Raising money is arguably one of the most important and challenging aspects of being an entrepreneur. However, with a strategic tactical plan the fundraising process can become efficient and even enjoyable.
The Clausehound team has supported many companies through the fundraising process with deeply annotated investor documents and FAQs. Although we’re primarily focused on the deal documents themselves, we’ve learned some key insights and tactics on the art of fundraising along the way which we have compiled below.
Take these suggestions with a grain of salt, and as always, make sure you consult with your advisors.
1. What you pitch should be based on where you stand on the “Ladder of Proof”
A Ladder of Proof (LOP), created by NFX, is a mental framework for investors which enables them to evaluate a startup based on certain indicators of risk and success. Within the ladder, each rung represents a specific indicator (like rapid growth, powerful team etc.) and the further up the ladder a company is, the more viable they look to potential investors. The rungs on the ladder must be customized for different investors who will be searching for certain qualities based on their funds’ objectives. Learn more about the Ladder of Proof.
Top Tip: Determine what rungs should be included on your ladder and how they will demonstrate your company’s value to investors.
In our experience, the ladder of proof was very useful in helping us determine what information we should be sharing and, more importantly, who we should be sharing it with.
At one point in our own company’s journey, our team was targeting the wrong investors for our stage of funding. We mistarged seed stage investors when we should have targeted pre-seed funds, based on our stage. But by carefully examining the ladder of proof and applying it to our situation, we were able to refine our pitch and target the right audience.
To give some further insight on each rung, and how our company approached our messaging, let’s have a look at the red-highlighted rungs on the LOP:
- In bolstering our team, we highlighted our executive team’s education, core skills, industry presence, and overall ethos. We also briefly detailed our overall team and the talent that makes us special.
- For our “Fresh, Good Idea”, we made sure that our messaging conveyed that 1) we were unique; and 2) our idea was worthwhile based on industry experience and insight from other legal professionals.
- In discussing our existing customer base, we made sure to emphasize that, while many of our customers were engaged with us on a pilot-basis, the use of our technology had a significant return on investment. This in turn suggested a “no-brainer” for conversion to full adoption.
- For rapid growth, we based our growth metrics not on how many prospects turned into customers, but how many leads turned into committed scoping prospects. This metric was ultimately much easier to prove and bolster.
2. Create a list of target investors.
Set specific goals regarding the type and number of investors you would like to engage with. For example, your goal could be: ‘I want to talk to 50 legal technology investors based in the Bay Area within the next 3 months.’
Many entrepreneurs will look for/research all the funds that might invest in them and then make a big spreadsheet with links - that will circulate to all their advisors.
A challenge is then put out to your advisors, investors, service providers (and anyone else who wants you to succeed), to fill in as many warm leads as possible to the investor list.
Top Tip: The fundraising process is about matching the correct fund to the right company. Funds in the industry have a mandate to invest, so they are actively looking for talent and ideas to capitalize on. Keep this in mind and market your company’s value proposition vigorously. Not every fund will be right for you and that is okay.
3. Setting Up Calls
While seeming mundane, setting up calls can be an important part of the fundraising process. Some key tips to remember while setting up calls are to:
- Limit the options for meeting times to keep the process concise and to ensure your meetings stay within your timeline.
Consolidate all of your calls into a short sprint period.
- This will help you stay focused and continuously refine your pitch. A potential sprint period could involve making 5 calls a day for 2 months straight.
Top tip: Use a calendar tool like the Calendly app to create boundaries around the timing of meetings (for example only allow for meetings to be booked in a 14 day period). Use this to: (1) create a sense of urgency for investors to have an opportunity to look at your company (2) avoid playing ‘email tag’ with investors and (3) present a professional and organized image.
4. Avoiding ‘Waste of time’ Conversations
Be careful of conversations that do not directly help you achieve your goal of raising funds. The best way to do this is to ensure early on that you are engaging with the correct parties.
Many will suggest that you should not spend time trying to persuade a junior associate at an investment fund of your company’s value when you should be talking to a partner at the investment firm.
That might sound like a blanket statement, however, although all conversations seem worthwhile, often a junior associate is trying to collect research to compare your business to others they are considering investing in, and rather than advancing yourself in the investment process, you might merely be providing business model information to benefit another company.
Top Tip: Value your time at all expense.
As noted in section 2 above, make sure that the fund you are approaching is interested in your company, your market, your stage and isn’t investing in a competitor, so that you have a viable shot, before wasting your valuable time.
5. Dripping Out Information to Your Leads
You will likely have to present investors with a plethora of communications materials like slide decks, reports and more (‘drip’ materials).
First, remember that for many investors, investing is a business, and they are looking at your company as a black box that will potentially make a lot of money, not as “cool technology” or a “much-needed product”.
Distill down your messaging to key points that indicate how/why the black box will be successful and highlight in every subsequent conversation some new how or why development, that the black box is indeed better, faster, cheaper, etc. than the competition, reinforcing that your investment is a safe bet.
When disseminating these materials, think of yourself as methodically dripping out information regarding your company to investors. If you give too much information at once it might be difficult for them to absorb. Remember that you’re living and breathing your company while they are trying to understand the opportunity in a brief conversation.
Structure your fundraising campaign strategically. Only ‘drip-out’ materials that are pertinent to the investor you are pitching to (i.e. if an investor is interested in your near-term goals, do not only talk about your long term dream (and vice versa). Ensure that the materials are conveyed in a medium they understand.
Top Tip: Heavily feature metrics and numbers-based information in your drip materials. Certain statistics like increased usage, customer growth, transaction response time and user retention are important in establishing your businesses base and viability. Remember: numbers are king.
6. Seeking out a Term Sheet
Your goal through the fundraising process is to obtain a term sheet (a letter of intent explaining the nature of the deal an investor would like to offer you). Ideally, by the end of the fundraising process, you should have multiple term sheets from various investors, all vying to have the opportunity to be a part of your company.
Action Item: Position yourself in a manner that creates a sense of urgency within the investor you are targeting.
Let investors know that they are not the only party that you are engaging with and that (if applicable) you have other offers already on the table. Promote your company’s value proposition frequently and confidently, even comparing your potential to other companies within your industry.
Top Tip: FOMO, or the fear of missing out, can be used very effectively within the business world. No investor wants to feel as if they are going to lose out on the next big idea.
- Determine what rungs should be included on your ladder of proof and how they will demonstrate your company’s value to investors.
- The fundraising process is about matching the correct fund to the right company. Funds in the industry have a mandate to invest, so they are actively looking for talent and ideas to capitalize on. Keep this in mind and market your company’s value proposition vigorously. Not every fund will be right for you and that is okay.
- Use a calendar tool like the Calendly app to create boundaries around the timing of meetings (for example only allow for meetings to be booked in a 14 day period). Use this to: (1) create a sense of urgency for investors to have an opportunity to look at your company (2) avoid playing ‘email tag’ with investors and (3) present a professional and organized image.
- Value your time at all expenses.
- Heavily feature metrics and numbers-based information in your drip materials. Certain statistics like increased usage, customer growth, transaction response time and user retention are important in establishing your businesses base and viability. Remember: numbers are king.
- FOMO, or the fear of missing out, can be used very effectively within the business world. No investor wants to feel as if they are going to lose out on the next big idea.
Edited By: Rajah Lehal