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startup-fundraising-process

What to expect from the startup fundraising process

This blog post is part of our series about startup fundraising. In this post, we deep-dive into what founders can expect from the startup fundraising process. 

In an earlier post, we focused on what founders need to know before seeking funding. Bootstrapping, as self-funding is known, can help you launch, but it only gets you so far. Eventually, you may decide to take on external finance, so your startup can grow.

You can learn more about when to raise, the different types of funding available and how much to target here

In our latest post, we break down the steps involved in getting ready for those all-important investor meetings to boost your chances of securing funding. 

 


 

TL;DR (in case you’re in a rush, here are the highlights): 

  • A solid understanding of how the startup fundraising process works increases your chances of securing investment 
  • The kind of data investors expect you to disclose includes: market research, financials and shareholder information 
  • A pitch deck is a key sales tool when selling your startup to prospective investors 
  • The right investor adds more value to your startup than just money, and finding the right fit is important too
  • How much you aim to raise and which investors you approach depends on how much progress your startup has made 

 


 

Gather data 

To understand your startup and its potential, investors need access to a broad range of data. 

  • Market research: As we discussed in our first article, the total addressable market (TAM) demonstrates the revenue you could generate by selling to every customer in your target market. Other useful metrics include your customer acquisition cost (how much you spend to sign up a new customer) and the retention rate (how many customers your startup manages to keep).  
  • Financials: The amount of financial data available depends on the stage of your startup. At a minimum, investors expect to see your balance sheet and sales forecast for at least three years, plus an income statement if you’ve started trading.    
  • Intellectual property (IP): If your product or service can be legally protected, investors will ask for copies of your patents, trademarks or copyrights. After all, their returns rely on these protections. If you haven’t registered your IP, you may have to explain why. 
  • Shareholder information: One of the factors influencing a startup valuation is what percentage is owned by existing shareholders. Investors may also inquire about stock options- the right to buy shares in the company at a later date, used to incentivise employees- and how much they were worth when issued.  
  • Material agreements: These are agreements that could affect your startup’s operations, such as terms of service with your customers, contracts with suppliers, property leases and IP licenses. 
  • Employees: Employees are one of your key resources, and they’re also one of the most expensive. Investors will want to know how much you’re spending on salaries, including bonuses and benefits, and to what extent that expenditure could grow as the startup scales.  

 

Create a killer pitch deck 

Once you’ve gathered this data, you need to package it in a way that sells your startup to investors. A killer pitch deck is an essential part of the startup fundraising process. A pitch deck is a presentation which outlines your vision, describes the scale of the opportunity and shows you have the team in place to realise your startup’s potential. It’s a crucial sales tool when meeting with investors. 

Investors receive a huge volume of pitches, giving you a relatively brief window to make an impression. Creating a killer presentation helps your startup to stand out from the crowd and improves your chances of securing investment. In fact, this step is so important that we’ve dedicated a separate post to it.  

 

Research investors 

The startup fundraising process is a two-way street. Founders get to vet investors too. Here are a few questions to help you choose the right ones.

  • What do you need from an investor? While funding is the obvious answer, investors provide other resources which support your startup. For instance, a network you could tap into for new customers or suppliers. Many investors prefer if you ask for more than money. 
  • Is the investor the right cultural fit for your startup? It’s important to get along with an investor because you’re going to work closely together. Ideally, you complement each other in terms of your skills and share a vision for your startup’s future so you’re both working towards the same goal. 
  • Does the investor have relevant experience? Experience in a particular sector or with startups at a similar stage can prove valuable. It also helps you narrow down the field of prospective investors.  
  • Is the investor suitable for your latest fundraising round? As we explain in the next section, angels tend to invest at an early stage, whereas venture capital (VC) usually waits until a startup has hit certain milestones. 

 

Raising for different rounds 

Fundraising takes place in what are known as rounds. Each round corresponds to the different stages of your startup journey and subsequently influences how much you raise and which investors you approach. 

  • The pre-seed round is a startup’s first attempt at seeking external funding. As it’s informal, founders generally appeal to friends and family, but some angels also invest. The startup can’t provide much hard data such as sales or financials, so investors rely on the founder’s vision. 
  • At the seed round, the startup has proved its offering solves a problem, and it needs to fund further research, key hires or product testing. Seed rounds tend to raise tens of thousands or low six-figure sums. But there are some seed rounds that raise in the millions.
  • A startup has gained traction by the time it reaches Series A, so it can show investors what it has achieved with previous rounds of funding. Startups typically raise capital from VCs and angels and use it to start scaling up. 
  • Once a startup is established, it moves onto Series B to build on its momentum. VCs tend to dominate this round, and the amounts invested rise to tens of millions. Later rounds of fundraising may follow, up to Series F or even G.  

 

Check out the other blog posts in this series about startup fundraising.