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Your fundraising strategy depends on whether you’re startup is hot

I spoke at a workshop this morning where most of the participants were CEOs and founders of early stage startups. We talked about the state of the market, what makes a good investor, and how to go about raising money and afterwards I was struck by how much of the fundraising advice given to startups is really only good advice for hot startups. The clearest example of this came from one CEO who had raised large rounds on multiple occasions who advised only talking to five investors and making them feel like they were privileged to be able to take a look at his company. That’s great if at least one and hopefully two of those five are going to bite, but it is only hot startups which get success rates like that.

This turns out to be an important question, because if your startup is hot then going to a small circle of potential investors is a good way to minimise the time spent fundraising and can be good for valuation, but if your startup isn’t hot then the chances are your process will fail if you only target five investors. In other words you need to know whether your startup is hot before you determine your fundraising strategy.

So how can you know if your startup is hot?

You get out and talk with potential investors a long time before you need the money. This is good practice anyway (remember VCs invest in lines not dots) but determining your fundraising strategy is another good reason to invest time in networking with VCs. The trick is to figure out their level of interest before you are actually asking for money but without pitching too hard and ruining your emerging relationship. It’s a delicate balance, and in my experience many entrepreneurs don’t get it quite right – some almost never talk about their companies and therefore don’t have any idea whether I might be interested or not, whilst others overdo it by pitching for too much of the time that we are speaking. If you’re not sure I would err on the side of pitching too much but keep your senses tuned for signs that you should tone it down a little.

If you get out and meet lots of investors and make sure they know what your company does then you should pretty quickly get an idea of whether a short and tight process will work for you. The only way to go wrong now is to read the signs badly. Be ruthlessly honest with yourself. Everybody will say they want to consider your round when it happens, so you should look beyond that for signs that there is real appetite, like investors requesting to meet before you ask them or starting to help with introductions.

Then, if you have five or more investors who are very keen before the formal fundraising process starts you can manage everyone to a tight timetable and hope that one of them will move very quickly to pre-empt the others. But if you don’t have those five then you should talk to many more potential investors (say 20-30) and figure that a successful the process will take 6-9 months.

  • http://fishfishme.com/ Abdullah Alshalabi

    Great advice in a great timing, thanks Nic

  • http://twitter.com/startuprob Rob Johnson

    I really enjoyed your insights today Nic – thanks for the talk and the article

  • Andrei Sharky

    Good advice. From my (limited) experience I notices some people are good at raising money some are good on product side. Usually they are opposite skills. So either you raise money then do the product or do the
    product then raise money.

    I now it sounds weird however it really depends on how many co-founders are and were your strengths are. I
    actually believe you should not even try to raise money before product market/fit or some equivalent traction etc. Not in software. Not today.

    Focus on finding 3-4 co-founders who will work for free and you are all set :-). You can move faster than your competitors who raised money. FAIL fast also applies to fundraising – so I think the article is spot on.

  • http://www.theequitykicker.com brisbourne

    Two great points here Sharky – in most sectors software is cheap enough to develop and test market that raising institutional capital shouldn’t be necessary before some demand and product validation (although maybe before product market fit), and fail fast definitely applies to fundraising. A lot of people don’t recognise the second point.

  • Liam Page

    Hi Nic,

    Given your recent move to Forward Labs how would your advice differ on approaching investors for Seed captial (rather series A or B)?

    I note the business plan and success metrics advice in the 50 Questions – http://www.gamesbrief.com/2010/12/50-questions-whats-the-difference-between-seed-series-a-and-series-b/.

    Are seed investors also happy to support activity such ‘proof of concept’ and further ‘market research’ to aid product development? Any other tips for newcomer?

    Best regards
    Liam

  • http://www.theequitykicker.com brisbourne

    Hi Liam – the advice on that post still stands, and yes seed investors are generally prepared to support market investigation and validation, although most will want to back entrepreneurs who are already convinced about the path they are on and have already accumulated some evidence that they are right.

  • Liam Page

    Thanks Nic – duly noted. Really enjoy the blog by the way. Liam