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🌞 Earlywork #72: How to Raise Your First Round
A no-bullshit guide going behind the curtain on how to navigate early VC conversations from Kath Han (Square Peg)
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Through the Earlywork community, we’ve been lucky enough to meet a ton of founders and side hustlers who are ‘pre-slides’.
One of the most consistent areas of confusion for these folks is reaching out and pitching to venture capital (VC) firms for funding.
Earlywork community member Katherine Han came to us with some powerful insights from attending the event, having also lived the investment process herself from a VC perspective.
Here’s what she learned:
As an intern at Square Peg, I’ve loved meeting founders early in their journey and learning about the nuances of the venture capital investment process that appear opaque from the outset.
Here are the key event takeaways I had for founders raising their first VC funding round, in the hope that any future & emerging founders reading this have a smoother fundraising journey.
Disclaimer: Fundraising is not a science. The takeaways shared below are my personal impressions of the panel’s advice. Take what resonates and is relevant for you; disregard the rest.
Why should you consider raising venture capital to fund your startup? 🤔
VC has aided the growth of hundreds of big-name tech companies, including Google, Meta, Apple, Uber, Airbnb and Canva.
Importantly, VC can contribute more than just capital. Good investors provide “smart money” - money that brings added benefits like:
Connections to a network of potential customers
Help with hiring top talent
Subject matter expertise
A sounding board on strategic decisions
Increased publicity and brand credibility
On the flipside, VC is a dilutive means of capital injection that comes with expectations of rapid growth.
There are many examples of successful companies that have grown rapidly without VC, too.
Taking VC funding is not the right approach for many businesses, and it really depends on the business and the founder’s ambitions.
Here are 3 key reasons I’ve seen founders choose to take VC money:
Scale more quickly (by far the largest reason): VCs provide capital upfront that enables faster growth. Some founders may want to grow faster to maintain their first-mover advantage or to cut through in a competitive space.
Access high-quality advice & resources: You can draw on the experience, expertise and networks of VC investors who are often industry veterans, seasoned operators, and ex-founders. A VC’s eagle-eye view of the industry landscape can also bring helpful insights.
Build a stronger network & brand: Leverage the connections of VCs to acquire customers and partners, build credibility within your target audience or amongst top talent, and raise the profile of your startup through media connections.
Some additional questions to ask yourself as you decide whether to bootstrap or seek VC funding:
Are you willing to give up a stake in your company?
Can you get yourself to a position where you can convince investors that you’ll be 10X from where you are today?
Are you raising to be labelled as a successful startup, or do you have a clear plan for using that money?
It should be noted that there are many other sources of funding for businesses that don’t suit VC funding, like debt, grants, investment from angels & strategic partners, and crowdfunding.
Let’s say you meet the profile of a VC-type investment. When do you start raising? ⏰
According to the panellists, it’s never too early to start talking to them.
They suggested having these three things before kicking off discussions:
A clear understanding of the problem you’re looking to solve and the market gaps that currently exist for that problem
A roadmap for building the business and your team
A hypothesis around what your business model could look like
It’s worth talking to VCs before you’re actively fundraising, to build an initial relationship and introduce the idea.
Once fundraising time comes, your existing rapport with the investor helps foster a more open conversation.
Two key tips by Casey and Olivia on when to start speaking to VCs to build a relationship:
“You don’t need an MVP or polished branding before speaking with investors.
It does help if you understand the problem you are solving and are able to communicate the market gap you want to fill.
Square Peg backed Zeller [now a unicorn] when it was still pre-product, pre-revenue, without a decided-upon name.
They had a vision for the gap they wanted to fill and that was what mattered.”
VCs appreciate when founders are transparent and aware of the gaps that need to be filled to reach their 10-year vision and we are more than happy to work through those with you.”
Now you’ve decided to raise VC. How do you prepare for the fundraising process? ✍️
Fundraising can be a very time-consuming process involving engagement with multiple VCs across varying stages of the investment process.
Here are some practical tips from the panellists on approaching different stages of the fundraising process:
📝 Develop your investor hitlist
When deciding which VCs to approach, be mindful of whether funds have the following:
A thematic focus (e.g. fintech, cleantech)
A stage focus (e.g. Seed only, Series A+)
Geographical limits on where they can invest
Once you get to meet them, you can ask investors for examples of ways they’ve helped their portfolio founders and how they typically engage with them, to further narrow down your list.
