How do you raise money for your startup in a climate where it’s increasingly hard to obtain funding? Securing support from the right investors is not only a vital source of money, but is also an opportunity to benefit from their skills, experience, and connections.
This post outlines the strategies that have worked for us. Of course, every organization is unique, so these are the tips that have been most beneficial in our own quest to raise funding at GitLab.
Eight quarters of run rate is the best time to raise money for your organization. This gives you sufficient time to spend as long as you need to plan the deck and meet investors without feeling like time is running out. It means that if you are offered a deal you don’t like, you don’t have to accept it. You have the time to step back from fundraising, get back to stockflow neutral, and not be forced to lay off any employees.
Make sure that you have a lot of runway. This is indicative of how conservative you are financially, so investors will be looking closely at this. You can achieve this by fundraising early. Another strategy is to make sure that your net worth compared to your revenue is low. Don’t make your burn equal to half of your revenue, make it equal to 20% or even 10%.
Surround yourself with a great team. Fundraising requires hours of work from everyone in the group. Make sure you can work effectively with everyone on the team and that you will enjoy spending significant amounts of time together!
Set aside around three or four months for the fundraising process. When we went through our first round of fundraising at GitLab, we spent one month on the design phase, one month on the road, two weeks wrapping up with the people that had term sheets, and then one month closing. But, this is extremely fast—most organizations take longer to raise funding. The time consuming element for most organizations is meeting with investors. Some companies can raise funding in just a few weeks, for others it takes months. It’s always best to be prepared for the process to take longer than you expect.
As a CEO, you should be prepared to focus solely on fundraising. There will not be enough time to run the company as well as raise funding. Hire an assistant to prioritize emails and direct your attention towards urgent messages.
Try to minimize the amount of time you spend traveling to investors. This stage can easily last anywhere between three to six months. At GitLab, we decided to spend only four weeks as we wanted to focus on progressing the company, rather than fundraising. This approach to travel is much better for the team’s quality of life because fundraising is very intense. There are a lot of ups and downs, where you can be ecstatic one day because you are connecting with one investor, and frustrated the next day because you have been turned down by another investor. Confining the traveling stage to a relatively short period of time worked best for us.
Make the deck the sole focus of one team member. Although content is vital, good design is equally important. Spend some time with designers, whether they work for your company, or whether they are employed by an organization like SketchDeck. The right design will help to clarify and strengthen your message.
Spend time working on the pricing chart. Your pricing chart should be sufficiently detailed and include the relevant information, but the investors have to be able to understand it!
Over the course of fundraising, your deck will evolve. Although you have spent weeks perfecting it and believe it to be a finished product by the time you go out onto the road, you will find that there’s more to add. As you speak to investors, issues are raised that you may not have addressed in sufficient detail, or questions are asked that you might not have considered. It will be necessary to add more slides as you learn more about investors’ interests, expectations, and concerns.
If you have an unusual business model, discuss it in your slidedeck. Investors will ask lots of questions about it, so you want to give them as much information as possible, and ensure they see the advantages of your choice. When we were fundraising, some investors were concerned about our decision to be a remote-only company. Mid-way through fundraising, we wrote a presentation to provide them with information on why being a remote-only organization works so well for us.
Don’t include too many slides in the deck. There is no hard and fast rule, but between 10 and 20 slides will enable you to strike a balance between informing the investors and sharing an overwhelming level of detail. The pitch is your chance to tell investors everything they need to know about your organization, your product and customers, financials, and projections. It’s an opportunity to get them excited and allay any fears they may have.
If you get useful feedback, use it. It doesn’t matter how late in the process you receive it, take the time to incorporate feedback into your fundraising strategy if you feel that it could make a real difference to the funding you secure.
Be prepared for the deck to change from series A to series B. In series B, there will need to be a lot of data relating to sales figures, as the investors will be very interested in this. You will need to share details of the funnel, and where the sales team is meeting its targets. In general there should be less strategy, as you should have consolidated your place in the market by the time you reach this stage.
Turn on the TV! If you really want to know what life is like when you’re in the fundraising bubble, watch Silicon Valley! (But when it comes to the show’s portrayal of investors, just remember that it is a TV show and certain aspects may be amplified!)
