Tl;dr: Learn an effective fundraising strategy when reaching out to investors. It’s asking for what you want and doing the preparation so investors are willing to invest more you might be able to get the fundraise amount that you want.
How much are you raising? Is it a fixed number or do you have a range?
Do you know why you want to fundraise that amount from investors?
Is there an amount you could live with to make meaningful progress to position yourself for your next round?
Is there a number too small that isn’t worth raising?
Is there the ‘ideal’ amount you would love to have to really deliver on what you wish you could have to position yourself for the next round?
Did you know that you might be able to get both if you have a proper fundraising strategy?
Well, you can. You never know what investors might give you.
Only you need to know what you need and want, why, and be able to have logical cases to discuss with your potential investors.
Ask for what you need, you might get what you want
I find myself teaching this again and again to founders, so I thought I would share it with you.
Let’s start with the anecdote where I learned this so you see it (Can) work in the real world.
She asked for what she needed and got what she wanted
The first time I helped a founder raise for was one of my best friends.
She was #2 for a large startup that was heavily funded. She was working to at least 11 pm every night, then coming home and on calls building product, doing bus dev calls, and everything else that goes on when you are making a product for consumers. She was using her salary to bootstrap everything.
“Oh Alex, I’m so stressed! Startup shits!” she would constantly lament to me on her couch.
I know about raising, so helping her just get the cash so she could focus was on her to do list.
Raising is a balls, but she’s awesome so I reluctantly acquiesced (eventually!).
So I did the usual in preparation for a fundraise:
- Did the financial model (What I built was the basis for this app and social financial model)
- Built the pitch deck (If you have 5k and want my help to build your deck from scratch, head to Perfect Pitch Deck)
- Built a ‘business model’ pitch deck (Something I invented and doesn’t have a blog on yet)
- Built out a lead list of investors in a Google Sheet (See: Fundraising process manager tool. I made a nicer version of what I used you can get for free)
- Decided on the fundraising structure which was originally through a convertible note- I also ended up writing the note myself which we didn’t use (Read about what terms are standard: Seed round convertible, priced and SAFEs. What venture capital terms are standard?).
Then came the question… “How much are we raising?”
She was pre-everything, though she had actually built most of the v1 of the product already. So we had nothing really to sell other than her and her vision.
When you are at the pre-seed point, how much you raise is pretty arbitrary aka market. In say Italy, that number is almost always EUR250k as it is all they can raise. In other countries that might be about $500k in Asia, or maybe $1m when you are coming out of Y-Com.
We talked about it and $500k was what she thought she needed to:
- Finish the product and build some machine vision stuff
- Do marketing according to out marketing buddy that was helping out
- Pay the devs she had
Nothing crazy. It was the basics she needed, and she knows how to spend money!
We decided that number was $500k. Why?
- It seemed like a number she could get
- It seemed to be in line with what startups were getting in the market
- She could do enough with it given her runway (We wanted to do a larger round in under 12 months)
There’s nothing really wrong with that logic. I knew she was great and she could get more, but let’s just see what happens…
I started the main outreach as her “CFO” and she reached out to her friends that were the best prospects.
She was fairly quickly able to get maybe a few hundred K. Over time these firmed up and one or two wanted to bring in their friends (We didn’t give them an allocation at the end).
We ended up getting the money from a family office and a VC.
For both of the investors, we were chatting and they got the idea pretty rapidly. The funny thing is both said the same thing pretty early on in the first call:
You could probably do a lot more if you had more money, right?
We smiled at one another and said “Yes. Yes, we could, ha!”
I can’t remember exactly what the VC said for example, but it followed on with something like:
I mean, a million or so is pretty reasonable, right? You could make a lot more progress.
We didn’t even ask the investors for more investment. It was their idea.
Thing is, the founder is very credible and people love her (High energy and great at sales). It wasn’t really a question of whether she could execute so investing more money just made sense to them.
Frankly, if a VC has money $500k, or $1m isn’t much. When it comes to writing a $20m check, there are a lot more considerations. The investor is just betting on the founder at the formative stages so a little extra actually de-risks the deal.
Now, you’re probably thinking “But Alexander, won’t the valuation and the terms change depending on the investment amount?”
Not necessarily. In this case, we didn’t talk about terms or deal structure to later. We just agreed that something a million $ plus made sense. We then changed the deck for the amount being raised to (I think) $1m and that it would be a priced round.
When I communicate a raise, I share as little as possible. I make it feel like I’m reasonable and not going to ask for anything bonkers that will derail the deal.
I think I just wrote initially:
- Raising: $500k
- Structure: Convertible note
- Terms: Market terms
- Runway: 12 months
Once we had interest from two potential leads, conversations with new investors were for a larger raise depending on interest, and we followed up with people in the process that we had an interest for a larger round which they could participate in. No one cared at all, and in fact, it made them more interested.
What I had to do was update the model with the larger round. I did most of the thinking, got the marketing dude to come up with a new plan I could put in the model, and had her tell me who else she would hire for the staff sheet. I shared that with the investors, but it was really a formality.
