The Fundraising Process – Part 1: Creating an Investor List and Checking It (Many More Times Than) Twice
Entrepreneur Toolkit – The Funding Process Part 1 of our most recent Fundraising Toolkit discusses the “how-to” of creating a quality list of prioritized investors upfront.
Part 2, which will be posted next week, provides a deeper dive into “how-to” for a results-driven relationship strategy and execution.
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If you are an entrepreneur building an advanced technology business, fundraising is never far from top of mind. You already know that many more investors will pass on your deal than will invest. But do you also recognize that a properly structured and executed fundraising process can improve your productivity and efficiency and can lead to greater success?
This two-part toolkit provides a roadmap and tips. The process begins with a laser-focus on building a targeted, prioritized investor list based specifically on your business plan.
Creating a Qualified Investor List
The fundraising process is like a sales funnel in a long-term, high-stakes sales cycle. You are selling qualified investors on your idea and team.
Successful entrepreneurs begin the process months before they make their first investor presentation with a targeted list of their most “desirable” investors. “Desirable” means investors who are most able and likely to invest in your business plan first. Building the right list and then creating contacts and relationships with those people is the secret to fundraising success.
Define and Prioritize the Best Investors for Your Company
Five characteristics help define the most desirable investors for your particular company. The better you define the requirements of your business plan—matching milestones to capital requirements, the better you can define and prioritize your list of prospective investors.
Stage of business. It is easy to identify which stage of business investors invest in. Look at their website or query their listing in Crunchbase or on LinkedIn. Narrow your search to only those angel investors or VCs who invest in your stage of business. Don’t waste their time or yours.
Broadly speaking pre-seed through seed-stage companies are introducing the product to prove market viability. They range from pre-revenue to $1MM. Early-stage companies (Series A/B) have validated their concept, demonstrated scale, and typically have achieved $1MM to $10MM in revenue. Growth-stage business (Series C+) exceed $10MM in revenue.
Typical seed stage valuations range from $2MM to $5MM and attract VC investments from $500,000 to around $2 million. Seed investors are angel investors, institutional seed-stage funds, and strategic partners. Early-stage companies with valuations from $10 to $75MM attract investments of $1MM to 15MM from institutional VCs and strategic investors.
Location. Easy question: Does the fund or angel group invest within your geography? Angels and venture capitalists invest in their own backyards. Nearly 60 percent of VCs invest in companies within the same state.
In 2020, 73 percent of the capital invested in the US went to California, New York, and Massachusetts—states where most of the venture capital is. The same is true locally, as more than 80 percent of the Columbus VC dollars stay within the region.
It is logical that investors like to be within driving distance of their portfolio companies. They want to provide mentoring, industry connections, and expertise. And, yes, they want to perform their due diligence by directly observing and engaging the founding teams of their portfolio.
Demographic. Does the fund focus on a particular demographic? Over the last few years, a number of VCs raised funds to invest in underrepresented demographics of founders (female, Black, Hispanic, LBGTQ+, veterans, people with disabilities, and more). If any of these demographics apply to you and your founding team, investigate and prioritize, but don’t limit your search to these options.
Sector. Does the fund invest in your industry? Does their staff include industry-specific partners or specific domain expertise?
Learn about an investor’s focus by reading their website. (See Rev1.) Google their portfolio companies to look for investing trends. A VC’s Crunchbase profile will show the breakdown of their deals by industry and may include the appropriate VC partner’s name.
With some detective work, you can identify a sector-focused partner within the VC. Read the team page on the VC’s website. VCs have blogs on certain topics for a reason. The writer is often a subject matter expert. Linked In and X can provide more clues.
Investment Size. Does the fund invest amounts that fit with your raise? Does the fund lead, co-lead, or co-invest? With the disclaimer that these ranges are approximate and there are exceptions, here are broad guidelines for check size by entity.
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- Angel – $25K – $1MM
- Accelerator – $100K
- Venture Capital (VC) – $1MM – $50MM
- Corporate VC – $2MM – $10 MM
- Private Equity – $10MM – $100MM
- Public Markets (via IPO) – $100MM+
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The larger the total round, the more likely there will be multiple investors. The lead investor is the entity issuing the term sheet. Negotiations will be with this investor. Co-leads are two entities who issue one term sheet. This circumstance happens with two very different funds, for example, a traditional VC and a strategic investor. Co-investors are VCs that follow along the same deal terms set by the lead investor.
Prioritize Investor List to Make Investor Meetings Count
Once you have identified your batch of qualified investors based on the five previous characteristics, prioritize them based on fund vintage year and recent investment activity.
Vintage year in private equity and venture capital industries refers to the year in which a fund began making investments. Each VC fund has a life cycle of ten or more years. That doesn’t mean the fund is making new investments for the entire ten years, but prioritizing a fund for investment in your company, you need to understand where the fund is in its life cycle. The first three to five years of the fund are the new investment years; after that, many funds are in harvest mode. Crunchbase can be a great source of information.
Investigate a fund’s recent activity. What other companies are in their portfolio? Have they made recent investments in a complimentary space? That’s a promising finding. Do you see any conflicts of interest or investments in competitors? That’s a yellow light.
Next Steps
As company founder, your job is to sell investors on your market solution, your business plan, and your team. It’s the same mindset and skillset that you use to convince a customer. Think of your fundraising process as a sales funnel. A well-vetted and qualified investor list is the starting point.
