The Basics Of VC Investment & All The Things To Expect During Fundraising
Every entrepreneur looks forward to the fundraising phase as the most important part of their journey. If you are in the startup waters, you certainly know the standard process which every venture capital firm undergoes before funding.
If this is your first startup and you have no idea, though, the most important thing to consider is that every one of the key stages gives you a sense of where you really are, what you have achieved and what is still left to be achieved in order to get to the funding phase.
Basically, the process can be broken down into eight stages — stages that each and every company is proud of undergoing before the final one, the fundraising. Today, we are listing every phase in detail — letting you know what to expect and how to prepare for each one.
The Eight Stages Before Fundraising Every Startup Needs To Go Through
Based on our experience with startups, as well as the stories of many successful ones, we have rounded up the eight vital stages before the official funding. In other words, this is what you should focus on if you want to get your startup funded.
We are assuming that by the start of the first (pre-raise) stage, you have a startup with a figured out strategy, market size and the needed capital to scale, improve the distribution systems or establish your own business model if you don’t want yet. However, if you missed some of these things — you should get to them straight away because they are vital from the first phase.
Note that while some people know and refer to the startup stages under their ‘official’ terms such as formation, validation, pivoting, iterating, etc. — we are keeping a more informal approach when describing each one of them.
Stage 1: Pre-Raise
This is the stage where some of the good investors have gotten to know you, your company and marketplace before you speak to them for the first time.
The best way to dominate the scene during this phase is not to wait for the call, but be active in the digital world. Basically, what you need to do is gain more traction about your startups in the online startup communities and show everyone that you are ready to pitch the idea not only to the investors — but the real world as well.
Alexa, LinkedIn, GitHub, ProductHunt and AppAnnie are some of the best websites to virtually ‘pitch’ your startup to during this phase. You can upload the idea, write the story behind your startup and describe how it is about to change the world.
In reality, great investors tend to check out websites like these and see how you hold up with the community. That being said, a profile on every one of the above mentioned websites can help you big time along the way, whether it’s about networking or impressing potential investors.
Key Takeaway: A good investor will always take some time to see, understand and track your business from every angle — just like you need time to see if they are the right person for it.
Stage 2: The Starting Point
This is the point where your startup initiates the fundraising process. Usually, people at first ping the investors they are common with or ones they already contacted, but this is not a strict rule to hold. It’s more like a signal to the world that your prepping phase is over and you have officially started to raise money for your startup.
So, the best game to play during this first phase is to avoid cold calls and emails — instead, build quick relationships that are made with networking. This is all in order to get some warm introduction to your potential investors, and a strategy that worked out well for many startups.
Key Takeaway: You don’t want to go all-digital when your startup officially hits the initiation phase. Instead, it’s better to give your ‘pitch’ in person to any of your potential investors or people in those waters.
Stage 3: The Early Hours
We are referring this phase as the early hours, disregarding the fact that it may take weeks or even months for it to happen. During this phase, you are getting people to know you and your idea and basically standing still in front of the world.
Having a deck by this phase is a must. In fact, there won’t be a single potential investor that wouldn’t want to go over it — whether you meet them in person or they find about your startup via other people.
The role you should play during this phase is all-natural, answering questions on your background, the idea behind the startup and what your company basically does. Prepare to be bombed with such questions, with the simple ones being asked more and more.
However, make sure you master the more complex things in your startup as well — investors love asking startups about their economics, technologies and how the startup goes in line with the recent trends.
Key Takeaway: Prepare to answer a lot of questions during this phase — and beware, they can range from simple to the most provoking and challenging you have ever seen. Investors love to tickle your creativity and problem-solving skills in person.
Stage 4: The Deep Zone
Not every partner gets involved in this phase. The truth is, usually there are two partners responsible for handling it — but if your startup counts four people only, all of them may participate. The catch here is that you are expected to showcase everything you have built and everything you know about your startup.
So, what you need to do?
Focus on the value proposition of your startup, as well as its competitive advantage. Ask yourself what makes you and your startup special and how is your idea different than any other. Know every detail of every complex question — because here, you are not allowed to blurb or go deaf.
The entire point of this stage is to get to know each other as partners and see what inspires you to work hard in the future. Everything from your goals to your hopes and concerns are important and should be upon your mutual agreement.
