Startups will usually need several funding rounds before they are ready or exit. An active investor can play a key role in helping the startup in securing funding in future funding rounds. In this article we take a look into tips on running a follow-up funding round as an investor.
Plan in time
Planning for the next funding round should be done early enough. Personally, I prefer having a rough outline for the round already in connection with the previous funding round, start scheduling the round twelve months before and finalize the plans six months before the contemplated closing of the round.
Outline for the round
The outline for the round should be set already in connection with the previous round. When the previous round is closed there should be clear goals to be achieved with the funding as well as runway obtained with the funding.
The goals act as a starting point for outlining the next round: Provided that the goals are met, what are the next steps the company is planning to take and what kind of funding would be required for that step? And since startups rarely achieve their goals, what is the Plan B (and even Plan C) for funding in case the goals are not sufficiently met.
Scheduling the round
In scheduling the round we need to understand the runway of the company and agree when founders can divert time from the business in order to meet and discuss with the potential investors. Raising funding is always a distraction from pushing the business forward, so scheduling ahead should help in mitigating the issue. Also, it gives the founders more comfort that the business is not running out of cash.
When scheduling the round, we need to plan for:
0. Planning (see next section)
1. Preparing the investment material
2. Contacting the investors
3. Meeting the investors
4. Due diligence
6. Closing the investment
Depending on the round I would roughly prepare two weeks for step 1, one to two weeks for step 2, two to three weeks for step 3, two to three weeks for step 4, a week for step 5 and two weeks for step 6. So overall three to four months is usually required even if the fundraising goes well.
The planning for the funding round is about combining the stage of the company, business opportunity, future plans, desired runway, and available funding sources. Balancing between these elements gives the options available for the round.
The stage of the company, together with the business opportunity the company has, lays the foundation for the valuation of the company. This combined with the size of the round determines the dilution, which is important in order to maintain a healthy cap table. The size of the round, combined with other potential funding sources such as e.g. grants and loans, set out the framework on what the company can do and how long the runway will be.
Balancing these elements usually requires some back-and-forth between how much dilution is acceptable, what the plan forward is and how long runway is achievable. E.g. if the dilution is too high and the cap table would not remain healthy (a healthy cap table referring to founders’ stake above 50% after A-round), we need to balance this by either adjusting the goals (i.e. operate with fewer resources) or the runway. Or if we would like to get a runway of 18 to 24 months to give the team the opportunity to focus on business instead of constant fundraising, we may need to revisit the dilution or resources.
Once you have balanced these elements you should have a pretty clear understanding of what kind of financing could be obtained. So the next step is to decide the investors to be approached in the round.
Executing the funding round
The execution starts by preparing the materials. You need at least a pitch deck to send to the investors, and you also need to ensure that you have your due diligence material prepared. One-pager might also be a good idea.
Shotgunning pitch deck to all possible directions usually does not help in closing the round. Instead, the key to successful closing of the round lays in finding investors which investment thesis matches with the case.
Most VC investors specify their investment thesis on their website. With angels it is more complicated, but some understanding of the investment thesis of an individual angel investor can be obtained by looking through the portfolio of the investor.
Knowing the investment thesis, the current status of the company, as well as plans for the future, helps to build a shortlist of investors who are most likely to get enthusiastic about the case. And the most enthusiastic investor is also the most likely investor.
For an angel investor, a good tip is to network with the later stage investors, get a deeper understanding of their investment thesis and build mutual trust. They are more likely to take a look at a case based on an introduction from you (especially if you are following the tips above) than a cold contact from the founder.
When meetings with the potential new investors come, it is time for you to step down and let the founders step in. Even if the existing investor is helping in the fundraising, you should keep in mind that the investors invest in the team, so they need to be given a chance to get to know the team and build trust with the team. Also in due diligence, the responses should come from the team, supported by the board as needed.
When terms are being negotiated, the investors can step in once again. Active investors have typically more experience in negotiations than founders, so it makes sense to use this experience in the negotiations with the new potential investors.
While investors typically like to focus on investing, it is quite often feasible to go to the opposite side of the table and help the startup in fundraising as well. As an investor, you have a good opportunity to build a valuable network that all of your startups can benefit from. Also, the lessons learned from the later funding round help you in developing as an investor yourself.