Connections matter more than capital
Why make contact with investors at an early stage?
Ideally, the interplay between venture capitalists and founders starts before the official funding round. A founder who builds a relationship with investors before they need money will be more successful in raising capital. Marcel van der Heijden, Partner at Fortino Capital shares his tips for start-ups.
List the investors
Long before you start fundraising, you compile a list of investors who might be interested because, for example, they have experience in your market or have made similar investments before. Start from your own network: your board, your angel investors, colleague-founders, etc. Take part in pitch and demo days.
Crunchbase and Angellist are relevant investor databases. Register your company, your name as founder and trigger investors with your story. Also check out the platform that scores well locally in your country, in the Netherlands you have Golden Egg Check, for example. They organise monthly speed dating rounds between start-ups and venture capital investors.
Inform your network
Update your investors of the positive evolution of your start-up. Also do this at times when you don't need money. This way, they get involved, see you grow and can assess the potential better.
Do you find it hard asking for time from partners? Stay in touch with junior profiles. However, always remember that partners also follow the market and want to know about promising businesses. Some are happy to help with projects they believe in at a very early stage.
Don't ask for money… ask for feedback
Always remember you can also ask for other things than money from venture capitalists: feedback on your plans and progress, new contacts, access to information, etc. And that's even before the fundraising starts. This information will help you raise capital later.
Some questions you can ask them: What do you need to invest? How do I improve my offering? Do you know a better way to reach the market? Are my prices correct? Do you know any investors who fit my business and activity?
Announce your fundraising on time
If you're planning a concrete investment round, do some pre-marketing, or informally announce in advance that you will be raising money. This gives the market time to prepare. If you maintain ongoing relationships with investors, they will certainly be ready when you want to raise money.
It might also happen that an investor may offer you money when you are not fundraising. Regardless of whether you are inclined to accept the proposal, note that this may be an ideal point to start a rapid and short fundraising process.
Collect all information in a ‘teaser deck’
Investors are interested in all figures that show the activity and the possible evolution of your business: growth, churn, market size, etc. This does not necessarily concern only turnover. In an open source company or a company with a freemium business model, the size and levels of engagement of the group of (free) users or the developer community can be the key metric in the first funding rounds.
Collect this information in a couple of concise slides, a so-called "teaser deck". Do a broad mailing to your list of investors.
Share information from a data room
Anyone still interested after your teaser deck receives access to more data stored in the online data room. A good data room underlines your professionalism and shortens the process. And because you're not creating the information on the fly, you're seizing the momentum better and avoid errors.
Clearly define the fundraising process and give interested venture capitalists access to your data room in stages. The first room contains more detailed decks, more technical information and business plans. A game of emails, phone calls and video calls then ensues before an investor gains access to the next data room with legal and financial information, contracts, etc. In short, with all the information an investor needs to make a final decision.
Be careful with NDAs
NDAs are commonplace between companies, parties that collaborate, suppliers and purchasers, etc. But in the VC world, working on the basis on trust is better than working with a non-disclosure agreement. NDAs are more common at a later stage, when the decision to invest is close, for example in case of start-ups and scale-ups that have reached solid NDAs with large, regulated companies in the pharmaceutical sector.
Non-disclosure and trust are in any case the foundation between founders and investors. Are you looking for more security? Nothing stops you from putting the word 'confidential' on your documents. A good investor sees and respects this.
Compare all investment proposals
Finally, set expectations and signal the end of the fundraising process. Clearly communicate the moments when you send out information, collect the bids and make the decision. If you are prepared well, all investors start at the same time – and this helps you get them to the finish line concurrently as well. This is ideal for you. It puts you, the founder, in the driving seat, and the investors end up in a bidding war, because they're running through the process at the same time and are sprinting to the finish line together.
The result? You receive all term sheets at more or less the same time. Ideal to evaluate and choose the best party.
Bonus: Work with potential buyers
“Connections matter more than capital.” Look for potential Merger & Acquisition partners at a very early stage, also outside the official list of investors. For example, look for your first customers and partners among companies that can invest at a later time. Spot friendly advisors who are also investors. Include an experienced investor or someone who is well connected in your board. This is how you build partnerships with parties who, in the long term, may also become potential buyers or investors.
Also listen to the interview with Marcel van der Heijden in the podcast Ad The Money.
Article by Marcel van der Heijden, Partner at Fortino Capital.