Instead of going through the model with investors, what I did was make a ‘business model deck’. In this fundraising strategy document I set out the key cost and revenue drivers and discussed them with investors. That way it wasn’t about debating a specific number, but getting investors to buy into how we thought about the business and what we would focus on.
Of course, it was a slog to get the deal done, but to cut to the chase, we ended up raising over $1.5m (Being vague) in a priced round. At that point, it was the largest pre-seed deal done in the region.
We asked for what we needed and we got what we wanted.
Investors offered more.
Why you should ask for what you need
Everything always ‘depends’ in startup land, so I rarely give specifics when I do consulting with founders and investors on fundraising strategy. I normally set out the options. It’s for this reason that you need to take anything I teach with a pinch of salt and think what makes sense for you.
Regardless, I think this principle of asking for what you need to give you the option of getting what you want makes sense for pretty much everyone (Including VCs fundraising from LPs).
Let us go through some reasons.
Show you are making progress
The main reason you ask for an achievable fundraise target is for social proof.
Let’s use two examples for an opening gambit:
- Go for need: You ask for $500k
- Go for want: You ask for $1.5m
You hit up some angel investors that you know. They like you and you secure 300k in two weeks. Not a bad start. They aren’t fully in though, they want to see how the round goes. That’s called a soft commitment. A hard commitment is basically money in the bank.
For the purposes of talking to investors, if those soft commitments are reasonable, you go telling any prospective investors you have commitments of $300k (you can add ‘soft’ if you want to be squeaky clean, and definitely if asked- lying is dangerous!).
- Sales: “We have $300k of commitments so far and we’ve only been raising 2 weeks!”
- Honest: “We have $300k of soft commitments so far and we’ve only been raising 2 weeks! They’re waiting on a lead to close things off”
But here’s the point and a key selling point that is missing from those examples, you haven’t illustrated how far through the round you are!
$300k in a $500k round is 60% raised. That’s a really solid start, but it’s going to look a lot different in the next scenario.
You’ve done nothing different in this scenario.
The only difference is this: 300k into 1.5m is only 20% of the way through.
You are still a long way off!
What’s the difference?
In scenario 1 you are 60% of the way and in #2 you are 20% through.
Investors are sheep and rely on others to make a decision. Any form of social proof and success builds confidence.
By asking for a smaller amount you appear to have more interest and are closer to your goal. It feels like you are much more likely to get a deal done.
Investors are like high school jocks: they want the cheerleader, not the band camp geek. You need to do whatever you can to cover zits and poor wardrobe choices.
If it appears you are eminently able to get your initial target done, you might also be able to achieve a larger number.
Open yourself up to more investors than you might if you ask for a larger amount
Some investors might want to invest in a smaller deal because they will have a higher ownership percentage.
If you come at them with a large deal and little interest to date, they might not think this deal is worth the effort. Looking at deals is a pain in the bum.
Alternatively, if your opening hand is for a ticket size they are used to, they might be more likely to emotionally commit to you and the deal. When you come back later and tell them you have a lot of interest and are now raising a larger amount, they might think “I found this deal early, and others want in too! I was right and I still want in“.
This is a lesser mentality factor, but everything adds up given investing is quite emotional. It’s more applicable to angel investors but could apply to seed investors in a series-A deal.
Allows investors to think for themselves
If you come to an investor with a plausible investment target, they like the startup and the team, the cogs can get a going and VCs might want to invest a larger amount.
That was the case in the example we went through above.
People buy into their own ideas more readily than others. That’s why in all sales it’s best to bring the horse to water and get them to think drinking is a great idea, as opposed to telling them.
If they don’t jump to say raising more is a good idea, you can slip the thought in with something like “Of course we’ve considered raising more. I’d love to know what you think about that though, given your experience in this sector”
You can go up but not down
In investment banking and management consulting there is a saying.
You can go up, but you can’t go down
There is also up or out, but that’s not relevant here.
Point is, let’s say you manipulate yourself into getting promoted to Director from VP early because you are great at running deals. What’s expected at Director level is different- you need to bring in deals. Crap, you realise your introvert skills were great at doing, but not getting, but you now have new KPIs you didn’t prepare for. You’re struggling as a Director and wish you spent another year as a VP to build relationships with clients, only you can’t. You can’t go back to a VP once you are promoted.
When you go pitching investors, you will always be asked how much you are raising. Always.
Once you say a number, that number can increase for a good reason (you have more interest). You can’t go down.
If you start raising that $1.5m and get little interest, you might think crap, I need to get this deal done asap or I’m out of runway. I could have just done $500k.
Only how does that play to the investors in your pipeline?
“Hey Jim. Yeah, we’re raising $500k now… there wasn’t much interest to be honest…”
It’s going to go down like a lead balloon, right? You’re definitely the band camp geek now… and you ain’t Pharell Williams.
That’s why you start with a number you’re sure you can hit in your fundraising strategy and go up. You can’t go down and save face.
