Startup Fundraising Playbook for 2024
Refresh, refresh again. Still no new email. This is so frustrating, they promised to get back today. Oh, how I wish I would have gone the bootstrap way instead of wasting months on fundraising. My previous startup was bootstrapped, easy, fast, and 100% control. I didn’t have to put up with this Shi*.
Refresh again. Still nothing.
Fundraising it’s not only frustrating, it’s boring. Giving the same pitch, sending the same email, and answering the same questions over and over again. Oh, how I’ve wasted my time, and what do I have at the end? Nothing.
Even if they say yes, I doubt I would be happy. The head VC guy seems a little bit… weird. He wasn’t very interested in our product or roadmap, he didn’t ask the right questions, and he didn’t know our industry at all. Instead, he talked more about things like the synergy with his other companies, partnerships, and his personal connections.
But I’ve spent all this time talking with them, negotiating with them, it has to work. I know, the sunk cost fallacy, but I don’t care. Refresh again, Oh 1 new email, Titled “We’ve got the yes”.
A little more than 8 years have passed since that day, the day of my first fundraising, and as you can already guess, it didn’t end very well. Since then, I’ve raised 5 more times for my companies and also advised various VCs and accelerators on tens of deals.
I’ve been on both sides of the table and each fundraising was more than anything, a lesson. That’s what makes this a little bit different from articles you usually read about fundraising. Here I want to share everything that I wished I’d known before fundraising.
Fundraising is different for each startup, and it’s also very different in each stage of that startup. However, there are principles that every founder should know before raising, and we will talk about them from the very beginning of the startup to later stages.
When should we raise?
Let’s get one thing very clear, not every startup has to raise investment nor it’s the job of a startup to raise money. Successful founders are not very happy when they raise a new round of investment, because they understand that they didn’t actually raise any money, they raised debt.
Rookie founders want to raise to reduce their risk. Seasoned founders know that raising money at the wrong time is just a costly distraction.
You should only consider raising investment when your house is in order. When everything is going really, really well.
There are two reasons why. First, raising investment won’t solve any issues that a startup has, even if that issue is that we’re running out of money. Even if we raise, we’ve just delayed the inevitable. No amount of capital will turn a bad idea into a good idea. It will not help with idea validation or reaching product-market fit. It will not turn a wrong team into a great team.
Investors hate chaos, and great investors can smell it from miles away.
Second, fundraising is very time-consuming. On average in fundraising, a founder will spend 70% of their time on this one task for months, even a year. This will steal the focus from super important tasks of a founder such as improving the product, leading the team, and attracting customers.
Even if everything is going well, it still takes a very long time to raise. Today on average, for a good startup, it will take around 10 months to raise their round (Source: Crunchbase). So if your house is not in order, if the co-founders and team are not picking up the slack on tasks that a founder doesn’t have time to do while fundraising, that startup is doomed to fail before the raise is over.
The biggest red flag for VCs is when startups start raising without any traction or before their MVP. This is the worst time to go after fundraising. Not even at the accelerator stage this is OK. Idea validation should be done before anything else.
If you don’t invest in yourself, why should I?
Pre-seed/Seed vs Series A, …
Each startup is actually 3 entirely different businesses with 3 different goals:
Business #1 (Idea Validation): The goal is to find out if the idea is worth doing or not.
In this stage, startups can choose to self-fund, raise from friends and family, get loans, join an accelerator, or raise from angel investors. This is normally called the pre-seed round.
Business #2 (PMF): The goal is to reach steady growth by securing a large, loyal fan base who love our product.
In this stage, startups can choose to raise their seed round from early-stage VCs and angel investors.
Business #3 (Scale): The only job is to create a growing but sustainable business.
In this stage, startups raise their series A, B, C, …. to grow their business.
These are 3 different businesses, they’re not the same. Everything changes at each stage, more than anything, fundraising changes dramatically in each of these stages.