Key Takeaway: Discussing the goals, hopes and concerns is important for team-building. As partners, they will help you strengthen up your relationship and overcome them as they are the easiest challenges.
Stage 5: The Partners’ Meeting
Yes, this is the stage with the big meeting. But not a stage you have to fear (well, once you are well prepared).
In this stage, you will be invited to meet the whole team. In some startups, this happens as a video conference call, but the best way to the meeting to go is face-to-face. Know that during this phase, you will be asked to do your pitch again (so, revise if you have to) in front of every partner.
Again, expect a lot of questions here — mostly because you are all gathered up to cover any hiccups and misunderstandings. That is why you have to be the leader that understands the product and the company, but also the great interpreter in order to make your investor understand you in a better way. So, the key takeaway from this is simple.
Key Takeaway: The way you pitch, answer questions and express yourself about your startup should be as fluid as your thoughts about it. Only that way, you will create harmony and help your investor(s) to understand you better.
Stage 6: Term Sheet
If stage five went well for you (and your startup), meaning that you impressed the team at the partner meeting enough to invest — you will most probably be issued a term sheet which is a document that puts every detail to paper.
Basically, a term sheet is the ‘one-and-only paper’ startups want to receive after a pitch, and a high-level document that sets out the proposed investment, the terms under which you and your partners agreed as well as the valuation of your company. It is also the document that will let you know what is expected from your crew in addition to the financing and what are the next steps you and your startup buddies need to focus on.
Key Takeaway: Always read the terms in the term sheet in detail, or have a lawyer do that. If everything goes in your and the mutual favour between you and your investors, sign the term sheet and mark your official start.
Stage 7: Legislative, Preparation, And Documentation
There is one thing you need to know when you enter this phase — misunderstanding, mishaps and hiccups happen — and you are not the only one getting through them.
After all, we are talking about lawyers, accountants, security, identity and technology experts and a lot of other people who are in a way involved in the process — but also ensuring that everything you represented so far is accurate. So if you didn’t lie about anything at all, you should be able to cover minor misunderstandings and clear up the ground before the final process.
Every larger document in this phase will be drafted so that it details all the basic terms coming from the term sheet. Rest assured, though — this is your lawyers’ job and a process during which you as the entrepreneur and the VC are engaged.
Key Takeaway: Stay close with your VC during this stage and make sure to clear all things up before they are made official. This stage mostly involves the work of lawyers, accountants and other experts that are prepping up the documents on which you agreed.
Stage 8: The Final Closing
This is the stage when you can finally relax. The stage when the diligence is finalized, and there are no more questions popping up from nowhere. By the time this stage comes, you should clear the ground with your investor and sign all the documents.
Congratulations! This is also the stage when you get your money wired — and when the hard work actually starts.
Key Takeaway: Congratulations again, you made it. But now is the time to show the world what you actually got. Things are about to get very interesting, right?
Why Startups Fail (And The Answer Why You May Not Get To The Last Stage)
We don’t know that yet — and there is a lot more than only knowing things when that happens. However, we can list the biggest reasons why startups fail, which are the following:
- Market issues: not a compelling enough value proposition, wrong timing, small markets
- Business model failure: not finding the most scalable way to acquire customers, failing to monetize them at a higher level than the cost of acquisition
- Poor management: weak strategy, execution or team
- Running out of cash: failure in estimating the milestones, not being able to estimate the shipping/beta test costs, scaling costs, etc.
- Product problems: failing to develop something that meets the market need
We hope these common startup challenges tickled a nerve in your head and you will use them to make the most of your idea. After all, you should always be prepared.
So, Where Are You Know?
Can you see yourself in some of these stages? Have you figured out everything you need to successfully come to stage 8?
If not, you are once again — not the only one. However, you should know that successful startups are ‘all about scaling.’ That practically means that if your startup is serious and wants to get to the final stage, you must establish a clear idea of how you are going to solve the industry challenges awaiting you.
It’s true that startups are changing the world. Some of the biggest and most profitable companies nowadays have started from garages, living rooms or apartments for rent — sharing the same vision and knowing their qualities. Today, they are valued at billions — which is a reason more to roll up your sleeves and show the world you and your startup are worth it!