🦄 Advice for Your First Round of Financing
Getting you ready for your very-early-stage fundraising round.
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Welcome to this week’s edition of Fundraisedd, the newsletter that tells you all you need to know about fundraising and startup finance. A special hello to the new subscribers who have joined the Fundraisedd community this past week 👋🏼
This week, I want to talk about very-early-stage fundraising, namely your first round or what professional investors would call a pre-seed (or angel) round.
Launching your first round of financing is always exciting, but it is also kinda scary. Where to start, what to expect, how will I know I’m on the right track?
You will ask yourself all these questions and many more during the countless sleepless nights and overworked days of your first round. Enjoy!
First, let’s get one thing straight: there is no definite recipe to a fundraising round, no magic formula. The advice I’ll provide you with here is a summary of my experiences working with startups in Europe but they might not exactly apply to your situation and circumstances.
Remember this: your first round is a highly personal affair. At this stage, it’s all about you, your co-founders, your values, and your vision.
There are things you can optimise, best practices you should follow, but at its core, a pre-seed round boils down to a relationship between you and an investor.
That being said, let’s see what you can optimise to tilt the odds in your favour!
🏃🏽♀️ Prepare for a marathon, be ready to sprint
While you might hear about someone raising their angel round in a matter of days, it’s way more common for these shenanigans to last between 3 to 6 months.
My first round ever ($400k angel round, a prototype, some customer commitments and one technical hire) took me and my co-founders 4 months from launching to money in the bank.
Strike while the iron is hot.
⏲️ Think about your timing
Keep in mind that people who are not founders tend to go on holidays at some point during the year.
While this may vary from country to country, you should not expect anything to happen in December/January and in August.
Time your fundraising efforts accordingly.
📢 Talk to everybody
You’re working on something amazing and people need to know about it. Spread the word, ask for feedback, tell people you’re looking to raise funds.
Don’t fall for the great idea fallacy.
Nobody will steal your concept, people have better things to do. At this stage, your idea is nothing more than this, an idea, and ideas are worthless on their own. Don’t be afraid of other people stealing it, let alone investors doing so.
You need to garner interest in what you do and build followership around you and your project. This will increase the size of your network tremendously and will bring you closer to potential investors, which leads me to my next point.
💬 Ask for introductions/referrals
At your early stage, cold-calling or cold-emailing investors will be too hard. You can do it, but manage your expectations.
Try instead to connect with people who can recommend you in turn to investors they know.
Ask everybody around you for leads or introductions. Ask your close family, your cousins, your college friends, colleagues.
Once again, you need the world to know that you’re raising.
I like a quote by Chris O’Donnell of Brooklyn Bridge Ventures:
The right time to fundraise is when you know you should be funded—and you should act like it.
Rebounding on the quote, you should act like you’re raising. What does this mean?
🤝 Set things straight with your co-founders
You must agree on the essential aspects of the fundraising round:
How much money are you targeting?
What kind of investors are you looking for?
What % of the company are you comfortable giving away? (Author’s note: at this stage, anything from 20-30%)
What milestones should you reach with this investment?
Who will lead the fundraising efforts?
Who will handle the operations while the raise is ongoing?
Never come in front of an investor without making sure you agree on all points. An investor meeting is no place to argue between founders or to share diverging opinions.
👍🏽 Divide labour between co-founders
Fundraising is like having a second job. Fundraising makes being a founder feel like a yoga retreat.
To raise efficiently, you and your co-founders must pick a fundraising manager (usually the CEO) and divide all daily tasks intelligently between the others.
Include your early employees in these efforts. They trust you fully and commit just as much as founders. Their input will be essential and you’ll make them feel valued.
📋 Have your documentation ready
You’re raising an angel round, no one will expect you to have a formal data room ready for a long due diligence process. Truth is, at this stage, due diligence doesn’t really happen.
Once again, what matters is who you are, where you plan on going, and your ability to execute towards this goal.
You must, however, be able to share your plan, define your targets, and explain how you will spend the investors’ money, and for this, you need a specific set of fundraising documents:
A pitch deck explaining the problem you solve, how you solve it, your value proposition, your business model, your current state of development and what you’re looking for (more on this later);
Financial projections for the upcoming 2 to 3 years. Have a detailed view of the next 12/18 months, explaining the drivers behind each revenue and cost and detailing your assumptions. Extrapolate the rest with % growth.
Some people argue you should have 5-year projections, but this is pointless. Your projections are not based on a proven track record, you already struggle to plan 6 months forward, how on earth could you extrapolate this to 5 years?!
I would go as far as to say that if someone requires a 5-year financial projection for an angel round, they don’t know what they’re talking about.
Financial projections must include:
A detailed budget for all spending; and
A sales forecast; that will allow you to build
An income statement projection; and
A cash-flow projection
The budget and cash-flow are the most important documents.
That you will lose money over the first years of operations is a given, nobody should care about that at this stage.
What matters is your expected monthly burn and your ability to generate positive cash flow in a short period of time.
🖥️ About your deck
Keep it short, keep it simple.
Have it tell a story centred around you and your co-founders. Use it to share your values, your vision, and to display your ability to execute.
I’ve written on pitch decks at all stages, and I believe you can learn a lot from great examples, so don’t hesitate to check my teardowns on Medium.