When a startup is in the scale stage, and they’re raising their Series A, B, etc. it’s a totally different story than raising for the pre-seed and seed stages. From Series A, VCs want to invest in well-established, growing businesses. Businesses that are scalable like startups, but at the same time they are a well-oiled machine, sustainable, not super risky.
At the seed stage and earlier, VCs are not investing in a business, they’re not even investing in an idea, they’re investing in the team.
VCs know that in the early stages, everything will change. Startups might pivot their product into a totally different product, they might change their business model, target customers, target markets, and everything else about their company. They’re not investing in a business, rather they’re investing in the ability of that team to overcome any obstacle in their way and find the growth.
Team is everything, a team is the most valuable asset of any startup.
Hero vs Zero
We all know that 9 out of 10 startups fail in the very beginning. Another statistic that people don’t talk enough about is that 8 out of 10 startups that successfully raise money, still fail in the next 2–3 years of their life.
Early-stage VCs and investors have one objective, finding hero startups in the sea of zero ones, the ones that will eventually turn into a zero-dollar valuation sooner or later.
That one hero startup will cover all the losses of all other investments that will fail. Hero startups don’t have great ideas, they have great teams. A great VC will identify the teams that are capable of creating a hero in the future, and bet on them.
This flowchart shows how most VCs evaluate startups before investing:
How to start
Same as everything in startups, you will learn it by doing it. As Aristotle says, “For the things we have to learn before we can do them, we learn by doing them.”
VCs, accelerators, and angel investors are humans as well. Everyone prefers to work with people whom they know, and that’s why you should make connections and build relationships before you start to raise.
Being active in the startup ecosystem is very important and gives you a chance to connect with like-minded people and brainstorm ideas together. You should know active members of your industry and try to get connected to them.
Conferences and startup events are great places for building these relationships. Not to mention online events and LinkedIn, which enable you to connect with people all over the world.
A great way to get connected with potential investors is by participating in pitch competitions. Best case scenario, you find your future investor right there, worst case scenario, you have practiced your pitch, got feedback on it, and found what’s wrong in the business from challenging questions that investors ask there.
The great thing is when you talk with VCs before you raise, they will tell you their honest feedback, which shows what’s wrong with the business, and give you some insights and ideas on how to improve the business, and how to make it ready to be investable.
I always sucked when I wanted to explain my startups to other people, especially in the beginning. I couldn’t pitch the idea clearly, which meant that even I didn’t understand my solution, so why should others?
Practicing the elevator pitch of the startup with real people will show what’s wrong with our idea. The eyes tell it all. After every pitch, I learned what was wrong with my idea, am I focusing on the wrong problem that doesn’t exist? Am I focusing on a solution that’s not better than others? Am I focusing on the wrong market or the wrong product positioning? A broken elevator pitch will show all the flaws in the business.
The Outreach
After that, we fixed the important parts of our startup and our house is in order, now that we made some connections, it’s time to start reaching out to potential investors. Here are the important steps to outreach:
- Create a VC CRM
List every potential investor that you’d love to have as your investor. Each investor must check all of these boxes:
1. They’re active in your industry and/or in your market.
2. They have a great reputation
3. They focus on the stage that you’re in right now (Pre-seed, Seed, Series A, …) - Score them from 1 to 5, 5 being the best one you wish for. Remove the ones that score low.
- If you know them, contact them directly. If you don’t know them, try to find a mutual connection and ask them to make an intro for you. It’s always better to have a personal intro.
- Don’t be afraid if you don’t find an intro to them. Many VCs love cold emails. Email them directly, message them on LinkedIn.
It works more than you think, in my last round, we got 11 offers, 5 of which resulted from cold emails. - Send a very short email. Introduce yourself and pitch your startup in only one sentence. After that, add something exciting about your startup, like your traction, your team’s track record, KPI growth, key partners, and anything that makes you stand out.
