It has been five months since the Square Peg Founder Summit in Tel Aviv, Israel and I still find myself returning to some of the insights shared by our founders during that time. The topic of fundraising came up a lot, with our later stage founders sharing their lessons learnt from going through multiple funding rounds. Fast forward to 2023, and the topic of fundraising has become even more important for founders to navigate the market downturn.
Fundraising is both an art and a skill that can be acquired. While easier said than done, you often need to move quickly past the numerous rejections, take on board any thoughtful feedback provided and focus on the few ‘yeses’ you need to pull a round together.
That’s the mindset required, but what about all the practical ways you should go about fundraising including the when and the how? Below are some of the insights shared by our founders at the Summit.
1. When should you raise a round?
Raise when you don’t desperately need to.
As a matter of psychology, it’s often better to raise when you don’t absolutely need the money - negotiating leverage looks very different when you have 3 months’ cash left in the bank than when you have 8 months. Time equals options. If possible, try to time your raise for when you’ve reached a point of strong momentum in the business. This allows you to craft a convincing narrative for new investors and have leverage to negotiate a less dilutive deal.
If you have a clear plan on where and how you intend to grow, don’t wait.
One of our founders spoke about their approach: “if you have the sense that you can be 5x or 10x bigger, go raise money even if you have 80% of the last round in the bank”. Their view was that if you have a clear plan in mind to get to an ambitious goal, you’re much more likely to convince investors with your passion, honesty and clarity of thought. However, this advice is more relevant to later stages (Series B onwards) when you’ve found product-market fit and have a proven motion for scaling. For earlier stages, Fred Wilson from Union Square Ventures (a consistent top performing US VC) points out that too much capital leads to lack of constraints on decision making. This can result in the company doing five things poorly rather than doing one thing well.
2. How should you run the fundraising process?
Generate competitive intensity.
Being able to get multiple funds interested in your company gives you negotiating leverage. One founder who raised a large Series A gave some insight on how they went about the process: “it’s all about generating competitive intensity. I told investors that I’d open the data room at this date. They’ll have 2 weeks to go through it, and I’ll be available for Q&A the whole time. I outlined how the process will run. Otherwise, you’re just taking investor calls whenever and it can suck up a lot of time”.
Have your house in order.
Another founder shared: “as of 2 years ago, I keep the data room open every month. Anyone who’s interested in investing can get the latest information”. Both founders are, in effect, being proactive about how they want their fundraising process to run. This means being clear with investors around your desired process and timelines, and having the right information ready when investors inevitably ask similar questions around revenue data, cohort metrics, customer interviews, and so on. For the early stages where there is not much data beyond a deck, the data room point is less relevant. Anticipate that the full process might take longer than usual in this climate and seek guidance from the VC as well by asking them what their internal process looks like (it often varies quite a bit!) and what they typically need from a diligence perspective.
Vet the VC.
Fundraising is a two-way process. Given that it can be a decade-long relationship that both sides are entering into, take the time to get to know each other properly. Adam Fisher from Bessemer (one of the top investors in Israel) observed: “if you’re an early stage company and you try to pick your VC partner in a week, there is nothing responsible about that - there is very little you can really learn in a week about each other”. At Square Peg, we often tell founders to vet us by speaking to the founders in our portfolio who haven’t shot the lights out in terms of growth. We do this because we believe that how a VC shows up in the rough times is the true test of character.
In a tough fundraising climate, I summarise below a conservative timeline you may want to use as a starting point for planning your process. Of course, things rarely go according to plan so depending on your circumstance (e.g. if you haven't hit all your milestones or metrics haven't gone the right way), anticipate deviations and build in buffer.
I would love to hear from founders outside our portfolio about their fundraising journey and the lessons and battle scars they’ve taken away from those experiences. As always, you can reach out at email@example.com - I look forward to hearing from you.