these meetings differs greatly before and during a fundraise.
When you are not raising, you are mostly having frequent casual discussions. These normally start with introduction calls talking about your idea or the market opportunity, while confirming that you fit within their investment criteria. Both parties are sizing each other up to see if there’s a possibility of partnering in the future. Beyond building familiarity, it serves to eliminate firms that are unlikely to invest and helps you get feedback on your product/go-to-market motion as well the level of interest you should expect when you go to raise. After an intro call, if an investor liked what they heard, they might ask to meet every now and then to check on your progress and see if you might look to raise soon.
Even if interested, not all firms will proactively reach out. Therefore after a few initial discussions, send a periodic Investor Update email with the firms you would want to work with. Depending on your stage, this update can include developments with your product, your team or commercial performance. It’s your call how much detail to include in these updates, just keep in mind this email can be shared with other investors or possible competitors.
Once you’ve decided when and how much you want to raise, you should start by letting your preferred investors know of your plans so it’s on their radar. Your point of contact will need to start socializing this within their firm to start building alignment and ensuring that the right resources are set aside to work on the deal. If you have done a good job generating interest with your prior discussions and investor updates, some of these investors might want to get a jump on the competition and preempt the round.
It’s important to know where you stand with an investor before you enter a fundraising process. During a fundraise there are two types of meetings, formal pitch meetings and diligence meetings. Your preparation for these meetings starts well before you launch your process.
Today we covered How to identify potential investors, how to make contact and how to communicate before you start fundraising.
As a recap, here are the actions you should take:
Compile a list of potential investors where you fall within their investment criteria
Look for warm introductions to your desired investors through people within your network
Start building relationships with potential investors well before the raise with meetings and investor updates
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