Fundraising is an activity that requires considerable time and effort and, as founders, we often wonder when is the right time to commit to it. Without proper planning and timing, fundraising can even become detrimental as it diverts a significant amount of attention from the business.
Truth is, startups are always fundraising.
However, in different periods you should put different emphasis on the fundraising process.
We like to compare the fundraising process to running: there are times to do jogging (you keep the exercise and train) and there are times to sprint (you compete).
During the jogging time you should not dedicate more than 10% of your efforts to fundraising. However, this period is as important as the sprinting one because if you don’t prepare, improve and exercise in this period you are not going to succeed.
Being in a sprint means that you push to close the round with efforts that can take up to 50% of your time, or even more.
When to do “jogging”?
Two can be the reasons why you shouldn’t raise capital:
- External reasons. Some periods of the year are more unfortunate than others because they don’t allow you to have a quick communication with investors. Avoid December (Christmas holidays, end of the year) and July-August in Europe (in the States it’s more shifted towards September). By avoiding these periods you avoid receiving answers like “Let me get back to you after the holidays”, risking to lose your fundraising momentum.
- Internal reasons. Don’t raise capital if you don’t have your fundamentals rights and a solid company proposition.
What to do while jogging?
It is paramount for your sprint that you get your fundamentals right and have a sustainable business. So how to reach that?
1. Identify few KPIs you want to focus on and make sure that your organisation works towards them
You should build a growth engine that measures them and work on improvements. The KPIs depend on your type of business (e.g. retention metrics for SaaS companies), but in general
Every type of business should aim at having a CAC (Customer Acquisition Cost) lower than the LTV (Life Time Value)
This doesn’t mean being profitable: profitability is not the metric to measure if your business is solid and sustainable. You can be cash negative but still have your fundamentals right.
Let’s explain it with an example: It can make more sense, at this stage, to invest more than what you earn in customer acquisition, thus having a negative cash flow, because if these costs are lower than your customers life-time values it only means that you are simply postponing the moment of profitability.
Profits should just be an option, they should be there on the table as soon as you decide to stop investing in customer acquisition (growth) but, since you have the opportunity to, you decided to reinvest as much as possible to generate more and more profits.
This is what it means to have a solid and sustainable business in which investors like to invest.
2. Pretend you are raising capital
It may sound controversial, but let’s explain it taking a step back. This is the most suitable moment to identify your potential investors, as you were “qualifying leads”. Normally leads are qualified by talking to them, but VCs don’t have much time to waste. If you approach them and then tell them that you are not raising funds they will only see you as a waste of time.
Prepare a teaser deck (a complete one is not necessary at this moment), look for introductions and contact them, keeping in mind that your purpose is not to raise funds.
Your main purpose in this phase should be to learn as much as possible.
You should find answer to these questions:
- Do they usually invest in your type if business?
- Would they be a good partner? – Focus only on the ones that give you a positive vibe
- Do they usually invest the same amount you are targeting to raise?
- Which type of fund is it? What is their thesis of investment? Sometimes they invest their own money, sometimes they use governmental funds, sometimes they are a historical firm that invests based on the power-law, etc.
You can also take advantage of this by improving your pitch deck, trying different slides, emails and approaches so that when you decide to sprint you are sure you will have their attention.
Time to sprint
Spending more then 50% of your time on fundraising is not doable every day of the year. The ideal situation for a sprint is when you cannot cope with the demand you are generating.
This is of course very difficult to achieve, but it is the ideal situation because like in human psychology, it is exactly when you don’t need something that you get it offered.
You should be in a situation in which, thanks to the focus on your core business and KPIs during jogging, you should just stop reinvesting capital in growth to become profitable and not need an external investment.
Your proposition to investors will then shift from you needing capital to survive or build something to needing capital to make your running business run faster and expand to a larger scale.
If you are not in this situation, it doesn’t mean you shouldn’t try. Of course you should, this is entrepreneurship and great entrepreneurs emerge from hard and difficult situations. It is just important that you are conscious of the fact that you are in this weak situation.
1. Define an internal deadline
It is very important to do so otherwise, if you spend 3-4 months on raising capital it is not a sprint anymore, it becomes a marathon. Not only it can get very frustrating, but you cannot afford to spend that much time on it because your business will suffer.
2. Pick the list you collected while jogging and prioritise them starting with the ones that are less likely to invest
This will allow you to further refine your proposition. Prepare a killer email to get their attention and be ready to answer fast and keep the momentum up. Otherwise you risk losing their attention. Thanks to the jogging phase, you should be able to tailor your proposition to the different recipients. It is also the time to prepare the full pitch deck in case they call you or they want to meet you to know more information.
3. Make your proposition clear
Clearly state what you are looking for – this will higher your chances of a quick response. The elements that you need to make your proposition clear are:
- How much you are raising
- What is the valuation range you are willing to negotiate
- A clear strategy with a potential for a huge exit – this is very important since a lot of companies invest based on the power law (only in companies that can reach 1 billion revenues)
In conclusion, a long term vision combined with your fundamentals, on which you have been working for the past months, will make your proposition look very solid.
When should you stop?
The maximum time I suggest is 5 weeks.
If in this period of time your chances only get smaller by the day and you went through more than 70% of your list, you should reconsider the sprint because you are losing momentum, especially if you didn’t get to pitch in person.
In that case, you should quit, focus on something else, recover energies and try again later.
What is your experience with fundraising? Do you have useful advice to share with other entrepreneurs? Let us know in the comments!