Some companies find fundraising easy. That’s usually because of work they’ve done at some point in the past (truly amazing growth, serial entrepreneur, some other magic) but when it comes to the actual fundraising process they’re courted by multiple investors and raising cash is quick and easy.
We have a few of those companies in our portfolio (and hope to have a lot more), but we also have companies that have to work much harder. Many of them still succeed in raising great rounds (we’ve got two like this closing imminently), but they find fundraising time consuming and laborious. One of our founders recently said that he wished we had prepared him better. This post is the result of the thought process that followed.
A couple of weeks ago I published our dealflow stats for the first four weeks of the year. The headline conclusion was that we had 24 first meetings for every deal that we did and I drew from that to advise CEOs to plan on having a similar number of meetings if they want to have a good chance of closing a round. For us the 47 first meetings led to 8 second meetings and two investments.
There was a bit of pushback from some quarters asking how typical these numbers are, but I’ve been doing some more asking around since, and for companies that have to work hard at their fundraising process it’s prudent to expect similar ratios.
If your startup is likely to have to ‘work it’ I’ve come to the conclusion that the best practice fundraising preparation has the following steps:
- Decide on your target investor group
- Build a list of names
- Start building relationships and qualifying for interest
- Ask for a first meeting
If you are raising money from VCs and don’t have prior relationships then I would target having a long enough list of names at step 2 that you will get 20-30 “yes’s” when you ask for a meeting in step 4. If you are targeting VCs and angels then you should make sure you have enough angels in the pipeline to close the round if none of the VCs come through.
All of this is a lot of work and in an ideal world would start well before the 3-6 months you should allow to close the round once the fundraising starts in earnest. If you have existing relationships which allow you to straight in at step 4 (or even further through the process) then you can proportionally skip the earlier steps. E.g. if you have two relationships which you know will get you a first meeting and two strong relationships where it is more like coming straight in at a second meeting (e.g. the investors have previously expressed strong interest in investing) then you can work it back and see how many new relationships you need. If the stronger relationships are each equivalent to five first meetings (we see that approx 20% of first meets convert to second meetings) and you get enough new names in the pipeline to get 13 first meetings then you will be in good shape with the equivalent of 25 first meetings in total (13 new, two existing first meeting relationships and two existing second meeting relationships that between them are equivalent to ten first meeting relationships).
If you follow this process you will be sending lots of emails over a few months and will have to be on top of remembering what you’ve said to who and following up efficiently. If you are diligent you can manage the process in a spreadsheet (which is what most entrepreneurs do), but a CRM system can be a big help, particularly if you use one on the sales side of your business and don’t have to pay for an extra license to use it for fundraising. We use Prosperworks. If you don’t get organised with a system you will drop balls and make an already difficult process more challenging.
You might be wondering how many names you need on your list at step 2 to get to 20-30 meetings at step 4. Unfortunately there’s too much variation between companies for me to give you a helpful answer. It depends on how hot your startup/sector is, how much progress you’ve made, how well you tell your story, and the investing climate more generally. You should just start gathering names and testing their interest in your company.
Not many CEOs follow a process as disciplined as this. As noted, it takes a lot of time and before fundraising gets pressing most founders have other priorities. If you do prepare thoroughly then you have minimised the role of luck, and the less well prepared you are the greater your chances of delay and/or failure.
There are of course a host of other things that impact the success of fundraising processes, most importantly the strength of the underlying business, but also including short term momentum, the quality of the deck and the quality of the pitch. These all need to be worked on in parallel with the process above, but my point here is to highlight the volume of networking and connection making necessary to go from a cold start to a well prepared fundraising process. Then with a bit of luck the well prepared fundraising process is as quick as the easy fundraising processes enjoyed by startups lucky enough to have found that bit of magic.