Funding rounds aren’t just about raising money. They’re a chance to gain experience, hone your company’s vision, and significantly strengthen your business savvy. With the recent raise of our Series A, we thought we’d share a few key lessons we learned along the way.
Some of these seem so obvious, they risk being overlooked. Others can turn into stumbling blocks that you don’t realize are there until you’ve tripped over them and faceplanted your way into a problem. Take our advice: don’t overlook the obvious, and avoid painful faceplants. Here’s how.
1. Get your docs in order
A well organized data room is a well organized company, and a compelling pitch deck is only the beginning. It’s easy to invest a lot of time and energy into perfecting your deck, but if the rest of your docs aren’t also in order, the impression you’ll give is that of a company that thinks more about waving its hands than building a solid foundation.
What shows you mean business? Here’s a comprehensive list. The way you organize these docs matters, too. Make them easy to find with a consistent file naming convention and easy to browse through with a logical folder hierarchy, as opposed to tossed into a dropbox at random. Regardless of how organized you are, your lawyers will likely ask you to arrange them slightly differently for the opposing counsel during the diligence process.
2. Have a well-defined financial model
“It is a truth universally acknowledged that a startup in possession of a good financial model must be deserving of funding.”
- Jane Austen, 1813
Pay no mind to the fact that said financial model may not apply six months down the road because startups. If you want to raise a good round, have a solid model in place for where you see your company going. Not only does this help investors understand where their money is going, it helps you understand how much of an investment you truly need. (Sometimes less is more.)
Here’s a great resource for creating a comprehensive financial model.
3. Be smart about your customer references
Plan how you’ll use your references in advance, and your customers will feel valued without feeling like they were peddled like prized goods around the investor marketplace.
If you’re going for Series A, chances are you’ve got a cohort of early customers. 🎉
Of those, you’ve got a handful willing to act as a reference.
Of those, you’ve got a favorite. (Don’t worry; we won’t tell.)
Think carefully here about how you play your cards. Save your trump card for the pitch that needs it most. Maybe that’s your favorite VC, or maybe it’s an investor you’ve already had some promising conversations with, but to whom you don’t otherwise have a connection (and by connection, we mean someone to sing your praises besides yourself).
It can be hard enough to ask your customers for favors; don’t put yourself in a position where you need to ask for the same favor more times than you feel comfortable with.
4. Plan for pro-rata
Simply put, make sure you allocate space in the round to those who have previously invested.
Pro-rata allows earlier investors to preserve their percentage stake in your company. If you’ve included a pro-rata clause in your investment agreement, you’ve granted investors the right to participate in future rounds in a way that allows them to maintain their percentage stake.
N.B. theirs is a right, not an obligation. Naturally, if they choose not to participate, their position will be diluted. But it’s likely that they won’t want to see that happen, given that your company is on an even surer track to success.
Investor Yan-David Erlich (aka Yanda) created some very helpful cap table simulators that take pro-rata into account, here and here.
5. Have answers ready for these essential VC questions
Of the many (many) questions we fielded over the course of raising our Series A, these were the most likely to be asked. Plan your answers out as thoroughly as your product’s marketing messaging because that is essentially what these answers are.
The only difference is the audience (investors) and what you’re selling (your company).
With those targets in mind, your messaging should be as clear and crisp as the language you use to speak to your customers.
What's your 5 year plan?
Product roadmap, market share, team expansion, revenue and/or ARR—your plan should address all of these areas. Define milestones and project numbers wherever possible. Leave no doubt in the investors mind that you have a well-studied path forward and the drive to accomplish it.
Who's your buyer?
It’s easy to muddle your answer here with your user or influencer; beware that pitfall. The buyer is the person allocating the budget for your product, and the more specific you can be, the better. Which business unit will be paying for your solution? If you have more than one use case with more than one buyer, that’s fine; just make sure you can speak of each clearly.
Why now?
Here’s your chance to tell a story. Make it memorable. Stories stick in our minds so much better than numbers and facts. Give them an answer they can easily share in conversation when talking about your company to others. Here are a few prompts:
- What’s going on in the world that gives your product urgency?
- What personal, relatable (to your buyer, at least) experience inspired you to start this company?
- What trailblazing technologies are you building on?
- What broken technologies are you stepping in to repair?
How big will this be?
Your answer here can come from a variety of angles, but ultimately you’ll want to speak to your TAM (total available market). It isn’t enough to be innovative, to be a category creator, or to come up with a better way of doing {cumbersome_task}. Your product will only be big if there’s a big market for it. So identify that market and be prepared to talk about it in quantifiable terms.
Conclusion
It’s a big world out there, with plenty of opportunities for scrappy startups like us. That said, there are also plenty of scrappy startups like us. You need to put your best foot forward at all times, every step of the way. We hope these tips help you do just that, so that we can raise a glass to your own Series A in the not so distant future. Drop us a line if you’d like to talk through any finer points, or to let us know how these helped you in your raise!
