5 Key Steps in the Fundraising Process
Sometimes, the narrative about fundraising can be taken straight from a movie. Founder creates company rooted in unique world vision. Founder meets investor. Investor and founder fall in love over their shared worldview. Business soars and champagne corks fly. This narrative makes for convenient plot devices. It does not provide useful guidance for founders or investors seeking to meet one another. Investors generally know this. Some founders learn this lesson too late, and some never learn.
Investors generally seek out a wide variety of companies in order to find the very small number of companies that can survive what essentially amounts to a process of elimination. Many founders I speak with do not understand that the fundraising process is much like a process of elimination that progresses through various stages. In the mental narrative they construct, chemistry results in a deal and a full bank account.
Founders who successfully raise money approach financing as the process it is by breaking it down in its distinct steps. Here are the 5 key steps in the process:
- Develop Investment Thesis(es): Use the lessons learned from the discovery process of the lean startup method in testing and validating your “fundamental investability message.” This is the short, core thesis that explains why an investment in your company will succeed under the right conditions. Stop thinking in terms of “we are uber for x,” and start thinking in terms of, “the world will inevitably shift to use of x, and we provide a solution for that transition.”
- Get meaningful Feedback on 1-3 fundamental investability messages. Ideally, you have people in your network who have a proven track record raising outside investment. If you do not, then you should seek these folks out quickly! This process requires folks who understand how to present messages to investors. It requires much debate and brainstorming between founders and advisors. This process is a fairly dialectic process, so don’t go into it with a thin skin.
- Research financing deals in your space. You wouldn’t try to bring a product to market without doing market research. Likewise, you shouldn’t approach financing without a deep understanding of the financing market. This step requires deep analysis of which players are active in the space, whether it appears investors are betting for or against various theses, whether certain investors are picking batches of similar companies or different companies, etc. You also need to gather as much information as possible about the investors’ philosophies and positioning.
- Prepare the 15-page summary pitch deck (maybe a few versions depending on the above) and executive summary.
- Leverage your social network and any data sources to try to find a way to reach your key potential investors. This takes skill, diplomacy and experience. If you are reaching out to several investors or groups with “canned” emails, you will likely fail.
- Defend Assumptions and Defend your Adaptability. Once you get an audience with a potential investor, they usually will have reviewed your summary pitch deck and executive summary. They will want to see the more detailed summary and financial model. The key here is being able to demonstrate and defend your assumptions so that your new investor contact becomes a believer or defender of your viewpoint. For example, an investor may challenge your user acquisition assumptions or assumptions about paying subscribers. You should be prepared to explain what happens in these situations and how it affects your business model and strategy. You must be able to answer questions and challenges about assumptions in your model and thesis. You will need to show how you can respond to events that cause a change in your assumptions.
This last step will likely be an iterative process, meaning you may need to repeat it with other people at a fund or angel group many times. Through this process of exploring and challenging assumptions, you will learn about your own business and hopefully find a good fit. Your investors will use this process to place conditions on their investment and structure the deal Good luck! Those few that are best prepared win in the game of angel and venture capital.
By Mark Graffagnini, President, Graffagnini, L.C. Mark is an attorney and advisor who represents investors and companies in financing transactions, general corporate matters, M&A deals and public offerings and securities reporting.
Disclaimer: This post discusses general issues, but it does not constitute legal advice in any respect. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Graffagnini, L.C. and the author expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post.
Sometimes, the narrative about fundraising can be taken straight from a movie. Founder creates company rooted in unique world vision. Founder meets investor. Investor and founder fall in love over their shared worldview. Business soars and champagne corks fly. This narrative makes for convenient plot devices. It does not provide useful guidance for founders or investors seeking to meet one another. Investors generally know this. Some founders learn this lesson too late, and some never learn.
Investors generally seek out a wide variety of companies in order to find the very small number of companies that can survive what essentially amounts to a process of elimination. Many founders I speak with do not understand that the fundraising process is much like a process of elimination that progresses through various stages. In the mental narrative they construct, chemistry results in a deal and a full bank account.
Founders who successfully raise money approach financing as the process it is by breaking it down in its distinct steps. Here are the 5 key steps in the process:
- Develop Investment Thesis(es): Use the lessons learned from the discovery process of the lean startup method in testing and validating your “fundamental investability message.” This is the short, core thesis that explains why an investment in your company will succeed under the right conditions. Stop thinking in terms of “we are uber for x,” and start thinking in terms of, “the world will inevitably shift to use of x, and we provide a solution for that transition.”
- Get meaningful Feedback on 1-3 fundamental investability messages. Ideally, you have people in your network who have a proven track record raising outside investment. If you do not, then you should seek these folks out quickly! This process requires folks who understand how to present messages to investors. It requires much debate and brainstorming between founders and advisors. This process is a fairly dialectic process, so don’t go into it with a thin skin.
- Research financing deals in your space. You wouldn’t try to bring a product to market without doing market research. Likewise, you shouldn’t approach financing without a deep understanding of the financing market. This step requires deep analysis of which players are active in the space, whether it appears investors are betting for or against various theses, whether certain investors are picking batches of similar companies or different companies, etc. You also need to gather as much information as possible about the investors’ philosophies and positioning.
- Prepare the 15-page summary pitch deck (maybe a few versions depending on the above) and executive summary.
- Leverage your social network and any data sources to try to find a way to reach your key potential investors. This takes skill, diplomacy and experience. If you are reaching out to several investors or groups with “canned” emails, you will likely fail.
- Defend Assumptions and Defend your Adaptability. Once you get an audience with a potential investor, they usually will have reviewed your summary pitch deck and executive summary. They will want to see the more detailed summary and financial model. The key here is being able to demonstrate and defend your assumptions so that your new investor contact becomes a believer or defender of your viewpoint. For example, an investor may challenge your user acquisition assumptions or assumptions about paying subscribers. You should be prepared to explain what happens in these situations and how it affects your business model and strategy. You must be able to answer questions and challenges about assumptions in your model and thesis. You will need to show how you can respond to events that cause a change in your assumptions.
This last step will likely be an iterative process, meaning you may need to repeat it with other people at a fund or angel group many times. Through this process of exploring and challenging assumptions, you will learn about your own business and hopefully find a good fit. Your investors will use this process to place conditions on their investment and structure the deal Good luck! Those few that are best prepared win in the game of angel and venture capital.
By Mark Graffagnini, President, Graffagnini, L.C. Mark is an attorney and advisor who represents investors and companies in financing transactions, general corporate matters, M&A deals and public offerings and securities reporting.
Disclaimer: This post discusses general issues, but it does not constitute legal advice in any respect. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Graffagnini, L.C. and the author expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post.
