Fundraising is reaching a fever pitch: in March alone, 233 seed-stage companies — the highest number for six months — raised €453m.
How can founders take advantage of this spike? What’s the best way to ask for funding? And how should they decide what kind of investor to work with?
In our recent Sifted Talks we asked our panel for the best ways to persuade investors to part with their cash. Our experts were:
- Helery Pops, cofounder, Estonian VC firm Honey Badger Capital
- Napala Pratini, cofounder, Habitual, a healthtech trying to reverse diabetes
- Michael Riegel, managing director EMEA, business travel management platform TripActions
- Katia Yakovleva, cofounder, no-code startup Beyond
Here’s what we learnt.
1. Decide if the VC route is right for you
A lot of startups approach VCs for money to grow — but there are other ways to raise, and VC funding might not be the right option for everyone.
Pops said it all boiled down to economics; she pointed out that seven out of ten startups fail, and while VCs need to be willing to take on that risk they come with high expectations. Founders need to think carefully whether they’ll be able to give the VC a return on their investment. Sometimes, she said, it’s better for a startup to work with a super angel investor who can help with growth before going to a VC.
Riegel said founders should think about their business model. If founders can get to a profitable stage with little initial investment and grow from there, it’s better to rule out VC funding. TripActions was complex technically, and Riegel needed a big investment to build the platform, so VC funding was the right option for him.
It's really important to make it a conscious choice. It sounds fancy to go down the VC route, but it puts you on a certain trajectory and puts a certain pressure on you. This means there are certain growth expectations and you have a lot of expectations from external parties” — Michael Riegel, TripActions
2. Do your homework
The panel all agreed: founders who want a successful raise need to prepare as much as possible beforehand.
Pops said founders shouldn’t underestimate the value of good preparation, especially when it comes to their pitch deck. It should be well written with absolutely no typos. Founders should also be clear as to why they’re talking to a particular investor, what they want from them and under what conditions.
Reigel said founders should research the typical questions that investors might ask. It creates a good impression if founders have the answers at hand during a pitch.
Founders should also go to events, build relationships and become a part of the ecosystem pre-raise, Yakovleva said. She suggested connecting with people on Twitter and creating wish lists of dream investors.
Yakovleva also recommended practising your pitch. She said the game changer was having her friends listen to her pitch and play devil’s advocate.
You only have one shot. You might have half an hour: you have to present your business, you have to know your numbers… Ask a couple of friends to coach you. Maybe there are also investors but not necessarily in the space your startup is operating in” — Katia Yakovleva, Beyond
3. Crunch the numbers
How much money should founders ask for and how do you go about valuing a startup?
Pops warned that getting money in the early stages was often expensive because founders needed to give away large parts of their company. She recommended taking a frugal approach and asking for only as much money as you need to get to the next financing round.
Pratini said founders needed to figure out what level of dilution they're comfortable with. They also needed to think about how much of the company they'd have left to sell to future investors.
It is a bit of an art and science. It's based on what the market will give you. At the end of the day, there is no one way to value your company. The valuation is literally what people will pay for it. Figure out the max amount you want to sell and just stick to that” — Napala Pratini, Habitual
4. Create FOMO
How long should fundraising take?
Yakovleva's took less than two weeks. While there are some founders who seem to be constantly fundraising, her strategy was to raise money and get back to building Beyond as soon as she could.
Pratini took a longer time to fundraise, but said it was important to put a time frame on it to make sure investors didn’t end up missing the boat. She said it was important to be the talk of the town and generate a buzz about your startup while looking for money.
All investors have FOMO, fear of missing out, all of them! If you manage to create FOMO by being able to say 'we've got another term sheet' or 'we are getting one this week and we have this time pressure,' then everyone gets interested. The first term sheet is the most important one, because then you can start playing with it. That momentum is crucial” — Riegel
5. Find the right match
The panel said finding the right investor could be a little like dating. Some investors will string you along and avoid commitment, whereas others will want to see you all the time.
Riegel said that if investors were keen, they'd be engaged and constantly in contact. Founders should focus on these investors, and be wary of others who are using the data you share with them for market research.
Pratini said founders should pick investors who understand the product and growth strategy. When they started Habitual, Pratini and her cofounder decided not to build an app and only a few investors understood their decision. Had Pratini chosen an investor who wanted an app, she thinks it would have changed the customer base, how they hired and how they built the business.
Pops said she thinks about the possible long-term relationship when considering founders. She asks herself whether she wants to work at the company. If the answer is yes, she’s more likely to invest in it.
Founders should be precise about investor due diligence. You should go and find the other companies they have invested in and ask are these funds helpful. Everyone can talk and say they are super helpful. But at the end of the day if the investor just gives you money and disappears, that is not what you want” — Helery Pops, Honey Badger Capital
Like this and want more? You can watch the full Sifted Talks here: