Risk Capital for Startup’s Growth: Fundraising Tips for Global Early-Stage Companies
It’s been a Carrie Bradshaw Sex and the City moment for me last week when I decided to start looking to the weekly conversations with the founders I back, mentor or advice for the fodder for my Medium blog. In the last couple of weeks we were talking about fundraising strategies and tactics for global startups, a hot topic given the recent tech ecosystem boom in previously overlooked markets like Brazil, Mexico and Colombia in Latin America and an existing lack of early stage capital in the region.
1. Start with understanding your long term capital requirements as it will allow to either narrow down or expand the list of potential funders.
For example, if you are building a company in bio-tech, defense-tech or energy space with expensive engineering resources, long R&D cycle and significant technology risk, you might want to at first focus on investors that both understand the space and have deep pockets to fund your venture over multiple financing round
On the other hand, if you are working on a platform solution with strong network effects (when your product increases in value the more people use it), clever go-to-market and customer acquisition strategies signaling attractive unit economics (i.e. market places or fin-tech), you might consider focusing on specialized pre-seed / seed firms that will provide you with moderate amount of capital and stage-appropriate expertise to get to product-market fit before talking to larger VCs. Some advantages of this approach are:
- Financial discipline and enhanced creativity as you’re figuring out how to grow without spending tons of cash that in best scenario will lead to more sustainable growth
- Simpler investment terms, more equity in the hands of founders, higher valuation step up in the next investment round
2. Find that anchor. In both scenarios, if you are a first-time founder, an industry outsider or missing critical technical skills, consider raising small check from domain experts, someone who has reputation leverage and understands technological and /or operational aspect of the problem you are attempting to solve before actively pitching VCs. That will do two things for you:
- Provide initial validation. In our high-risk environment, VCs are looking for social proving in order to mitigate the risk. Getting qualified people to vouch for you early will certainly be perceived as such. More on herd mentality and social proving in venture capital here.
- Give you an access to network of prospect customers, partners and key employees, huge advantage given that hiring high-qualified people is one of the key challenges early stage startups face
3. Start fundraising as you start your business. The common misperception is that you need a pitch deck to talk to investors, when in fact you need to build your target list, find mutual connections (or design short and specific cold emails), schedule quick intro meetings to get on each other’s radar; collect early feedback and give VCs an opportunity to track you over time via infrequent but consistent communication (think quarterly email updates or coffee catch ups depending on your rate of progress). Fundraising is a painful time-consuming exercise, thus the optimal way to deal with it successfully is to prepare oneself adequately.
4. And finally, for those that are struggling to find an immediate founder / investor fit, feedback is a gift. Every NO you will hear is an opportunity to improve the narrative, product and go-to-market strategy, learn about the market and so much more. In most cases NO is neither personal nor absolute, it often means NOT YET and showcasing your ability to act upon constructive feedback is a better way to expand network, build bridges and maybe come back next round.
As Judah Folkman, whose discoveries revolutionized biomedical research and clinical drug development, said:
“You can tell a leader by counting the number of arrows in his ass.”
So keep grinding.
Two other hot topics of our weekly conversations with entrepreneurs are around co-founder dynamics and hiring, on-boarding and retaining of key employees. I will interview the founders / CEOs of some of the fast-growing companies I backed as well as industry experts, and will cover key findings in the next post or two.