How to Raise Funds Effectively
By James Martin
August 24th, 2020
When it comes to fundraising, there is no one size fits all. Whether you are looking at raising 1 or 10 million, figuring out just how much to raise requires serious thought, succinct planning and evidential explanation. After reviewing the advice from several top investors, it is clear to say there are many methods that can help start-ups figure out how just much they need and how to go about asking for it.
Clarity is Key
Whichever tactic a founding team uses to secure their round, the most important element is clear communication. When it comes to asking for capital, a founding team must ensure they explain, in a crisp and concise manner, where they want to get to and just how much money will catalase that journey. If a team can present an impressive analysis of how X amount of capital is going to get them from A to B, an investor is going to have an easier time coming to a decision of whether or not to invest. The worst thing a founder can do is play coy and have no indication of just how much capital they are looking to raise. Investors could be left wondering a variety of scenarios; is a team asking different firms for different amounts? Are they trying to get whatever they can get hold of? Are they worried about seeming to under raise? Even worse, an investor will be concerned that honest communication will be limited, which will severely stunt business growth—the bottom line: clear communication.
For a particular set of investors, being presented with a range, matched up with a set of milestones that are to be achieved, is a more than adequate method of fundraising. When a team is able to produce an analysis of their thinking behind the fundraising target, by demonstrating how the capital will be used to scale market or incorporate partnerships etc, a VC is in a much better position to understand if the team has been accurate in their evaluation, the figure is appropriate for the company, and the founder-VC fit is suitable. Even better still, when you present your ideas to a VC, don’t be afraid to ask for their opinion on your analysis, as this will start to build up a back and forth dialogue, showing them you want their involvement as a partner. With this open-minded and feedback receptive approach, a VC will be much more inclined to lean in.
On the other side of the table, VCs looking for a specific number, as opposed to a range. When a founder comes to a VC asking for 4-6 million, there’s a big difference between the top and bottom-end numbers; in this case, we are looking at a 50% increase, not something to be overlooked. Ultimately an investor will need to know where a team plans to deploy this capital and give an idea of what the company is going to look like at the end of the investment. Of course, for the majority of ventures, 50-75% of the capital will go to the salaries of the founders, but, nonetheless, it is essential to show this is a part of the planning process. One way of adapting a range to a more specific figure is by explaining the target is to raise 5 million for X and Y reasons. However, there is an additional plan to operate at 6 million for the following Z reasons. This not only shows meticulous planning and thought but also demonstrates to a VC just how adaptive and flexible you can be.
Going the Extra Mile
It may seem surprising, but some VCs actively encourage founders to raise more capital than they think they need. In the eyes of Reid Hoffman, at Greylock Partners, the benefit of securing more than necessary allows founders to be prepared for the inevitable, such as encountering unexpected problems, hiring new members, or adapting smoothly to a pivot in the company’s direction. In Hoffman’s expert opinion, when a founding team is looking to raise funds, they should take what they think they need, based on the analysis they have conducted, and then bulk that figure up by anything up to 50%.
Less is Best
Having just explored the option of asking for more than necessary, an opposing approach, strongly supported by Mark Suster, at Upfront Ventures, is to ask for slightly less than what you require. According to Suster, founders are making a big mistake when asking for too much, or, not having clear motives for their fundraising figure. To convince a VC of this nature, a founding team must have justification for the capital being requested, compelling enough for a VC to want to get involved. Another common problem seen when founders raise too much too soon is that a team will often spend too much exploring the market, which will then lead to a big valuation, ultimately leading to fundraising difficulties in the next round. In Suster’s opinion, going for less is always more appealing to VCs because smaller rounds generate more interest, and so, gradually, one can creep up the round over time.
Each to Their Own
Not only will each company have its own fundraising target, but different stages of the fundraising process will prompt different objectives. For early-stage rounds, too much too soon can take the all-important pressure off of the decision-making process that needs to be tightly managed, which ultimately leads to a more robust product. In general, the amount of money being requested depends on the stage and company fit.
Despite having the same goal in mind, investors will respond to different fundraising methods in entirely different ways. Whether they are looking for an exact figure or a range, whether they are looking to give an additional buffer or a dilution, or whether they want to have every milestone mapped out and feel motivated by their own personal interest, before approaching an investor make sure you are aware of their preferences, so that you can maximize your chance of raising capital.