So let’s say you’ve done all the work to create and hone your pitch. How do you know when it’s time to seek investment, and how much to raise? How will you find investors to pitch? And what will the terms of a first investment look like? In this post and the next, we’ll look into these questions.
When to Raise
When Cy Megnin, our Entrepreneur-in-Residence (EIR), talks to founders, he advises them to go as long as they can without raising money from investors. To extend that pre-investment period, often founders don’t even pay themselves (especially if they still have day jobs). The reason it’s good to wait is that the riskier your business is for an investor, the more equity you’ll have to give up in exchange for the money. If your startup is just an idea on a napkin, that’s the highest risk for an investor—meaning their investment at that stage will cost you the most. You also don’t want to immediately raise all the money you might need, because theoretically, as you show good stewardship of your first small investment, you’ll get better terms and a higher valuation of your company in the next round of investment.
To mitigate investor risk, increase the valuation of your company, and secure better terms, you need to do anything you can to show that there’s a market for your solution.
There are ways to mitigate risk even if you don’t have a prototype or an MVP. For example, put up a splash page to collect names and email addresses of people who might be interested in your product when it’s available. If you get 10,000 signups, that shows there’s a market. If you get a letter of intent from a large potential customer that says, “If you build this, I’ll pay for you it,” that’s great. If you get a contract from a future customer, even better. Best of all? Actual sales! Look for ways to prove the viability of your company and the value of your solution.
How Much to Raise
For the first raise, most people don’t know how much they need. Pre-pandemic, startups often tried to raise enough for 12-18 months of runway: that is, 12-18 months of expenses. During the uncertain times of peak pandemic, raises often covered less runway, maybe 6-9 months. These days, it’s back to 12-18. The point is to raise enough to get you to the next raise.
You can figure out how much cash you’ll need for 12-18 months of runway based on your anticipated expenses and your burn rate. Essentially, how much do you spend or burn through each month? If your startup is earning revenue, that may slow your net burn rate. Investors like businesses that are capital-efficient and can make the most of their cash, so keep your expenses to a minimum. You’ll need to calculate what you might need to build the product, pay rent, or secure great marketing and sales. Consider what you most need to do to build traction.
Who to Pitch
Early-stage startups making their first raise will probably pitch to an angel investor rather than a venture capital fund. Angels are willing to take on more risk at an earlier stage. VCs will want to see more evidence of progress before making an investment. There are many ways to approach finding the right people to pitch, but our EIR Cy coaches founders to follow this process.
First, he has them create three pieces to share:
- A one-pager about the business (like an Executive Summary)
- Your pitch deck (the version you’d use if you were standing in front of them pitching)
- A reading deck (a version of your pitch deck with more information that allows someone to understand the problem, your solution, and your traction just from reading it)
Second, he has them do some research and put together a spreadsheet that includes:
- The name of the fund or angel
- Their contact info
- Their Crunchbase profile
- Their LinkedIn information
- Their investment thesis: their criteria for who they invest in (this might include geographical or industry restrictions
- The stage they invest in (seed, Series A, etc.)
- Their average check size
Third, the founder then ranks them or puts them into buckets of A, B, C. You can do this by examining which are the best fit: which invest mostly in your industry, which offer connections you need, or other criteria.
How to Connect
The last step, of course, is to actually reach out to those investors. Start with your C list or the lowest-ranked investors. Why start there? You need practice! You’ll get better at pitching over time, and you want to be sure your A list gets your best pitch. Pick a date four to six weeks out—far enough out that investors might have time on their calendars—and try to pack as many appointments as you can into that window. Why? Again, you need practice! Repeating your pitch many times in a two-week window will help you get stronger.
But before you start trying to make appointments, check your network. A cold call to someone you don’t know at all—“dialing for dollars,” as Cy calls it—might get you a meeting with 1 out of 20 investors. The key is to reach out through your network and find someone who knows a particular investor and would be willing to give you a warm introduction. You’ll get a much better response rate.
And when you do get an appointment, be clear about what’s likely to happen. You won’t be giving your pitch at that first meeting. Investors need to get to know you, and that takes time and multiple meetings. Your goal for the first meeting is simply to get to the next meeting. Think of it as trying to get a second date, rather than getting married.
Different funds work different ways. Sometimes your first meeting will be with an analyst, sometimes with one of the general partners. When they’re ready for you to make your pitch and make a decision, you’ll likely meet with all the partners at once, or perhaps an investment committee.
In our next post, we’ll talk about typical investment paperwork and terms to understand.