VC Best Practices for Early-Stage Founders
With rising interest rates and overvalued tech companies, we’ve seen rounds to the downside in the private market, hurting entrepreneurs and their businesses.
Early-stage tech founders are facing fewer happy investors compared to just 6 months ago, which has put a cap on valuation expectations and round sizes.
But bad times also mean great investment opportunities, so venture capital remains plentiful; it just comes with more security requirements such as settlement preferences and investment tranches.
Founders must recognize and deal with market uncertainty by being more thorough in their fundraising efforts.
In general, I would recommend early-stage tech founders (in Angel, Pre-Seed, Seed, Series A) to make good use of these fundraising practices:
- Establish ties to investors long before you need them.
- Have strong arguments for your time, ie “why now”.
- Be realistic about your multiple of income/property offering.
- Consider raising a smaller bridge/round.
Building investor confidence is a key activity to secure funding. Unfortunately, some founders neglect its importance, which is a shame.
The trust, or let’s call it the mutual compatibility that both sides of the table need, usually comes from spending time together and closely observing everyone’s behavior.
And since an investment relationship is longer than the average American marriage, being aligned and being able to trust each other is paramount.
If you want to raise capital, especially in current market conditions, you should start talking to investors 6-12 months before you need the money in your account. Here, the cold approach to VCs is fine because you don’t need the money right away, but warm introductions through your network are always preferable and work best.
One of the best strategies for cold outreach is to call and email the VCs you’d like to work with and share a preview presentation (8-12 slides) with them. To get a warm introduction, you need to find a common connection, for example, on LinkedIn. Or ask venture capitalists who they can recommend you talk to and if they can connect you via email.
In general, when I talk to investors, I would highlight why you think they would be a good fit for your next round. And he would be precise about when he expects to go back up the next round. Investors want to see you understand your cash flow track and get to know your business.
It’s the question many venture capitalists would like a good answer to.
Acceptable responses include,
- You do not have enough clue to wait for better market conditions.
- You have great momentum in your sales, products, etc., and raising capital would boost those efforts significantly, perhaps giving you a strong competitive advantage.
However, timing is everything, and investors know it. Diligent investors would want to challenge it in their timing and examine the maturity of the company on parameters such as team size and capabilities, technical and product debt, growth and sales metrics, etc. For venture investors, it’s all about investing in growth. turning point, which is hard. Therefore, we pay close attention to time both internally in the company and externally.
To prove your time with the company is solid, you need an organization and product that are ready to scale, or at least have a proof of concept, which should suffice at the Angel and Pre-Seed stage. Externally, or let’s say in the market, investors would see whether or not there are severe frictions in the market, such as a very uneducated market segment or strict regulations. However, the former can also be an advantage.
Make sure that you as the founder have a very good understanding of your market and customer segment because many don’t! The most successful companies I’ve seen spend a lot of time talking to customers, gathering feedback, and then improving their products with that knowledge.
Finally, investors want to know about its valuation and expected round size. If you are going to meet with investors 6-12 months in advance, I would advise against discussing the valuation simply because your business should change so much that the previous valuation quickly becomes irrelevant. Instead, I would focus on the expected round size and how they can work together post-investment to help you successfully scale the business.
About 3 months before you want to close the round, it’s time to restart your dialogues with investors and have your material ready. This is where the valuation and discussions about the size of the round will begin, although not in advance.
It can be difficult to assess when to have the valuation negotiation; Should you discuss it in the first two meetings to avoid wasting time with the wrong investors? Or should you lure them into your business through various meetings and workshops and get them to take the bait before calling them on your desired valuation? This is the game that both sides of the table play, and there is no good answer to it.
As for the round size, you might consider raising less now and more later with better valuation. Sometimes I come across founders who want to raise very large amounts but don’t need to from a cash flow perspective. It’s hard to spend a lot of money quickly, and even harder to generate a good return for your investors. Don’t raise more than is needed, plus a six-month mattress. Typically, one round should give you 18-24 months of experience.