April 1, 2023
2022 has already shown us a preview of what fundraising might look like in 2023 and beyond. Inflation, record-high interest rates, and talks of recession have investors more apprehensive than ever before. For the inexperienced founder or the early-stage startup, it’s easy to let these external variables make fundraising seem impossible.
We’re sharing less obvious fundraising tips with the hopes that it provides you with new perspectives and added confidence as you prepare for your next fundraise.
Process and momentum are everything when it comes to M&A and fundraising deals. If your product is more advanced than your competitors, but you lack market momentum and traction, investors will give capital to the company with better momentum, not you.
Who introduces you to an investor/acquisition target is very important. An investor intro is better than a cold call. Goldman Sachs is better than a 3rd tier banker. While a cold call or email may sometimes be necessary, you are better off building relationships with investors you want to engage with. This is especially relevant for early startups with little market traction or momentum. The VCs that invest in these early startups are often investing in founders and their stories more so than the product itself, so get good at storytelling.
Investor engagement is extremely time-consuming. Only 1 to 10% of meetings with a venture capitalist result in money in the bank. Tire kickers are everywhere. As backward as it may sound, to maximize time spent on investor engagement, you must minimize the time spent with them and stop chasing opportunities that aren’t chasing you. If an investor wants to invest, they will return your call the first time. If an investor asks you for a meeting, you should almost always say yes.
Know the difference between a Series A vs. Series B vs. private equity investor, etc, and make sure you have your data ready to meet their expectations.
If you don’t, they will very likely (though not always), move on to something else. Different types of investors care about different types of investor metrics.
The market has become more diligent in recent months, but Series A investors are focused mainly on revenue growth and basic unit economics related to customer acquisition costs.
Series B investors do much more detailed due diligence and will want to look at customer renewal cycles, revenue retention rates, and detailed growth costs. They will also want to verify that the information you provided ties to legal agreements and other documentation.
Unlike venture, private equity investors are focused on the bottom line as much as the top line. In their world, that means EBITDA (earnings before interest, depreciation, and amortization), which is a proxy for cash flow, since most lenders will use that as their lending base, and also because private equity exits are usually valued off of a multiple of EBITDA.
There are 2 things that investors look for:
When an investor or buyer is meeting you for the first time, the only question they are asking themselves is “Would my boss (or partners) be impressed with this opportunity?” Fit your story into the one they need. If it doesn’t fit, you’re talking to the wrong person.
Ridiculous valuations and closing a round in a single phone call seem like the norm, but they are not. Those are just the stories that make it into dinner conversations, Twitter, and LinkedIn. The truth is that no one talks about the other realities. The startup valuations of 2021 are a thing of the past. For the vast majority of companies, fundraising is terribly difficult and time-consuming.
These were just six learnings we extracted from our experiences raising startup capital from VC’s. There’s an unlimited amount of information out there about how to raise startup capital. Regardless of what you stumble upon, we hope that these six items cut through all the noise to provide you with some memorable tips.
Fundraising can be daunting. While we hope that this field guide will provide you with some confidence as you pursue your next round of funding, we know that you will most likely need some extra help.
We help growing SaaS companies and investors with developing SaaS financial clarity. If you’re interested in receiving due diligence or fundraising support, schedule a demo to learn more about how Facta has helped hundreds of companies raise their next round.