Questions on Startup Fundraising? Ask The VC
This was the third webinar in our “Ask the VC” series. Structured as a Q&A session, Raising Venture Capital featured Sean Foote of Co=Creation Capital and Gadiel Morantes, Chief Strategy Officer for EGFS.
Here’s the recap:
How involved do VCs really want to be with their portfolio companies?
Sean: All VCs say that they help companies, but that “help” means board seats and monthly calls unless there’s a problem. The major constraint is time, given that VCs have multiple portfolio companies.
Incubators are a different story. They do provide help, but it is structured help. Shop around to find the best incubator program for your startup.
How should you decide how much funding to raise?
Sean: Start with the most important question — how much money do you need? Then when you approach investors, ask for the amount that that investor typically provides. For example, angels and early-stage funds typically write checks for $750,000, while $2 million is typical for priced rounds.
Gadiel: Building your financial model and working through your three and five year projections will give you a framework for what size your ask needs to be as well as allow you to connect the dots for investors as to what impact their funding will have.
Sean: When you’re talking to VCs, your five year revenue figure better be between $50 and $100M. Too high and it’s not credible to investors. Too low and it’s not interesting for VCs.
Can you share any guidance on metrics investors look for?
Every company is different, so it’s hard to give you precise numbers or even ranges.
Does it make more sense to choose an investor based on the size of the check s/he can write or on the “value-added” that investor can provide?
Sean: VCs do a good job of making introductions to certain sets of customers, but they can’t “deliver them.” That is up to the company founders. My advice is to disassociate funding from help with customer acquisition. I would always advise founders to take the money regardless of whether or not an investor can make helpful introductions. Money is its own kind of help.
Gadiel: It is important to find the right investors: ones who will be good long-term partners keeping in mind that the relationship could last for 7-9 years before there’s an exit.
That said, with so many new funds, increased competition means some VCs are looking to differentiate themselves on the strength of their value-added services. It should still be a consideration when you’re looking for a funding partner.
How do you convince VCs to say yes?
Sean: The bad news is that VCs say no a lot. Even if they don’t use the word.
To put this in black and white, Sean laid out some financing stats:
- There were 20,000 seed-backed companies in 2014
- 1,200 (across all funding stages) were VC-backed financings
- That translates into a 5% chance of any one startup getting funding
But… for companies trying to raise “concept” funding — under $400,000, it is easier than it’s ever been — look to Kickstarter, AngelList, and incubators.
I have a SaaS fintech startup: what kinds of investors should I approach?
Sean: There are a couple of fintech focused funds and investors, but you do not have to be fintech specific in terms of approaching investors. Investors are increasingly looking at the same metrics: acquisition costs, customer lifetime value, monthly recurring revenue, customer attrition rates, and growth rates.
Gadiel: Funding stage and check size matters more. For early-stage funding options there’s less need to target investors by sector. When you’re ready for an A round, you can focus more narrowly on fintech investors.
What are some common questions EGFS gets from founders preparing for a raise?
Gadiel: We get a lot of questions around valuation — things like “how should I approach discussions with VCs?” and “what baselines should I consider?”
Sean: The amount of money you raise affects your valuation. Series inflation means that today’s Series A is what a Series B used to be; while what’s called a Series Seed is what Series A used to be.
- Target selling 25%-⅓ of your company over 3-4 rounds of financing
- Keep the end in mind and plan for multiple rounds of funding. The valuation needs to be high enough that you aren’t selling 50% of your company in the first round
- In the end, meaning by the time a company goes public, management should own 20% of the company
The most important thing is not to try to set the valuation. You don’t know the market as well as VCs do. Let VCs pick the number, and then use that to leverage higher valuations from other interested potential investors. But don’t get ahead of yourself by trying to sell for the absolute highest amount you can get–that could lead to negative momentum.
Sean: Convertible debt is increasingly common–and somewhat overused. In terms of advantages versus disadvantages, there are definite tradeoffs between on the one hand few terms, and on the other, more unfavorable relative treatment of founders versus investors in a downside scenario when compared with deals funded with equity. The main valuation discussion with converts is around the size of the cap and the amount of the discount. A 15-25% discount with a cap of 4-8% is typical.
Deborah Adeyanju is Content Strategist & Social Media Manager at Early Growth Financial Services (EGFS), an outsourced financial services firm that provides small to mid-sized companies with day-to-day accounting, strategic finance, CFO, tax, and valuation services and support. Prior to joining EGFS, Deborah spent more than a decade as an investment analyst and portfolio manager with leading financial institutions in New York, London, and Paris. Deborah is also a Chartered Financial Analyst (CFA) charterholder.