In this article, we to look into the workflow of how to raise money for a startup company.
We not only raised venture capital for our own business, went through some top US accelerators (DreamIt, 500 Startups), but have helped hundreds of companies raise money through our product, in many cases sitting with them and helping them craft their story.
So, let's look into the process of how to raise money for a startup, from business validation to investor meeting.
Here's an oversimplified workflow of how the process works for most businesses:
1- Create a Business
2- Get Traction
3- Find out if you need venture capital, and why
4- Create a Pitch Deck
5- Find investors
6- Get Intros
7- Email Pitch
9- Negotiation = Time
10- Get a Lead investor and Sign a Term Sheet
11- Get Money
Very few businesses can raise money before traction. Traction is proof that your business is viable, and that you, as a founder, were able to bootstrap your way to it.
Finding Investors and Getting Intros
I had a lot of help here, mostly thanks to the accelerator programs I mentioned. You see, the best way to reach an investor is with a warm intro- that means finding somebody you both know who can introduce you to them via email.
When inside a startup accelerator, it's your job to navigate the partners' LinkedIn network to reach out and connect to relevant investors- meaning, putting money in companies in your stage and your industry.
I would expect most of you watching are not in an accelerator, so your next bet is navigating your own professional LinkedIn network.
The way I used to tackle this was I'd sit down with an investor list (we have one at FounderHub), filter them by industry, deal size, and then start looking them up on LinkedIn. If you have a 2nd-degree connection that you know well enough to ask for an intro, shoot them a quick email blurb explaining who you want to meet and whether they can introduce you. We'll look at the blurb in a second.
What if there are no investors in your network? That gets tricky. The first step is growing your network: attend startup events, connect with people, and add them up on LinkedIn.
Alternatively, you can pay for a premium LinkedIn account and use it to contact them that way. Typically LinkedIn has a reasonable response rate, and it might be a better alternative than their cluttered email.
Cold emailing is really a last resort. Before that, you could do Twitter mentions, but we are already stretching far down the rabbit hole. Your success rate with anything but warm emails will be quite low.
The email pitch should be short and to the point.
-When requesting an intro, your email could look something like this:
I noticed that you are connected to Elon Musk. Do you know him well?
I'm working on a new company called XXXXXX, and I think it's right up his alley. I am wondering if you can introduce me?
- Now for the investor email, you should also keep it short. Something like this:
Hi Elon, I noticed that you have invested in some companies in the XXXXX space. I am working on a new startup that does this XXXXXXXXX.
We are not raising money at the time, but plan to open a round in the next few months.
Can I send you my investor deck you to take a look? I would love to get your thoughts.
Needless to say, you shouldn't try to reach to Elon Musk.
Now, the reason why I recommend going with the 'not raising money at the moment' bit is because it helps, for two reasons:
1- You don't want to appear in a hurry to raise money. No investor wants to put money on a sinking ship.
2- It's essential to build relationships. Few investors will give you money if they just met you, so saying that you don't need money NOW, is an excellent way to establish a relationship before actually discussing a round.
If your pitch deck is interesting, you will likely hear back from them. This is why the first pitch is the first and often only impression you'll get to make.
If you share that with platforms like Slidebean, you can get a notification when the investor opened the deck, and know which slides they saw.
After a couple of emails back and forth, you will get invited to a meeting.
If you don't get a meeting, make sure you ask why wasn't the pitch deck attractive, and whether there's a particular KPI, they would like to see you hit.
Meeting with Investors
First meetings with investors usually are an informal conversation about your company.
The average flow is for you to go through the deck (a variation of the one you sent, with more details, especially on the vision and the metrics side).
After a 10-15 minute walk through your deck, you'll jump into a Q&A session and discussion about the business, what they found, and whether you are going in the right direction.
While I'm not an investor myself, I have talked to hundreds of startups, and I can undoubtedly say that the conversation that happens after the pitch is a fantastic way to get a feel for the founder's expertise and passion about the business. If someone like me can tell when a founder knows their trade, you can bet that most investors will too.
There's also an inevitable founder compatibility variable. They have to like you, and chatting for an hour is one of the best ways to find out.
Negotiation and Time
Other questions might come up. They might not like your terms. They might want more traction. At this point the conversations could go in many directions so here are some general tips for you to get through this:
- Be responsive to emails and use an open email tracker, that will cure your anxiety and give you some visibility as to what's going on.
- Try to close conversations with an action point. Maybe a reply from them or your company hitting a goal- but make sure there's always an item to follow up on.
- Send monthly or bi-monthly updates to your progress.
- Make commitments and overdeliver them If you fail to deliver, acknowledge, be honest, and explain what you are doing about it.
Get a Lead Investor and a Term Sheet
Getting the first investor is the hardest. Once you have one, you can get others to follow in their terms, but that first one commitment will be hard to get.
A lot of investors, especially angels, will want to wait for a 'large' investor to accept the round terms as a validation that they are not the only ones liking your business.
Don't be afraid to ask them openly if they'd be willing to come in as the first investor.
I always quote Elizabeth Yin, one of our mentors at 500 Startups when she said that you need to pitch 100 investors for every $500,000 you want to raise. We found this statement is close to the truth- so don't expect to close this deal with the first investor you talk to.
A term sheet, by the way, is a summary of terms for the round, such as valuation, cap, fundraising amount and other specifics. We have a few term sheet templates you can check.
A signed term sheet means that you have agreed on terms, and you can go to other investors and say 'we have our lead investor,' or 'we have X% of the round committed.'
We interviewed the Sam Wilcoxon CEO of AskLorem, who had terrific insights on how they raised their money. You should look into that session for ideas.
Getting the Money
If you are raising money on a convertible note, then the first check could be as little as 10% of your round, and you can close it and collect the money before you even get the other investors onboard.
That's the great part about convertible notes- and you should check out or video on convertible notes if you haven't.
If you are raising a priced round, you will need all investors on board, signing the round to make it happen, which can, of course, take longer.
Alright, so I hope you found this article useful. If you have any questions about this, please let me know in the video comments.