Check the time. When you are preparing for meetings and follow-ups, make sure you are always on time.
Dress code is not important. What matters is what you say during the meetings and follow-ups.
Don’t go hungry! Eat something before going into a meeting, especially if you know you don’t perform well when you’re hungry!
Have some backup slides for your deck. We found it useful to create a slide that listed questions we did not yet have an answer for; after the meeting we could find the answer, then follow-up with the investor and add it to the slidedeck for future presentations if we felt it would be helpful. When you’re preparing your slidedeck, there will always be content that you’re not certain will be required, but could still be informative for the investor; these slides should go in the backup set. If and when you need the information, you can switch to that slide easily.
It can be hard to keep the meeting on track. The investors will start asking questions based on the content in your slidedeck. It is possible to skip ahead to the relevant slide, then go back to resume the presentation, but this can get confusing and you will lose the flow of the presentation. It is best to acknowledge the investor’s question and let them know that this will be dealt with later in the slidedeck.
There should be someone on your team who is not presenting. Their role is to write down the questions, so you can follow up after the meeting. If possible or relevant, add this information to your presentation.
Prorata rights. Prorata rights can be one of the most contentious aspects of investment, so make sure you understand it. Any lead investor will want a certain percentage of your company. For the A round it’s usually around 20%, for B round it’s 15%, and for C round it’s 10%. They need that much of the company to make it worth their time and effort investing.
Prorata investment rights allow investors the right to keep their percentage of their share of the company the same when you start the next fundraising round. During the second (or third) fundraising round, all existing shareholders get diluted; these investors can invest more money so they maintain the same percentage. This is what it means when you hear about investors ‘doing their prorata’. Super prorata is what happens if the investors want to increase their ownership percentage in the next round. If you would like to learn more on prorata, this post is helpful.
Super prorata rights are not founder-friendly. Firstly, what do we mean by ‘founder-friendly’? These are terms that do not give too much leverage to the investors. Instead, the CEO will be given the freedom to make decisions. If an investor asks to use super prorata rights, they want to increase their percentage ownership in the next funding round. This is not founder-friendly because it might make it difficult for you to secure funding from new investors, as there isn’t a significant percentage of the company left for them to invest in.
Ask yourself whether a potential investor is the right fit for your board of directors. If someone is prepared to invest in your organization, that is extremely flattering, but it important to consider whether they believe in your vision and whether they can help you meet the challenges ahead.
It isn’t easy to raise money in an economic climate where less investors are keen to invest. But, whatever the climate, you will be valued on more than 10 or 20 eighths of your sales - this is to your advantage, as it means that you can give clearly demonstrate your company’s success and potential. Market forces (such as what similar deals are being priced at, the competitors in your sector and how your company is different) will affect the valuation of your company. You can’t change this, but you can control how you present your own organization to investors.
Show investors that you have disrupted the market. Being the market leader is good, and certainly what you must aspire to be, but as a startup it is not always possible. You want to demonstrate to investors that you are innovative, you have the drive to make your organization the best, that you have a better strategy, and, ultimately, the best product.
The right investor is more important for your company than the valuation. That’s not to say the valuation of your organization isn’t important, but it’s important that you don’t miss out on the best possible investor who great connections and a wealth of knowledge, for a relatively small sum of money.
Know what you’re looking for in a board member. As well as acquiring some funding for your company, another reason for fundraising is to find a great board member. You have to be able to work well with your board member because you will be working together for many years to come. They have to be intelligent, ethical, hardworking, and well connected in the industry. Many times, a board member will be used to close somebody who is considering joining the company. Their strategic outlook and understanding of your industry will give you confidence in their abilities to be a real asset to your organization.
Know the difference between what round A and round B investors are looking for. Round A investors will be looking at your prototype, traction, and management team. Their terms will be more founder-friendly, as they know that subsequent terms will be increasingly investor-friendly. In the B round of fundraising, investors will be scrutinizing your metrics, sales, and conversion rate will be scrutinized.
A good series B investor will reach out to the existing board members. They will also want to know whether the A round investors will take advantage of their prorata. The terms of investment for the B round will not only have to be acceptable to the company, but also the investors, so make sure your current investors are happy with these.
If you have any insights on fundraising, share them with the GitLab community. Start the discussion below.