From creating a little FOMO to building a milestone-based strategy, EQT Ventures’ Ashley Lundström shares five lesser-known tips for planning your fundraise.
For every company out there getting billion dollar valuations, there are thousands more trying to navigate the investment landscape.
Advice from VCs to startups on how to raise funding is abundant, but there are a few actionable tips that don’t get talked about as much as they should. Here are five pointers for founders to better help their fundraising chances before kicking off the investment process:
Build diversity in your team
Whether you have a diverse and inclusive workforce is something you may not think about when searching for an investment round. However, if your management team lacks diversity — and let’s be honest, the odds are it does — do something about it before the round begins.
Times have moved on in recent years, and we’re increasingly seeing the benefits of a diverse workforce. If you are an exclusively male management team, don’t be surprised if you’re asked where the women are.
Of course, gender is only one facet of diversity that needs to be addressed. Race equality alone in the UK could add £24 billion to the economy and, if the employment rate of people aged 50 to 64 matched those aged 35 to 49, a further £88 billion would be added.
Diverse teams have also been proven to work better. For example, according to a study by Harvard Business Review, when a team is cognitively diverse, they’re faster at solving problems. So, equality in the workplace makes good business sense.
If you’re showing a conscious effort towards building diversity in your team — or ideally, incorporating this into a strategy — this will almost certainly impress your potential investors.
Get to know your VCs
The fundraising process starts long before you actually get to raising money and both sides of the equation benefit from time getting to know each other.
VCs receive a lot of cold inbounds and many will prioritise a warm introduction, so make a list of investors you’re targeting and get to know them well in advance of your round. If you’re able to be introduced by a connected founder, even better. Introduce yourself in a relaxed setting and use the time to explain your story, get to know each other, but also gather an outside perspective on your business. Building a relationship at this stage is crucial, as you’ll soon know if your views and future goals align.
When you are ready to run a fundraising process, invite your favoured investors to your timetable. Creating a little FOMO (a VCs weakness) around your business won’t hurt, but be transparent with all of those involved if things begin to advance. It may be tempting to turn it into a game, but if your first fundraising meeting involves telling a VC that you have one, or multiple, term sheets on the table, you’ll be off to an awkward start. The VCs will firstly wonder why they weren’t invited in earlier and question whether your real preferred investors have passed. Also, they may think you are bluffing — which isn’t great for trust.
Plan fundraising around milestones
Identify turning points and milestones in your business. Examples of these will depend on what stage you’re in, but can be anything from hiring the core team, reaching positive unit metrics, seeing retention stabilisation or completing a minimal viable product. Once you have established these, build a milestone-based strategy around them, spanning at least one round into the future. Fundraising should be based on having reached milestones — don’t fundraise to fund them.
But why is this so important? Milestones are small proof points that will de-risk the round. Very few VCs will want to back extended periods of development or slow sales cycles. Reaching these points, however small, will show that something is working and justifies putting more money into the business to accelerate further progress.
Tracking this progress is also vital and being able to do this with data will objectively highlight your advancements. If you’re not there yet but money is running low, bootstrap, as ultimately, it will be worth it. If you can present a milestone-based strategy while building those relationships with VCs in the early stages, it can lead to valuable conversations on overarching strategies, priorities and tactics.
Get the VC math right
Before reaching out to an investor, it is important to know if your current stage and, indeed, endgame vision is in line with their required return. Only a small fraction of businesses will fit the return profile that VCs are looking for, and many successful companies may be outside of the scope for an investor.
There are also many different nuances within VCs, so find out the size of the fund, the required return, preferred ticket and stage in its lifecycle. As a general rule, a VC’s target return will be determined on the size of the fund — so, the bigger the fund, the more likely they will be looking to invest in something truly innovative and groundbreaking.
Be realistic about your valuation
VCs will expect to see healthy up-rounds as a signifier that you have met the goals of your previous round. So, the higher the previous valuation, the bigger the expected delta will be for your next round. As such, it is worth bearing in mind that a high valuation can potentially become a very big burden by inflating expectations. Even if things have been going well, you don’t want to over promise for your next round.
Thinking twice about valuation is something that needs to be stressed. You may find that your timeline becomes more uncertain or the amount of cash needed to meet the next round of milestones fluctuates; this is when you will appreciate having been realistic about your valuation and creating a buffer for yourself.
If you take on board some of these tips, and do your homework, you will be well on your way to taking the plunge into your funding round. Now that you have caught the attention of a VC, next up is the pitch. So, make sure you are prepared to follow through on all of your hard work so far and funding shouldn’t be far off on the horizon.
Ashley Lundström is Venture Lead at EQT Ventures.