The art and science of early stage fundraising

Early stage fundraising is about storytelling, a big long-term vision, and a solid execution plan for the 18–24 months post-close. It’s also about your business model and product innovation, unfair advantage and massive market opportunity as well as a go-to-market strategy. There’s also team composition, your value proposition, and product/market fit. And a ridiculous number of other things. And all you have is 5 minutes to capture the attention of a VC.

After spending the last seven years running an early stage firm and the last several months helping my mentees and portfolio companies raise capital and define go-to-market strategy in the USA, LatAm and Asia, I became convinced that many founders especially those coming from emerging markets are struggling to raise not because the idea is too easy to replicate or the market is small or the traction is not enough but because they are lacking the processes framework.

I’d love to share some tips that worked for my portfolio companies with hopes that they will work for broader entrepreneurial community. Here are some ideas on how to approach fundraising and the role of the vision:

1. Start from the end. Close your eyes, take a deep breath in, breath out and visualize the end product or service as you see it in your wildest dreams. How big can it actually be if everything goes right? How will it solve real world problems? The scale of your thinking is everything.

From a venture capital perspective, every investment is a recorded loss until proven otherwise, so dare to dream big and bold — there’s no risk in that. We love contrarians with bold ideas and massive potential upside. Like Jeremy Zachary said on a podcast episode ‘VCs are in the returns business, not in the investment business. It’s about using the check writing to create returns.’ Ideally, IRR of 40%++ kind of returns.

2. Draw that big vision out on a white board. Think about the end product as a fully bundled technological stack, the finished version of a puzzle. Once you know what the picture looks like in the end, it becomes easier to break it down by focusing on specific parts and making them work first. Obviously, the product might evolve in a very different way than you envision but having a North Star and focusing on results will impact the way you think about the processes.

3. Create an attention-grabbing blurb. This helps crystallize the message and take readers through the fast facts you want them to know. Make sure to include a clear product description, a meaningful value proposition, compelling market size data and growth metrics traction. If you have customers, consider discussing what they love about your product and why they choose it over alternatives. Keep it simple though. Don’t let it become overwhelming.

Here is an example:

“Eunimart is a vertically integrated e-commerce solution that empowers SMEs and mid-market customers in emerging markets to streamline their operations through a single platform, cut costs by 35%, and boost revenue by the factor of three. We monetize through SaaS subscriptions and data analytics and sell to three groups of customers: SMEs, mid- to large enterprises, and supply chain companies. For the last two years, we have been growing at 24% MoM with 80% gross profit in what is considered a $384BN global market with a 24% CAGR. With over $400K in ARR this year, we are planning to hit $3M in the next 12 months. We are enjoying an above market average LTV / CAC ratio of 7:1 and are thrilled to partner with Vodafone India and B2Brazil in Latin America to accelerate our global expansion. We have raised $1.5M in seed funding and are raising $3–5M in Series A to fuel the growth.”

PS: Thank you Shayak for letting me use this here.

The blurb is the essence of your narrative. It has to be remarkably consistent across all channels. Consistency helps build trust, brand recognition and the sense of familiarity aka the ‘mere-exposure’ effect, which is critical given the network-based nature of venture capital.

4. The fundraising deck is the representation of your business story in which you are unpacking and expanding on the statements you made in the blurb. There are many ways to design this, and I will definitely talk about various structures in other posts. I’ll just mention that the deck shouldn’t have more than 15 slides, with most critical data on the first 3–5 slides. Plan to get through the entire deck in 20 minutes maximum.

5. Before even starting conversations with VCs, it makes sense to test the ground and approximate the reasonable valuation and model different scenarios of the post-round ownership structure. It’s very important to think about BATNA and the Aspiration Price and be able to back this up with data when you negotiate with VCs. Use common measures for benchmark valuation: i.e. a revenue multiple based on the annualized current revenue run-rate and growth expectations based on unique product components, performance metrics (MRR, gross margin, LTV / CAC, etc.), the size of the market opportunity and the go-to-market strategy. Look at the wide range of comparable companies and their growth dynamics in different geographical markets.

6. Be very intentional when designing the list of potential investors. Look at the most recently announced Series Seed / Series A / Series B deals through resources like StrictlyVC, Techcrunch, Crunchbase, Pitchbook (paid) or the Information (paid), paying special attention to the invested startups with which you likely have natural synergies. Put the name of the firm and the lead partner in an Excel spreadsheet. Aim to add 10–15 names to the list and start doing your homework. Here are some of the things that I would do:

· Reach out to startups that have just raised fresh funding from your target investor. See if there are immediate collaboration opportunities or if such opportunities might arise in the future. Potential portfolio synergies are one of the evaluation criteria for a VC. Additionally, you can ask for advice on how to tailor your pitch to this specific investor. If the conversation flows, you might even ask for an introduction.

· The best way to approach a VC, especially Tier 1, is via a warm intro from an entrepreneur who has already made money for them. Look at the IPO exit data and find a way to reach out to CEOs / founders / key employees of the best exited companies. If you are persistent, persuasive, and your product makes sense, they might consider putting you in touch with the right partner.

· Whether or not you managed to secure an intro, show the VC that you are serious and have done your homework. Do research the VC firm, their investment and the partner. Listen to podcast episodes they’ve participated in (Harry Stebbings’s TwentyMinuteVC has some great stuff), read blog posts, follow them on Twitter. Find common ground, things to which both of you can relate: Are you betting on technification in South East Asia like Peng T. Ong, GP at Monk’s Hill one of the leading early stage investors in SEA, is? Do you believe that every company will be a fintech company like Angela Strange GP at 16z does? Do you enjoy solving difficult problems in extremely regulated markets with high barriers to entry like Katherine Boyle, partner at General Catalyst enjoys funding companies that do so and supporting their growth? VCs do read cold emails from time to time if you are brief, sharp, and did some prep work before reaching out. And in the end, securing the first call or coffee meeting is not that difficult. The second meeting and further evaluation becomes possible only if you are aligned and believe the same things to be true about the market, business development and / or product strategy.

· In Venture Capital we invest in businesses we believe can become homeruns and typically we have some strong rationale in the form of underlying tech or market dynamics i.e. accelerated adoption of e-commerce makes us look at infrastructure for offline businesses migrating online and so on. While you are preparing for the pitch it makes sense to think through the questions like

• What are some of ‘free riding’ opportunities you see that will help you accelerate the growth?
• What is your go-to-market strategy?
• Why are you the best person in the world to run this business? Many founders focus too much on their academic degrees, professional background and not enough on their interpersonal traits like resilience, adaptability and self-motivation.
• Why are you relevant for this VC in particular and why they should invest?

And finally, timing is everything and so is run rate. If you start raising when you have 3–4 months of cash you are already late and have very limited negotiation power. Against the backdrop of the COVID-19 pandemic, it takes 9–12 months to raise capital for an early stage startup. Financial discipline and relationships are critical as your business is taking off.

In the next posts I will focus on approaches to designing the deck, the flow of the narrative and ways to think about go-to-market strategies. I will also discuss the pros and cons of raising money from angels, seed funds and multi-stage VCs and later will get to the terms.