4. When to start fundraising for your startup
Note: this is Part 4 of Fractionalist’s Startup Fundraising Series for Early Stage Companies.
Timing matters: when to raise capital
By now you’ve decided you want to start fundraising, you’ve started in on your investment deck and now it’s a question of timing for when to start your capital raise. We’ll talk about how you actually pitch your story a little later.
While there is no real fundraising season, there are three times in the year that are optimal for starting your process.
In September, after Labor Day,
In January, at the start of the new year,
In late April, after the first quarter.
It’s not that you can’t raise outside of those times, but choosing your timing is about increasing your odds and maximizing reach with potential investors.
Knowing the steps to raise capital
Here’s a rough outline of the steps you need to take for a September start and an October close.
Mid-August: establish your list
Line up the investors you want to target (BTW - we can help with this). These are firms that have an interest in the area you’re working in but haven’t already invested in a similar offering. Most VCs list their investment thesis on their websites.
Start booking in person or online “coffee meetings” with investors. These are get to know you meetings; not formal pitches yet. You will both be sizing each other up. Are you as a founder credible and presentable? Is your idea well thought out and are you delivering it succinctly? Are you personable? For you as the founder, you’ll be wanting to see how well you get along with this investor. At the end of the day it’s a tryout for both of you. If you don’t like them now, you won’t like them more after you take their money.
Labor Day / Beginning of September: start your outreach
Right after Labor Day, you can tell folks that you’ll be opening the round mid-September, with a goal of closing by mid-to-late October.
By “running the process,” you’re telling the market that you’re wanting to close and you believe you’ll have the right pieces in place to make it happen. This creates a sense of urgency around the raise for those potential investors. On the flip side, this can be a detriment; if you don’t close the round when you say you will, then it makes investors question your ability to deliver.
When I put together my list of potential investors I like to stack rank them from least-likely to most-likely. I book the least-likely meetings first. This helps you practice your pitch and prepare for tough questions in future pitches.
There’s also value in speaking with investors who probably aren’t investing at your stage just yet. While you might not be a fit for them today, they are likely to give you great feedback in the near term, and you are building your relationship with them. Which reminds me of a story….
Airship’s Series B
When we were out raising our series B, I met with John Johnston at August Capital. We had a nice enough meeting, but it was clearly going to be a no. He was cordial, gave some great feedback and said we were a little too early for them. I kept in contact with him with my regular investor updates and when the time came to pitch for our series D, I actually had him pretty early in our process. In fact, I was late to the meeting and jet-lagged having come in from Asia that morning. I apologized profusely and proceeded to pitch for about 20 minutes or so when he politely interrupted me and said, “So all that stuff you said you were going to do 3 years ago, you actually went and did?” I nodded. “Great,” he says “we’re in for the round. But I think you should raise $25M, not $20M.” Moral of the story? It pays to take every opportunity to pitch and to follow-up regularly. Even if you get a no, keep that investor in the loop in the future. You never know.
Mid-September: running the process
I say “run the process” because it is exactly that; a process. When I’m in the thick of fundraising, I sometimes will do 7-10 meetings in a day. That means you’re saying the same thing over-and-over and sometimes (especially if you’re up on Sand Hill) the meetings start to blend together. You get into a rhythm. You hone your pitch so much so that you can recite it in your sleep and say it backwards. Your responses to tough questions will simply roll off your tongue. But it takes time and practice. The only way to get good at it is to do it over and over.
Early October: TBD
By now, you’ll have a better sense of how investors view your company and how viable it will be to close the round. Potential investors will have discussed you at partnership meetings and you may be invited to pitch. Check out our next post on “Pitching to Investors” for some pro-tips.
Mid-October: TBD
By mid-October, you may have found potential investors who will be a good fit. The next step is assessing term sheets and trying to figure out who is going to be the lead investor. For smaller rounds this may not matter (pre-seed and seed). However, if it’s a priced round or “big” seed you’ll likely have a lead. The lead will usually set the terms and signal to other investors that something interesting is happening here. If you have people on the fence, finding a lead almost always gets them over the hump.
End of October: close your round
Once you sign your term sheet it’s a race to get to close. You think 30 days is more than enough time to get your round closed but you’d be amazed at the diligence firms will do, the missing documents or signatures you need that always come up. Every moment an unread message from their legal sits in your inbox is another minute longer (and likely a lot more) you’ll have to wait to close your round.
Make sure to have your diligence ready ahead of time. I like to do it ALL the time and just fold it into my daily process.
Closing the round is a moment to celebrate. You did it. Guess what?
Now the really hard stuff starts.
The Takeaway
Continuously work on your network and personal relationships. Your dentist's wife may be a VC. You never know.
Make a really big, but targeted list. Plan to contact a lot of investors to get to your first meetings.
Don’t burn bridges
Don't be embarrassed to follow up. Investors are as busy as you are.
Get ready for your next round right after you close this one. The next 16-18 months of runway will fly right by.
What’s next?
This is part of the Fractionalist Fundraising Series for Early Stage Founders. We always appreciate feedback on the series and we're always here to help you with your fundraising efforts.
Fractionalist helps early stage companies navigate the challenges new companies inevitably face with a team of experienced CxOs you can leverage at a fraction of the cost.