100 employees. 100 lessons. Part 4: 🤑 Fundraising: Why, when and how much? 🎯 The process 🧮 Cap table & negotiations

This is part of a series. You can find a link to all the parts here.

🤑 Fundraising: Why, when and how much?

See also my article on: Early Stage Fundraising for European Startups: Amount and Valuation.

And decide if you really want it. When you take VC funding you are implicitly committing to trying to become a unicorn (opposed to lifestyle business). This means you are expected to spend money unsustainably for the first ~5 years which means you will become dependent on finding the next investment round to survive.

You have to take a deep look inside yourself and figure out what you want. See Basecamp’s story and the rather hilarious way it achieved a $100bn valuation.

If you’ve decided that you do want to go down the VC route, take a deep breath. This is not to be underestimated.

You should take money that helps you create the success that will get you to the next stage so you can raise the next round. Think about what milestones you need to reach to go from Seed to Series A etc. You should raise for at least 12–18 months (18–24 months for seed and pre-seed) to give you enough time to focus on the business.

Take it!

It’s typically derived from factors like how much you’re going to raise. More info here.

Celebrating our 4th birthday. Make sure to organise fun events to break the tension of fundraising!

🎯 Fundraising: The process

Understand that the management will be (very) distracted during the fundraising process. Make a plan to compensate for that distraction e.g. 2 co-founders focus on the raise, one focuses internally

Be optimistic in mindset, but plan contingency strategies on how to increase runway e.g. reduce costs or a bridge round.

Fundraising should be ongoing e.g. building long-term relationships with investors. The most basic form is sending quarterly investor updates, but a better way is to create meaningful relationships with investors where you ask their advice and exchange information on what is happening in your space.

Some investor calls go well. Some go badly. Get over it.

Pitching should follow this structure 1) Intro by investor — personal & fund including typical investment and stage 2) Personal intros by founders 3) Walk through deck / conversation about company 4) Call to action e.g. You: “I’ll be in touch for our round in Q4” or Investor: “I’ll get back to you after our IC (Investment committee). Also, ask the question: what would you hope to see when we talk again in X months? This is super revealing.

Remember, you’re hot shit. They would be lucky to be able to invest in you!

When fundraising, your objective is to get the first term sheet. Afterwards, everything will fall into place.

Try to milk investors for detailed, honest feedback. Often a follow up email or call after a rejection will turn “not the right stage for us” (default, bullshit excuse) to something insightful.

Different investors will want different things. Group and categorise the feedback and figure out what to prioritise.

VC to founder translation — source

🧮 Fundraising: Cap table & negotiations

It’s much easier to get investor to “co-” (join a round) than to “lead” (set the terms of the round) and take on the Due Diligence process.

They do it full time. You do it once a year. The only real way to create leverage is to create FOMO.

On giving away equity: It’s better to take more money and go faster than to try and hold on to as much equity as possible. Your personal time is the most valuable thing. If this is going to fail, better it happens faster. The same goes for ESOP and hiring great people.

Try to avoid milestones (e.g. receive second part of funding when you reach X users). They are dumb as you might have to pivot and distracting because you have to think about ticking boxes rather than what is best for the business

This is in addition to the company lawyer. Make sure that the company covers the cost.

Make sure the weight of ESOP is born equally by all shareholders. If this is not the case, there will be misalignment about how to incentivise good people.

As much of the cap table as possible should be “working” e.g. active management and investors who will re-invest

Investors want to see founders properly incentivised. Typically, the founders should still have >50% of the company after Series A.

Organise your angels and small investors into a shareholder pool to simplify the cap table once you get to Series A.

🎓 Investor relations

Remember, you are the boss, not them! This can be hard as most people always had a boss. Good investors should empower and support founders to realise their vision. Typically, investors will become more pushy / micromanager when the company is going worse.

Discuss backup plan to fundraising (internal round) so there are no surprises later on.

👋 Hi, I’m Ben. I support Seed to Series B companies to grow and scale. Connect with me here.

Startup advisor | Co-Founder & CEO/CTO @Nuri