There comes a time in a startup's journey to success when entrepreneurs need to raise their first round of growth capital.
When you first had that great idea, you may have raised money from friends and family or seed capital from angel investors to get your startup off the ground. What's next? Well, of course, it depends.
Let’s make some assumptions on where you might be at this point, and then think about when and how you might want to raise a series A round to really grow your business.
What is a Series A Round?
You have a real working product, a business plan, and you want to raise a serious first round of capital so you can get your idea to market. This is typically what’s referred to as a series A round. This series A round is your startup’s first significant round of funding from venture capital investors and is intended to provide enough capital to make your company profitable over the next one to two years.
Now it starts to get real...and stressful. At this point, it’s very possible you may be running out of money, your friends and family don’t answer their emails or texts any more, and your angel investors are getting a bit antsy. But your idea is working and looking good, and you have a business plan that is actually starting to make sense.
Raising some serious money from serious investors requires a new approach, though. Let’s assume for the purposes of this scenario that you don’t have any revenue yet.
Where ‘friends and family’ money was in the few thousands of dollars range and angel money was in the tens to hundreds of thousands of dollars range, venture money tends to provide startups with millions of dollars. Shit's about to get real.
How to Find Venture Capital Investors
First, let’s talk about how to find venture capital investors and get their attention. Your typical venture capital investor might see hundreds of new ideas a month. They may invite a few in to see what they have to say. They might invest in one. Already the odds are against you. Don't let this discourage you, but do calibrate your expectations accordingly. Raising venture money is hard and you have to have your act together, as well as have a kick-butt idea. The further along you are in your business process, the better your odds of getting an audience with an investor.
When it comes to how to find venture capital investors, the Internet is going to be your best resource. Do some research online for venture capital firms that have a focus in your industry. There are a number of reliable online resources, some of which include detailed lists of venture capital firms, identifying the firm, the key partners and the types of areas they like to invest in.
Make sure your list is current, then identify the firms that invest in your technology or market. If you are getting into the social media space, sending your plan to a firm that specializes in healthcare is wasting everyone’s time. There is nothing wrong with sending your executive summary to dozens (or more) of firms but do try to be a little selective. It's recommended you don't send your entire business plan at this point; just send a cover letter and an executive summary, which we will talk about next. You might want to start with local firms, at least ones on the same coast line — travel expenses are on you and can add up fast.
What Gets the Attention of Venture Capital Investors?
How do you get the attention of a VC and an invitation to hear more about your company? You need to write an executive summary.
First, focus on creating your elevator pitch, which will help you quickly and clearly articulate your idea. Pretend you are stepping onto an elevator and just as the door is closing, the very investor you are trying to get in front of steps in and presses the button for the 36th floor. That’s how long you have to clearly and succinctly articulate your business plan. Figure you have 30-45 seconds tops. When the elevator gets to the 36th floor the investor is going to step off and either walk away or invite you to tell them more.
Executive summary
Think of the executive summary like a 1-2 page elevator pitch. In the real world it’s hard to imagine an investor sitting and reading a 30+ page business plan cold so don’t bother sending one at this point. The investors are good for 1-2 pages, at which time you get put into one of two piles. You want to be in the first pile. The goal of the executive summary of your business plan is to get them to want to read the rest. Your first paragraph needs to be awesome.
If you ever watch Shark Tank, the first 30-45 second spiel that the entrepreneurs give to the Sharks is the elevator pitch. This is then followed by a more detailed presentation, demo and Q&A session. This is a miniature version of what you will need to raise money. The show shrinks what will likely take you several months into a 15-minute segment.
Introduction letter
Your ’package’ then needs to consist of an introduction letter which is best described as the executive summary of your executive summary. “We have a new approach to the social media space that eliminates fake news and are seeking a series A round of financing in the amount of $XXX,” or whatever your idea is. This is then followed by the 1-2 page executive summary. The executive summary also needs to contain the ‘ask’, how much are you trying to raise and what are you going to use it for? Don’t be shy, they need to know. Keep your executive summary at the 10,000 foot level and avoid getting mired in details.
If you made it into the first pile it means your executive summary got their interest. They will get in touch with you and either request a copy of the plan or more likely ask you to come in and talk to them. The written plan following the executive summary can either be a written document or a PowerPoint deck, whichever can keep their attention. You will need the PowerPoint version eventually if you get invited in, to guide the conversation, so maybe create it now.