Finally, attach your pitch deck (the fewer slides the better) and that’s it! VCs don’t have time to read long emails or pitch decks. On average, a VC analyst will look at your deck for less than 30 seconds. - Meet with interested investors, update your CRM with the notes of each meeting, what went wrong, what went well, and more importantly, evaluate the VC to see if they’re the right partner for you or not.
- Rinse and repeat!
In our VC CRM, we kept track of these:
- The status of each conversation
- The feeling toward that VC (Awesome, Mediore, Awful)
- Their target locations
- Notable portfolios
- Focus areas/industries
- Preferred terms (Lead investor, follower, usual investment type)
- Deal size sweet spot (How much they usually invest)
There are a lot of great templates you can find for creating a great pitch deck. A good practice is to check the pitch decks of leaders in your industry and learn from them. A professional pitch deck has very few slides, answers three key questions (Why, What, How) about the problem and your solution, has all the relevant KPIs, achievements, and tractions, shows your vision both short-term and long-term, and most importantly, explains why your team is awesome and why it’s the right team to do it.
The 80/20 rule: Finding the right lead investor
Same as everything in startups, the 80/20 rule should be followed in fundraising too.
The 80/20 rule suggests that roughly 80% of your results come from 20% of your efforts.
In each round, 80% of our time and effort should be focused on securing the right lead investor. The lead investor is the investor who provides the largest amount of funding in that investment round and they usually take the most active role when working with the startup. The lead investor is usually in charge of preparing term sheets and legal documents and conducting the due diligence as well.
Our primary task is to find the right lead, the right partner. When choosing a lead investor, ask yourself these questions:
- Do you trust them?
- Are they a visionary mentor? Do you value their mentorship and advice?
- Are they capable of growing you to the next stage? Could they help you in the next round?
If the answer to all of these 3 is yes, that’s a great lead investor to have. While our focus should be on finding the right lead, we should open conversations with other investors who might participate in the round as well. Allocating 20% of the time for these conversations is perfect.
Show that you’re a Pro
Everyone prefers to work with someone who’s a professional in their field. VCs love founders who know their shi* as well. They don’t like amateurs.
They expect founders to know the principles of running a startup and their market very well. They expect founders to know all their KPIs by heart. They hate it when a founder doesn’t know their competitors. They hate it when founders brag about unimportant stuff or wrong KPIs. They hate it when they have to explain to a founder basic startup terms like ICP, USP, CAC, etc. These are all red flags for a VC.
A pro founder is not only a pro in their own field, they’re a pro in running a business. A pro founder analyzes and understands every single one of their competitors, and they have a plan for how to beat them. A pro founder has a clear roadmap, knows the purpose of raising this round, and has chosen the right milestones and KPIs.
A pro founder has a great response to these basic questions:
- Tell me about your market, how well do you understand your competitors?
- What are you planning to do with this funding? Why?
- Why are raising right now?
- What’s your next goal? What’s your end goal?
- What if you’re wrong? What’s your plan b? What’s your plan c?
A pro founder is a teacher and a student at the same time.
The best founders in the eyes of VCs, are the ones who themselves learn from in the meetings. Visionary founders with a deep understanding of their business and market whose insight is valuable to any expert.
Start small
Keeping track of all of the conversations with investors is really important because they contain fantastic lessons. Each conversation with a VC means that you and your startup will be challenged and we can learn what’s wrong with our business and how we can fix it.
80% of each meeting is VCs asking the same questions, the FAQs. While this makes meeting number 50 super boring, it’s an opportunity too. Frequently asked questions are the areas in which our startup should shine. If we don’t have a good answer to these key questions, we should change something in our business, fast.
A great approach to fundraising is not to start it with the big names. Instead, we start with smaller VCs. This way we can practice pitching and become a pro at it. This way we find the real issues with our business model, our product, and our marketing. This way we can fix all of these issues and make our startup grow faster.
When we fixed the serious issues with our business, our pitch, our deck, and had a great answer to all the frequently asked questions by VCs, now it’s time to start the discussion with big names. Now they see a growing startup with a great pitch, slam dunk.