There is no magic formula for a pitch deck either, but here are my observations and advice relating to this document:
Your title slide should have three essential elements and one quality.
Element 1 — It should feature your logo and your company name prominently
Element 2 — It should display a tagline highlighting your value proposition. If you can’t summarise your value proposition in one line, you don’t understand it well enough to raise.
Element 3 — It should state the purpose of the deck. In this case, something like “Angel Round, 2020”
Quality — It should give the investor a feel for your brand and your values. In that regard, Postmates’ title slide is spot on (even if it lacks a purpose)
You should start with your team slide highlighting key achievements for each founder. Don’t start with your degrees, start with relevant professional stuff. If you have amazing advisors/board members, list them separately. This will give you more credibility.
Follow the standard Problem > Solution > Market Size > Business Model pattern.
Problem — Make it as simple, striking, and personal as you can. Ideally, the reader should feel the issue or remember a time they faced it. Sometimes, a simple picture can do the trick.
Solution — If you have a demo, show it here. A picture is worth 1000 words. A demo is worth 1000 pictures.
Market Size — I would advise you to not focus too much effort on sizing the market at this stage. It’s not really credible most of the time anyway (“We plan to capture 0.1% of a $5Tn market !”). What investors want to see is that you’re targeting a market that is in-line with current social and business trends, a market that is growing year-on-year, and a market where there is room for innovation.
Business Model — You should be able to explain how you will make money, even you haven’t done so yet. Stick to one business model (SaaS, broker, ads) and go into more details about your unit economics. While it is tempting to introduce all your ideas for future developments, don’t. Other revenue streams will come about in due course.
Then tackle your competitors and your USP (Unique Selling Point).
Competition slide — I personally abhor the magic quadrant and think you should avoid it at all costs. Prefer a comparison table, as Postmates did. Highlight how you are better than your competitors. Using such a table has the added benefit that it associates your brand with that of existing, established companies. It primes the reader to trust you more.
Unique Selling Point — Explain what makes your company unique and how you will communicate this to your prospective customers.
Following this, finish with your go-to-market strategic plan and your financial proposition.
Go-to-market strategic plan — At this stage, you will not be expected to present detailed sales/marketing/operation plans. Simply detail what initiatives you will be taking over the next 2 years to reach your customers, what resources will be needed, and what milestones you plan to achieve.
Financial proposition — How much are you raising, how you will use the funds, and what commitments are you willing to take towards your investors. For example: “We want to raise $2M, using them as per the attached budget. This will allow us to reach ARR of $1M and breakeven on month 24 of operation.”
Add a final slide and a few addenda for your financial projections.
All-in-all, your deck should end up being around 10-12 slides + a few addenda.
📈 About your financial projections
Helmuth von Moltke the Elder, a famous Prussian field marshall from the XIXth century used to say that:
No plan survives contact with the enemy.
He probably didn’t have startup financial projections in mind when he said it, but he’s right in that field too!
And investors will know this.
What your documentation must make clear is that you are on top of things, you can plan intelligently, and you know where you’re going.
A quick note
After you raise your round, you must keep updating your documentation at all times. This will help you internalise your company’s financial situation better, it will give you another perspective into your operations, and it will make you feel more at ease with your decisions.
Keep in mind you can’t plan for every contingency, and you can’t forecast everything for the next 24 months.
However, you should be able to assess any deviation from the plan and how it will affect your runway and your ability to reach your committed milestones.
Keep your documents simple enough to be updated weekly without having to spend too much time on it.
💕 Choose your investors wisely
Your time is precious in a fundraise, and so is your energy. You must expand both of these in a reasoned manner, maximising your output (expected investment).
Therefore, you should qualify your investors as fast as possible. Don’t waste time on someone you know won’t invest. Don’t waste time on someone you don’t want as an investor.
I remember coming across a rich man who wanted to invest in one of my ventures. He had us rework our financial projections many times over, asked for a due diligence folder,… and this was for an angel round. As inexperienced founders, we complied until, at a meeting, he insisted on being added as a founder on the corporate documents and wanted founder equity. We told him no after he had lost us a precious couple of weeks.
Qualify fast if you can!
You should also know who you’re talking to.
Not all investors get involved in angel or pre-seed rounds, so don’t lose your time talking to someone who can’t invest as a matter of policy.
Finally, you’re going to be working with your early investors for a while. They will surely sit on your board and keep in touch with you regularly. Make sure you have a good human relationship with them.
While this list definitely is not exhaustive, I hope it will have provided you with enough ideas to launch your pre-seed round and manage it successfully to its completion.
Don’t forget, it may look scary, but it is also one of the most exciting moments of your entrepreneurial journey.
Enjoy it, learn from it, and don’t let it overwhelm you!
📚 Suggested Reading
Pitch like you expect to be funded. Expect to be funded after you've done your homework. - Charlie O’Donnell, VC @Brooklyn Bridge Ventures
The Mispricing of Software Companies - Tomasz Tunguz, VC @ Redpoint
Drive Growth by Picking the Right Lane — A Customer Acquisition Playbook for Consumer Startups — Dan Hockenmaier & Lenny Rachitsky
If you have questions or feedback, leave them in the comment, I’d be glad to answer them!
Until next week, enjoy, take care, and keep raising!