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Timing Is Everything: How To Secure Early-Stage Funding

by Ash Rust, founder and managing partner of Sterling Road

Money is constantly on the mind of any entrepreneur: how to raise it, where to invest it, and how to make more of it. Given that mindset, it’s only natural that most entrepreneurs jump at the first chance they get to secure early-stage startup funding. The sooner they have the funding, the sooner they can invest it in their business.

However, strategy — not speed — is often the name of the game. Most startups will need a viable product and proof of credibility before they can expect early-stage investors to really bite.

The most common fundraising mistake I see is when early stage entrepreneurs focus all their attention on trying to secure a $1 million check from a lead investor. If they fail, they’ve spent months fundraising with nothing to show for it.

Instead, approach your fundraising in tiers. For your very first funds (up to $100,000), start with your friends, family, and connections. These are the people who have known you for a long time and want to see you succeed. Ideally, reach out to people from your past who have wealth, influence, or a network.

When raising your pre-seed round (usually $250,000 to $750,000), you’ll want to focus your outreach on active angel investors and the new generation of small fund managers, often called micro venture capitalists, whose fund sizes are usually less than $100 million. By this point, you will have had the chance through your customer traction to establish credibility, which will make you more attractive to investors than a mere idea. You can find these investors on services like AngelList, Crunchbase, or PitchBook.

When you reach the seed stage and you’re looking to raise $1 million to $3 million, that’s when you should start discussions with potential lead investors who can invest $1 million or more on their own. But the warning still holds: Don’t focus on lead investors exclusively (even if they’re the ideal outcome).

How to Secure Money to Ensure Success.

It’s tough to be patient in fundraising when you’re eager to build a huge business, but it’s worth it in the long run. Follow the steps below to raise the money you need, when you need it:

1. Start with people you know.

Start by talking to your contacts, particularly those who could help you get started. For example, you could call a pastor, politician, military officer, or college professor whom you knew well in the past. These individuals’ large spheres of influence will likely include investors. You may be nervous to reach out after so long, but most people will be very glad to hear from you, especially given your exciting update and request for feedback. When you’re in the meeting, tell them about your startup and ask, “Is there anyone you think I should talk to?”

2. Apply to accelerator programs.

Accelerator programs can be great preparation for your pre-seed or seed round. A lot of possible options exist, but look for programs that have histories of success and that actually invest capital (versus just providing advice). The typical range of investment is $50,000 to $150,000, and the program would ideally have at least one company that has reached a $100 million valuation. Some good options include: Y Combinator, Techstars, Alchemist, Pear, and SkyDeck. If you’re lucky, your college may also provide a program like Velocity at the University of Waterloo or the Foundry at Oxford.

3. Raise on strength.

Now that the global economy has turned, competition for investment from seed funds (usually $100 million to $350 million) will be especially fierce. To give yourself a chance to beat the odds, wait until you’re in a strong position in terms of customer traction before going out to fundraise for $1 million or more.

If you’re not sure, meet with three to five seed funds and ask them for feedback on where your company would need to be for them to be interested. If they get excited immediately, you might be ready to fundraise for your seed round.

4. Start with momentum.

If it is time to fundraise, you’ll need to start scheduling meetings to build momentum and create competition. If you’re in an accelerator program, it will usually provide a demo day, which is a great way to generate your initial meetings.
Ideally, you should aim to have 40 meetings scheduled during the first few days of fundraising. If you don’t have a demo day (or if yours didn’t go well), you can make up for this by requesting introductions to seed funds, micro VCs, and angel investors. Try to get about 60 introductions. Assuming a 2-in-3 success rate on your requests, you should be able to give yourself the needed boost.

5. Test the investor market.

If you’re looking for a large check, be sure to test the market’s interest. Schedule about 10 meetings with seed funds or larger VCs and measure how many come back within the next 24 hours asking for a follow-up meeting with more of their team members. If it’s fewer than 40%, you should focus more of your time on smaller check writers (e.g., angels and micro VCs), which will give you a better chance of building momentum.

6. Close the round.

For all investors, you have to be willing to push them to a no. Always follow up, and if they don’t respond, it’s OK to give them a deadline (individually) to push them to a decision. Just remember: A maybe is worse than a no.

If an angel is interested, make sure you tell them you will hold a spot for their usual check size. This reservation can’t be given to another investor, thus building momentum through soft commitments. Even if the larger funds aren’t initially interested, don’t be discouraged. Focus on the investors who are excited, and that momentum will increase pressure on everyone else. For most founders, the largest checks come at the end of the fundraising process.

When you know you have a great idea, it’s tempting to jump into fundraising headfirst. However, you’ll be more successful in the long run if you choose to build first and be strategic. By segmenting out your fundraising rounds and intentionally using a tiered strategy, you’ll have the chance to build a stronger foundation that will ultimately make you much more attractive to investors.

 

Ash Rust, founder and managing partner of Sterling Road, is an entrepreneur turned pre-seed investor. Sterling Road is a venture fund focused on pre-seed B2B companies. Ash has mentored hundreds of startups through accelerator programs including Y Combinator, Techstars, Alchemist, and universities such as Stanford, UC Berkeley, and Oxford. Connect with Ash on Twitter @AshRust.

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