Startup valuation in early stages
Valuing a company in the first years of its life is not easy. In later stages, you have real financial data, projections, and market data that can give you a fair valuation. But in the early stages, especially pre-seed, it’s just a guessing game.
A serious red flag for investors is when a startup overvalues itself. It’s a sign that the founders didn’t do their homework and have no understanding of their market.
There are a couple of famous methods that both VCs and startups use for valuation in the early stages. One of them is the Berkus Method.
Berkus's method of valuation was created to find a starting point valuation without relying upon the founder’s financial forecasts. The Berkus Method studies five crucial areas of a startup and indicates a value ranging from zero to $500,000 for each area:
Another common method is the Payne Scorecard method. This valuation method compares a startup to other typical startups at the same stage, the similar deals that happened in that space. (investors benchmark the “standard” value of a pre-seed or early-seed company in this case), within a geographic region and their startup sector (SaaS, AI, digital health, fintech, etc.).
For this method, researching similar startups in similar stages is necessary. The good news is these deals' data are accessible publicly in services like Cruchbase and CB Insights.
Great investor vs Bad investor
The bad news is that not all the investors out there are great. In fact, most of them are bad. Unfortunately, a large segment of investors who call themselves VCs or angel investors, don’t know the first thing about startups, they’re just here because they think it’s easy money or because it just sounds cool.
These types of investors are easily detectable from their portfolios. They usually have no experience working with real, growing startups. They usually try to persuade founders with empty promises like finding strategic partners or customers for them. They usually brag about their connections instead of their achievements.
This is even more common among many who call themselves angel investors. As a rule of thumb, you don’t want a rich angel investor who’s doing this as a hubby.
The best angel investors are strategic angel investors. The ones that are top experts in your field and can be your mentor.
The best angel investors are entrepreneurs themselves who grew their businesses and can teach you how to grow as well. They have a vested interest in you and your business, more than the ROI alone.
When you encounter a new investor, follow these steps:
- Check their portfolio, and see if they’re focusing on your market and stage or not.
- Check their success stories. How many of their portfolios grew to the next stage, check to see if they participated in the next stages or not.
- Talk to a couple of founders in their portfolio, especially the ones who grew to the next stage. Ask how was their experiences working with them, if they helped them in the next round or not, how was their mentorship, and if they micromanaged or not.
No need to be shy, founders love to help each other and are more than happy to share their feedback.
That’s how we can see the potential of an investor. That’s how we can differentiate a great investor from the bad ones.
There are three kinds of investors: Great ones, Mediocre ones, and Bad ones.
Two of these will kill your startup.
I have seen many promising startups with great teams struggle to raise just because they have raised from the wrong people before and now, VCs are saying no to them just because they don’t want to be on the same cap table as that other investor with a bad reputation.
Raising money from the wrong investor with a bad reputation can make that startup un-investable. On the other hand, raising money from mediocre investors is not that different either.
Mediocre investors are mediocre mentors at best. They don't bring real value to a business. They cannot help a startup grow to the next stage, they cannot help that much in later stages or next rounds. All of these are way more important than the money itself.
Great VCs love to work with other great VCs. They don’t like to invest in startups that have raised money from mediocre or bad ones. That’s usually a red flag for them.
KPIs in a hard time
Today’s climate is very unforgiving for startups. According to Carta, investments are down 50%–75% in 2023 compared to past years, and on average, for a good startup, it will take around 10 months to raise their round. It was just 4–5 months back in 2020, now startups have to be prepared that their fundraising will take even more than a year.
Back then, VCs pushed for one thing and one thing alone: Grow, no matter the cost. Burning money to achieve was a token of pride for many founders and VCs even promoted this behavior. That’s no longer the case.
Now that the market is more volatile and VCs lost all their money in crazy deals in the Covid era, they’re pushing startups to be more stable, and less risky, even if that means less growth.
Sustainability now is more important than growth, because VCs are angry at all the great startups they’ve invested in but are now bankrupt because they burned all their money in the name of growth.
