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Planning Rounds
When I was raising venture capital for the first time in Silicon Valley, I was struggling. Having already successfully closed deals in Canada and the UK, I thought that I had nailed the formula. In reality, there was one key thing that happens in the US (especially with tech VCs) that I was missing.
In the US, investors don’t always expect (focusing on VC) your business to be profitable or default alive because of their funding. Often, they expect that you will need to raise numerous future rounds of funding. Because of this, one thing they expect is that you have a plan for future rounds. Before you even raise your Seed round, investors will likely want to see your fundraising plans for Seed, Series A, and maybe even Series B.
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How to plan your funding rounds
What investors are looking for is as follows:
Demonstrate an understanding of the market - Your fundraising plans should show you understand what you can realistically raise and in what timelines and metrics. If you don’t know this information, they will question your ability to keep the company capitalized. This information can easily be grabbed from Founder’s Institute or Carta (for general information). If you have an Angel/VC already on your team, they will be able to provide insights, or you can book a call with me, and I can provide these insights.
Milestones - You need to know exactly what your company needs to achieve to raise the next round. If you are pitching a seed investor asking for $1M to help you reach $100k ARR, you will struggle to raise; at $100k ARR, you don’t have enough traction (in 99% of cases) to raise a $5M Series A. Generally, you need at least $200k to raise that round (ideally closer to $500k). If you are pitching an investor for $1M you need that $1M to get you to a place where you can raise $5M. You need to know the milestones required to raise $5M and show how that $1M will help you reach them. Milestones are the key.
Timelines - Investors like for founders to raise every 18-24 months. This is for a few reasons: (i) it means that fundraising never starts from zero. If you raise every 36 months, then by the time you go to raise your next round, most of your leads are dead; if you are raising every 18 months, that means when you finish raising a round, you go quite for 6 months then you are starting conversation again, you can pick up where you left off. If you hire someone like me to stay around for those 18 months, you can also help keep every lead hot with good investor updates, leads, etc. I do this for Seed-Series B companies; after that, many actually hire someone full-time to help with financing, (ii) they can mark up your company in their portfolio. VCs tend to raise new funds every few years. It would help if they could show that many of the companies they recently invested in have already raised another round at a higher valuation. If you raise within 18-24 months, they can instantly add you to their list of winners, even without knowing your company's long-term outcomes.
Dilution - Investors want to know that you understand how your and their shares will get diluted over time. To do this, you need to be able to model future raises and know how much equity you will need to sell in the coming years.
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Onwards and Upwards,
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