🎨 Cold outreach with a personal touch
You don’t need to specifically contact the partners of a firm to cut through.
On the contrary, junior investors likely spend more of their time actively looking for founders and have the most to prove to their firm (your success is their success!).
You don’t need to contact multiple people at a firm. VCs tend to have CRMs that they use religiously and find it off-putting when founders message multiple of their investors at once.
In today’s age of flooded inboxes, a personalised message to an investor helps you stand out.
It can be as minor as mentioning “I saw your recent article on X” or commenting on something they have in their profile that you have a connection to.
The aim of the outreach here is to develop a relationship that evolves over time, instead of viewing fundraising as a single transactional experience.
✨Spark excitement with a polished deck
Attaching a short deck about your business (generally no more than 12 slides in an initial email) when reaching out cold helps to increase your chance of securing an investor meeting.
A longer, more detailed deck can aid your pitch during an investor meeting.
Startmate’s framing of “Marketing” vs “Board” deck
For a suggested deck structure and a peek at an investor’s perspective when assessing pitch decks, Michael Batko’s webinar (Startmate CEO) for the “Marketing” Deck and Sam Wong’s article (Blackbird Partner) on the “Board” deck are both excellent guides.
Here the are the most common mistakes Olivia, Isabella, and Casey have seen in pitch decks:
Not showing the story behind the team and why your team is well-positioned to tackle your chosen problem
Not including customer testimonials (especially important for pre-revenue business) and user behaviour data
No product demo (a 5-min Loom is great for this!)
Sending long IMs, particularly in A4 style with excess copy to read
Not showing early signs of traction (if any). This doesn’t have to be in the form of revenue; it can be no. of signups, referrals, user engagement, inbound customer enquiries, etc. This also helps the investor understand your stage.
Caveat: a pitch deck is merely a form of communication; your storytelling ability matters more. Early-stage investors speak with plenty of founders before they’ve got a deck ready. Having a deck is not a must to get a meeting but it helps.
🤝 Term sheet basics and closing out your fundraising
A term sheet sets out key building blocks of your partnership with your investors.
Like a marriage prenup, it’s a great tool to ensure alignment between your company and the investor before you commence this long term relationship.
Here’s some advice from the panel on managing multiple fundraising conversations simultaneously and term sheet etiquettes:
Get legal advice early about standard practice for VC funding terms such as equity and valuation. This ensures you understand and can negotiate the important terms dictated in the term sheet.
This breakdown of key terms is a helpful read for new founders. Consulting other founders is another way to ensure you are receiving standard terms.
“In deciding how much equity to give away to investors, it’s dependent on what you feel comfortable with, how capital intensive the business is (e.g. SaaS vs FinTech) and how much capital you need to reach your next key milestone.”
Be aware of any no-shop clause on the term sheet. This clause restricts you from using the term sheet to solicit offers from other potential investors during the applicable period once you are committed to the terms.
It’s okay to continue existing conversations with other investors if you’ve already got a term sheet. You don’t have to sign this term sheet right away, but going to a brand new investor at this point may drag out the process.
There’s no obligation to disclose who the term sheet is from or what the terms are.
Maintaining clear communication with prospective investors throughout the fundraising process is critical to preserving good relationships.
Avoid exaggerating what one VC promised you to another VC to negotiate better terms; VCs talk to one another and this can diminish trust.
Run the fundraising process on a tighter timeline (as opposed to sporadic investor conversations). This adds competitive pressure between VCs to help you get to an outcome faster.
For a more detailed perspective on working with term sheets, check out Square Peg’s three-part series here.
So what happens after (hopefully) you sign a term sheet?
Pat yourself on the back, and get back to building!
You may want to ask the VC(s) you’ve partnered with how they would prefer to be updated on the business e.g. sync vs. async, frequency.
You may also want to put forward the specific things you’d like their help on, if they are a hands-on type of investor.
If you take away three things from this piece, let them be these:
Be clear on why you are raising VC to ensure you find the most suitable investors for you.
Fundraising isn’t a single transactional experience. Use personalised outreach, develop a relationship early, have a short deck, and understand your why.
Get legal advice early to ensure you are receiving standard terms and can negotiate the important terms.
Here are some other resources to learn more about fundraising:
Self-survey tool to assess your startup’s fundraising readiness by Astral Ventures
Watch the event recording of VC Demystified now: 👇
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