The KPIs of each business in each stage are different, but there’s one KPI that all VCs value more than any other KPI in the startups today when it comes to fundraising and that’s Capital Efficiency.
Capital efficiency shows the VCs that the founders know how to run a real business. It shows not only that they’re generating revenues, but they’re managing their expenses as well and they’re not acting like spoiled kids. Great VCs love founders who can build a scaling, sustainable business.
Here are some of the most important factors in a VC’s playbook:
- Capital efficiency (Being cashflow positive or able to survive without a raise are big advantages)
- Founding team advantage (Why this team, specifically, will win over their competitors, why this team is different)
- Growth in revenues (Steady number month over month)
- Growth in main KPIs (Different for each startup but usually MAU, GMV, Usage, etc.)
- Product/Market fit score
- A unique promising technology, product, and/or IP
- Size of the market vs size of the competition
Capital efficiency also helps founders raise a better round with better terms. I have seen many great startups with great ideas fail before they could finish their round because they ran out of money. Capital efficiency gives the startup options.
Talking with multiple VCs at the same time
VCs work on different timetables, some might give you the final yes or no in 2 days, and some might take two weeks to decide to have another call. Founders should explore all their options at the same time, waiting is not a good game strategy here.
Great VCs usually work very fast, if they’re interested, they will get back to you immediately. But that’s not always the case and some might surprise you after a while. A good hint when a great VC is interested in you is when they try to introduce you to other great VCs. They want to get more eyes on you, your product, and your deck. They want to get feedback from other great VCs about you, and possibly, lock in their co-investor in the round.
A good practice is to keep the conversation open with all the interested parties, the great ones. Nothing is certain until it is. A lot of deals that startups and VCs worked months on will fall through in the end. By keeping the conversation going, you’ll have options and will not waste time on only one VC.
When talking to VCs, transparency is the key. VC world is a small world, they all talk to each other, and many of the investors you talk to will discuss your startup in private between themselves. If they ask you who’re talking to, there’s a chance they already know. The more information you share with your potential investors, the more transparency you have with them, the better.
Cap Table is your baby
Raising from the wrong investor is one of the main causes of death in startups. You’re not only raising right now, but you should also consider all the future rounds as well. Especially when you’re trying to decide on the right investors and the percentage of the company you’re giving up.
A wrong name on your cap table (the list of all your shareholders and their ownerships) might equal to never raising money ever again. The reputation of each investor, their track record, and their role in growing the company are the crucial things to pay attention to from the beginning.
Many startups fail or have to settle to sell their stake just to get rid of a partnership with a bad investor, like what I had to do back in the day. Accepting money and signing a term sheet is easy, going back after that is hard.
Great VCs love startups that have clear, understandable cap tables. No mess, no surprises. Here’s what a great cap table looks like:
- Founders have divided their shares fairly.
There should be a reason why each co-founder has their percentage, and it cannot be because we’re friends or we started at the same time. Each co-founder’s percentage should reflect their role in the startup, their expertise, and their track record. - The founders didn’t lose too much of their equity in each stage.
On average, founders should give investors less than 10% in the pre-seed stage, less than 20% in the seed stage, less than 20% in series A, and less than 15% afterward.
This is the average of the market, and each situation can be different, but your numbers cannot be way off from these. Giving up too much of the company early on is a big red flag. - The startup raised only when they were supposed to.
Each round and each new investor has a purpose. They didn’t have too many rounds. There are no bridge rounds just to lower the risk. - There are no names on the cap table with bad reputations.
- Preferably, there are no advisory shares on the cap table. If there is, there should be a good reason for it.
- The cap table on the post-money valuation is still exciting enough for founders.
- There’s a balance between the key investors, no one has too many shares.
Cap table should be protected at all costs, there is no compromise good enough that will justify creating a messy cap table. Future rounds are as important as the current round, we should always look out for the big picture, for our vision.
