How to Fundraise for Your Startup
The worst outcome when fundraising, is to create a lot of high expectations internally and externally about a capital raise but come out of it with an empty bank account. Here are four principles that should guide your fundraising approach and maximize your fundraising outcome.
- Set the Stage. Create a Pre-Round
- Don't Speak Too Soon
- Focus on Your Team
- The Story Matters
Set the Stage. Create a Pre-Round
“Pre-Rounds” provide optionality and ambiguity around your round. You are meeting with investors and VCs, but you’re not raising money. You’re testing out the market and building relationships with them for advice, connections and industry outlook.
In order to pull off a pre-round, create a list of potential investors that you would like to approach and begin reaching out to them and setting up introductory meetings. Continue to do this even after your first round and while you still have money in the bank (usually 5-6 months worth of funding). This will leave you in a more comfortable position to feel the market and walk away from any offers that don’t make sense - since you are not desperate for money.
These meetings will not only help you identify the best future partners but also leave investors more comfortable with you and your company. They will feel like they have a more honest assessment of your business’s strengths and weaknesses since they have known it for weeks or months and not just through a 30 minute well-polished pitch.
Don’t Speak Too Soon
You have nothing to gain by announcing that you are raising a round. Avoid being the company that went on a road show and came back with nothing. Use follow up meetings to the “pre round” to maintain a dialogue with investors. From your meetings, a fundraising discussion will naturally emerge as investors see your progress. If this is not happening, something about your product, growth or traction -- or the way you are positioning these -- is not getting attention of investors, and it’s actually fine to ask a few of them why not.
Focus on Your Team
When speaking to investors, there is a high probability that they heard your idea from someone else before, or at a minimum, they think there is already a startup tackling this problem. Contrary to popular opinion, only 50% of your time should be spent explaining why people want what you are building. The other 50% should be spent explaining why you and your team are the best ones to execute. Highlight the strengths of your team, their backgrounds and experiences. This is the time to talk about how they will contribute to your company’s success in a unique way.
The Story Matters
Every company has a story. Dropbox founder Drew Houston, for example, conceived his concept after repeatedly forgetting his USB flash drive while he was a student at MIT. What makes your company special? What problem are you trying to solve? Focus on the story and spend time refining and simplifying the pitch. The best stories can be told in 30 seconds or less.
Your story must also evolve with every round. Make sure you communicate a clear plan for the capital you are raising. You’ll need to address where are you going and how will the fresh capital fuel your journey there?
Brex CEO Henrique Dubugras spends a large portion of his time meeting with investors, and has done so since his first company, Pagar.me in Brazil. He engages with investors regardless of whether or not Brex is fundraising. This allows us to identify the people who believe in our business and would be there for us during the highs and lows.
Some investors are “transactional” in nature and only care about meeting with companies when they are raising money. This profile is not ideal for us. We view investors as partners and seek to build long term relationships with them. Some of our early investors are our biggest sources of employee referrals to Brex. They are not afraid to open their networks to us because they believe in our company. We have repeatedly given up higher offers for better partners.
In terms of storytelling, we start with our founders and the beginnings of their friendship in Brazil. When they arrived in the U.S., Brex’s founders created a corporate card for startups because they themselves could not get one for their new venture, despite having $170,000 in the bank. Powerful narratives transcend geographies, are memorable, move us, and ultimately leave the listener in a state of deep thought tinged with excitement. Understand why your company matters, what it means to your target constituents, what happens if you succeed, and the implications of your future vision.
Tactically, after raising a Series B to scale our core product, we were explicit that the proceeds for our Series C would be used to build the main piece a competitive points and rewards program. The new round brought us the personnel and resources to create the best and most competitive rewards program for startups.