When venture capital investors approach you
Sometimes you will be contacted by an investor’s ‘assistant’. Don’t be put off by this, it’s just another filter they tend to put in place, plus typically the ‘assistant’ to a seasoned investor has serious brainpower and is being considered for bigger roles at the firm. If your idea is sound, this won’t be an issue. If the assistant ultimately rejects your idea, don’t feel like the actual investor would have had a different opinion. Probably not.
The odds of a rejection by any particular investor are high. It could be they are looking for a specific thing in a specific market and you aren’t it. It could be that you don’t really fit in their target markets. It could be a lot of things. This is why you need to target a large range of investors. Try not to get discouraged by rejections, your idea can get rejected for many reasons, not necessarily because your idea is bad.
Should you require a non-disclosure agreement?
One question that comes up regards requiring a non-disclosure in order to send the plan to an investor. This is a bad idea for several reasons.
First, real investors won’t typically sign non-disclosures. They see hundreds of ideas a month and they all probably overlap in some way, so they aren’t going to sign something that could potentially put them at risk. That said, do some research on the investor before moving forward.
Second, I personally don’t think non-disclosures are very enforceable. The amount of money you would have to spend suing a venture capital firm for breech would be better spent creating your company.
One of the likely reasons your plan might get rejected is because the investor already has a company in the general space you are going into, which is another reason they probably won’t sign the non-disclosure agreement (NDA).
Last, why put up another barrier to getting funded at this stage when it doesn’t accomplish anything? While it has maybe happened, I have never heard of a case where an investor took a plan and gave it to someone else to use. If your plan is truly unique and compelling, you will get an audience.
Your Startup Team: What VCs Want to See
What should your team look like? At this point you are looking for enough money that it may be time to hire a money person. This doesn’t have to be the ultimate CFO, more of a seasoned bookkeeper or controller that can produce monthly financials and pay bills. They can be a part-time consultant or what's called a fractional CFO. Your financials are not going to be complicated yet, which is why you might want to wait on the CFO until you get closer to actually shipping product. Ultimately, Investors want some reassurance that the checks they write will be well taken care of and some controls will exist around spending. In other words, they want to see some "adult supervision."
Don’t go overboard on hiring until you have secured financing, but be clear in your business plan about the team you intend to put in place. The people you have actually hired need to be full-time and they may have to meet with the investors at some point.
How Will You Invest Your Series A Capital?
Your first round of real startup funding (generally speaking) needs to get you to revenue (remember, we are assuming that you haven’t shipped anything yet), which means customers that pay their invoices because they are so delighted with what you sold them. If you are going to be selling, you will need a sales strategy.
Your business plan has to address not only the idea and the product, it has to identify how you are going to find customers and how you are going to get them to buy. For this you need some channel expertise.
Are you going to be completely online sales driven? Will you require personal contact with each customer? Web sales are very different from enterprise sales, your sales strategy has to be clearly articulated in your business plan. Investors at this point need to know you have thought all this through.
Do You Need Revenue to Raise a Series A Round?
Let’s be clear. To raise a series A round, you don’t actually have to have customers or revenue or a big team of professionals. You have to convince the investors that the money they put in will create all of this — that you have a solid plan and you have identified what you will do with the money you raise. At a bare minimum, you should think about your marketing expert and a possibly money person to augment your engineering team, so your pitch contains answers to their questions.
Anticipate Your Exit Strategy
You should also have some thoughts on your exit strategy. How will the investors eventually get their money back? It’s one thing to create a company and a product and sell lots of it, but then what? Some companies will just plan to grow and eventually go public. This was more common in the 90’s, it’s much more complicated and onerous to do so now. Most companies that survive and have revenue will be acquired by a bigger company. You shouldn’t have a list of specific companies you are targeting, but it's useful to have a general idea of the type of company that might be interested in your startup.
Final Thoughts
Raising a Series A round will likely take several months. You will hopefully be making the same pitch to larger and larger audiences in the interested firms, and hopefully you will have multiple firms interested in investing.
Often, venture firms like having other firms involved in a Series A raise, since it helps their diligence process as well as to establish valuation and mitigate risk. They don’t really see themselves as competing for the investment — if your idea is really good, there will be room for everyone.
The actual journey of raising capital is different for everyone and will likely be emotional, tiring, and frustrating. It’s all part of the process and there aren’t many shortcuts, so the best thing you can do is to be prepared.
Find the right funding strategy for your startup
Most entrepreneurs see venture capital as the holy grail of funding solutions, but fewer than 0.05% of U.S. startups ever raise a VC round.
There are other startup fundraising options, and some of them might be more advantageous for your business. This guide will help you decide what kind of capital to raise, when to raise it, and what you need to get it.