You can appear naive if you ask for the wrong amount
Picking the right number if you haven’t done the math can seem totally arbitrary, especially if you are like 99% of clueless founders.
But you have to pick a number which makes sense in terms of your stage, traction, and geography.
Asking for too much can scare people away
If you are at idea stage and you want to raise $8m as a random first-time founder, investors are going to think you’re a muppet. I mean there is no way you are going to get that.
You just lose credibility as you don’t understand how things work. No investor wants to invest in founders who are ignorant.
Let’s say you are a famous founder though and pitch little VCs for some reason. Well, they may know you will get the deal done, but wonder why you are talking to them, but more so, the valuation is just not something they can afford to invest in. They’ll pass wistfully.
Asking for too little makes you appear like you don’t get it
On the other side of the coin, if you ask for too little you appear naive as opposed to ignorant for asking for too much.
Let’s say you are in biotech and you need funding for stage 2 testing. You want $1m and pitch the perfect biotech investors for stage 2 phase. They’re just going to if you’re as insane as Elon tweeting his stock is too valuable… You clearly have no idea how much it will cost for approval and that’s really scary!
Let’s say you are a Series-A SaaS company at $1.5m ARR and you want to get to $7m ARR in 18 months. You’re asking for $500k and you have a $300 CAC. The math does not work? Muppet.
You only know what you need by doing the math
So many founders get lost as to how much to raise.
The reason is that they don’t know how to figure it out and have not done the math to back up their fundraising strategy.
You can figure out how much you need in a financial model. That’s what my financial models are partly for.
Your fundraise should be the amount you need to spend in order to meaningful change the metrics of your business for the next stage of fundraise, plus a buffer as things always go wrong.
I’ve built a free tool to help you figure out how much money you should raise: How to forecast your fundraising till you exit
Use my free high-level tool, then use a financial model to break those numbers down specifically for the runway.
You need a plan for what you want, and it is more work the larger the fundraise
Your focus should be first on what you need. Once you have figured out that you then figure out how much you want.
You need a specific plan for both scenarios. The later stage you are, the more detail you need as we’re talking more money.
If you are going to apply my strategy you need to plan for the possibility.
It’s like you really want to meet Bill Gates.
You randomly meet him in a queue at a train station as he lost his team… now you have your shot… do you have your pitch ready?
Small want raises don’t need that much more detail
When you are raising a small amount of money, if the investors aren’t n00bs you don’t need a crazy amount of detail in your ‘want’ plan. I mean it’s really some extra headcount, accelerated launch, more marketing spend, right?
Have a solid plan, know where the $s go, but it’s maybe a day’s work.
Larger want raises involve work to inspire confidence
When you are raising a large amount of money and your want is a lot more, then things get more complicated.
The difference between $20 and 30m can be an internationalization plan, more complicated marketing channels, additional teams etc.
You’re probably pitching investors with a banker type background that like this sort of shizzle.
Just saying. You’ve got more work to do here to give confidence that a larger plan is something you and your team can execute with. The bar for your fundraising strategy is higher.
What to put in your pitch deck
Regardless of fund stage (Unless you are post-series-C) what you put in a pitch deck is always simple and pretty much the same thing.
You only have two main options to do a deal. Let’s cover both now.
If you are raising more than about $1.5m you typically want to do a priced round.
You include in your ask slide:
- $2m raise
- 18 months runway
- Priced round
- Standard terms
Whilst you probably know what key terms you plan on having in your note, I don’t include them unless you are adamant about it.
You include in your ask slide:
- $1.2m raise
- 18 months runway
- Convertible note / KISS / SAFE
- Standard terms
If you have already raised a reasonable amount of money, you can amend your deck later, for example:
- $1.2m raise
- Soft commits of $400k
- 18 months runway
- Convertible note / KISS / SAFE
- 20% discount
- $8m cap
- Other terms are market
What does this actually look like in a deck?
I’m writing a pitch deck course at the moment, so I made an example using Uber. I used what I could from their deck (which is why the milestones are rubbish). Here’s an example of how I structure up the ask slide in a deck at Perfect Pitch Deck.
There are always exceptions
Fine, there are always exceptions to what I teach, especially in a fundraising strategy. Here are two.
When you are later stage, you likely have a much better idea of how much to raise and your investors are probably helping you figure out this too.
If you already have interest from investors, you’re likely to ask for what you want and you will likely get it.
If you’re one of those dudes that made money for investors already, the normal rules don’t apply to you. You can probably do an $8m idea stage raise. You will have a plan for the money, but basically you’re going to get it, so you do not likely need multiple scenarios, though the best founders will probably do it out of habit.
Conclusion on fundraising strategy
Raising is a fucking pain in the ass. No one says it enough.
Whilst it can feel overwhelming, if you follow my fundraising strategy guidance to deconstruct things logically, it will enable you to be more focused and credible. It will still be a lot of work, but it will be focused work with less likelihood of wasting effort.
So make a plan for what you want and need. Believe in those plans as you actually have to deliver on them. Go ask for what you need and you might just get what you want and deserve.
If you have questions, ask in the comments and we can debate them.
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