My 11-point plan for landing your first round of institutional capital
There’s no way to sugarcoat it. Fundraising is not a fun process. You see the end results through splashy headlines about extravagant sums and big expansion plans that make it look easy and glamorous. Unfortunately, the process for all but a few companies is close to the exact opposite. People will tell you that fundraising is hard and will take a lot of time. What they don’t tell you is that the process is tedious and can feel arbitrary at times. Fortunately, there are some straightforward and repeatable steps for maximizing your chances of success.
This may sound obvious, but the first and most important thing you need to do is objectively assess whether you really need to raise money, and if you’re at a point to get traction with investors. Entrepreneurs often view fundraising as a sign of validation, and it certainly can be, but fundraising is just one of many things you may or may not need to do to build a successful company. Make sure you are not raising money just because you think you have to. For me, the tipping point was recognizing that we had proven the viability of the concept at a small scale, but we would need to build a lot of technology and infrastructure upfront to make it scalable.
Start with thinking through how much capital you need, what you need it for, and how investing will lead to a great return. Force yourself to consider a plan where you don’t raise any capital. Raising money means selling equity in your business. While this is necessary for many businesses, the vast majority of successful businesses in the United States are bootstrapped or grow through traditional debt financing. If you have decided you must sell equity in your business to maximize its potential, here are the steps you need to take:
- Start with a plan: Lay out a three- to five-year plan with key milestones (product-market fit, regulatory approval, profitability, and so on). Then figure out how much capital you will need to accomplish each key milestone and the potential valuation at each stage. This will be your roadmap for the alphabet soup of financing rounds from Series Seed to Series A, B, C ,etc. If you cannot end the journey with a reasonable amount of equity and a return for your investors, rethink your plan. Otherwise, you are unlikely to raise money, or worse you will not get properly compensated for all your hard work.
- Research: Gather as much information as you can on which funds are investing in your space and why. Many funds have mandates on what stage of a company they can invest in and a thesis around a space (a fancy way to say they see a trend that is their focus area for investment). For example, Farmer’s Fridge is part consumer packaged goods, part quick-service restaurant, and part data-technology business. We looked for partners that invest in each of our focus areas and built a really representative, well-rounded group—Danone, Cleveland Avenue, and Innovation Endeavors each, respectively, bring domain expertise in their function. Another example is that three of our six largest investors have also made big bets on vertical farming because they are looking for ways that technology is changing access to fresh, healthy food.
- Network: Reach out to founders and angels in the space, go to industry events, and ask for introductions. You need to start to get to know people who can help you expand your circle and make introductions to the funds you have identified. Ideally, you can get another founder to introduce you to one of their investors with a credible endorsement of your business, or find an angel investor who has been successful in an adjacent space and is willing to invest. When I was trying to raise money for the first time, I went to a food and agriculture conference where I met the CEO of a vertical farm. He introduced me to one of his largest investors—who later invested in us. The idea is to get your idea out there and build credibility while developing relationships that can help make warm introductions to target investors.
- Create your materials: I also like to call this step “document the magic.” You will need a pitch deck, financial model, and backup data to support your story. Start by organizing your story into 15 to 25 slides that you can share via email to get people interested in taking a meeting with you to learn more. Once you have a meeting, you will need to have a presentation that explains your business and the growth plan. Include a detailed financial model that articulates how the finances of the business should behave over the life of an investment. This will allow investors to pressure-test your assumptions and figure out their potential return.
- Practice your pitch: It’s crucial to have your pitch nailed. Be prepared to answer every conceivable question about your business and practice with friends and mentors. Also, it is okay for you to ask questions of the investors, too. You will want to clarify upfront with funds to confirm that their check size, stage, and style are compatible with your stage and visions. Things like the life cycle of their current fund, and other investments that could also impact you, so you should feel comfortable asking these questions. This avoids wasting time for both groups and shows you know what you are doing.
- Start your reach-out: Once you have made some connections, done your research, and prepared your materials, start getting introductions to funds or reaching out cold. Treat this like a sales process. You want to have as large a funnel as possible. The more people you are having conversations with, the better chance you have of creating a competitive process. Plan on reaching out to 50+ people and don’t stop just because a few people get interested. This is a numbers game, and the more shots on goal you have the more likely you are to succeed.
- Meetings with potential investors: Each pitch meeting is completely different. The best advice I had was from one investor who insisted on meeting in the lobby of his gym during a break in the middle of his workout. When he sent the invite, I figured it was a space near the gym, but when he walked up in his tank top and said I had 30 minutes to pitch, we dove right in right there in the lobby. Think Shark Tank, but without the cameras and no offer at the end. Investors are evaluating how well you handle the room and test how well you know your stuff. Get ready. Use all the feedback you get to iterate your pitch and story for the next one.
- All you need is one (but two or more is best): Remember that it only takes one investor to set a term sheet, and then the process is usually downhill from there. Try to get at least two people, so you can have a competitive process.
- The commitment is real: Do not forget that you are getting married to the investor. Seriously, a lot of investment partnerships last longer than the average marriage, so make sure you understand who you’re partnering with. If you get a term sheet, don’t hesitate to ask for reference calls. Also, you should discuss up front expectations for things like meeting cadence, communication style, reporting, investment thesis, etc. to avoid issues down the road.
- It’s a two-way street: Understand what taking money means. You are signing up to do everything in your power to deliver a financial return for your investors, so make sure you understand what kind of return they are looking for, and make sure your business can deliver it.
- Get back to work: You knew I was gonna end with this, right? It’s easy to get swept up in the process of fundraising and think of closing a round as an end in and of itself, rather than as a means to an end. Raising money is not a sign of success. Running a good business and being realistic about your ability to take outside capital and deliver a return to your investors is how you build long-term value. Getting more money on your balance sheet will give you more resources to grow, but hitting the ground running after months spent fundraising and executing a strategy is the real work.
Luke Saunders is founder and CEO of Farmer’s Fridge, a network of more than 400 smart fridges stocked with fresh meals and snacks.
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