Pitch perfect: 10 tips to get early-stage fundraising success
By Caye Hurtado, Balderton Capital
Only 9% of seed-funded startups in Europe raise Series A business funding in less than 18 months. It’s a rare startup that successfully makes it from seed to Series A in under three years.
Research from Dealroom suggests that the average time to achieve next-level business funding is 18 months – with the majority of companies not hitting this milestone until month 36. In fact, only 5% of startups successfully complete Series A funding rounds within the first year.
Although there can be a modicum of luck involved, such as being in the right place at the right time, the most successful startups know that the best way to guarantee success is to have a strong plan.
At Balderton Capital we see around 3,000 startups every year yet will invest in around 10-15 of these companies. Although each company offers something different, there is often a number of observations that correlate highly with success. If you’re looking to nail your first, or even next fundraising round, read on to discover the top 10 tips for building your network, delivering the perfect pitch, and structuring an efficient fundraising process.
Build relationships early
Start meeting investors before you need money. Think about who you want to meet and ask for (warm) intros where possible. Take the time to perfect your pitch by meeting with a range of investors but save meeting your ‘preferred’ funds or partners until a little further down the line. This will give you the chance to refine your patter and make the best first impression.
Use your time wisely. don’t fill your diary with meetings too early. Any time spent with investors is time away from your day-to-day business. Make sure you’re learning from every interaction and you know what you’re looking to get from each.
Play with investors’ psychology
Generate scarcity and play with timing. Like any human being, FOMO is a real thing for investors and what seems like a competitive opportunity can help accelerate decision making. Of course, you first need to get that initial strong interest and term sheet but integrity should always come first — be careful shopping around and disclosing firms’ names.
Choose people over brand
Get to know the people at the different firms. It’s not just about the brand but what the individual investors can bring to the table. You’ll likely spend many years working with your early stage investors — the personal fit matters, a lot.
Take the time to understand how a particular investor and firm can help you scale your business. Make sure you evaluate investors too; the ‘interview’ process should go both ways. Observe if they ask the right key questions, if they try to help you think (and ‘shine’) through their line of questioning, if they understand your business or are only enquiring about generic points, etc.
Get the storytelling right
Tell a story, make sure investors understand the problem you are solving. Be clear in sharing your vision and keep your energy high because this will show just how passionate you are about your project. That kind of enthusiasm is contagious.
Be confident and credible, but don’t oversell. It is fine to share current weaknesses in your business and where you’d like help from new investors and future hires.
Understand who you’re talking to, as you might want to adapt the storytelling to your audience.
Focus on the key unit economics
Concentrate on the most relevant performance indicators. The metrics you present should reflect the nature of what you do and the stage your business has reached. For instance, for some businesses, focusing on users and their engagement is more relevant than obsessing over revenues.
It is also important to explain your unit economics and put them in context. One regularly quoted metric is customer acquisition costs, but this means little unless complemented with information on payback time and lifetime value’s main drivers. Likewise, growth should be considered against churn, upsells, and sales & marketing expenses.
Explain clearly the value proposition and long-term defensibility
Frame the problem and the solution in a jargon-free way that can be understood by anyone. Then, adapt your pitch to the investor’s background.
Once the value proposition is clear, explain why your solution is unique or better and why the business can be a category winner. Investors are looking for evidence of long-term defensibility.
Create your fundraising plan and fix your timeline
Start with your runway. You should raise capital six-to-nine months before you run out of cash. Research from CB Insights found that almost a third of startups fail because they ran out of cash – don’t be one of them.
Have a list of target investors and a schedule to talk to them. Only bring in other members of the ream when you need to. For example, if you are three co-founders, there is no need for the three of you to attend all meetings.
If you have a set timetable, make sure you give all investors the chance to invest in your business within that period. If you didn’t set a timeline upfront and an investor puts a term sheet on the table, avoid leaving him or her hanging for too long without providing an answer.
And finally, be strategic with your timings and take into account business seasonality. Look for peaks in consumer demand, or conversion of bookings to won deals when it comes to SaaS businesses, for instance.
How much money do you actually need?
Think how much you need to raise for the next 12-24 months and what you need to get you to the next big milestone. Your seed financing should have helped build your product, get it into the market, and find product market fit.
Your Series A money will mostly be dedicated to building a team to help you grow the business and scale. Then your Series B will help further scale that team and ramp revenues to take the market.
Don’t try to raise too much too early, and avoid seeking a high, unsustainable valuation. Raise what you need and what makes sense for your level of traction. Remember that valuation, amount raised, and dilution are all related (a c.20% dilution — 15%-25% range — per round is common in venture).
Always ask for feedback
Don’t take rejection personally and always ask for feedback. Most VCs should provide feedback upfront, but if they don’t, ask.
And do your due diligence
Getting a term sheet from an investor you like is a moment of celebration. However, make sure you do your due diligence too. Talk to other portfolio company founders and ask them how they work with their investors (level of involvement, expertise areas, frequency of interactions). This will help you make a better decision on who to let join your board.