How long does it take to raise capital?
Why am I not getting term sheets when other companies are?
Is that investor really interested?
These are among the most common questions entrepreneurs ask themselves and VCs. Rounds come in all sizes, shapes and forms with some happening in a matter of few days, especially at the early-stage and most especially at the pre-seed with SAFEs. But institutional rounds (i.e., where an institution like a fund or corporate is coming in significantly) tend to take 3 months end to end. At Tau Ventures we have noticed that covid has lengthened that process by a month on average. We continue promoting the general recommendation that a company gives an additional 3-month buffer for a fundraise, lest low cash forces them into a worse deal.
While every case is singular and there are exceptions for every rule, certain principles hold true no matter what exactly your startup is doing. This post will focus on five key stages of fundraising and guidelines to succeed through them.
1) Soft Circle Before Starting — As an entrepreneur it’s almost always in your interest to soft-circle a round before raising it formally. Three main advantages: get pointers on your pitch, understand what the investor would be looking for, identify others who could be a fit. How much to reveal, how many people to approach, and when to do so are perennial questions. The general advice is to be open but keep it tight i.e., only to people you trust will observe discretion, and do so at least a couple of months before officially kicking off the fundraise so you can truly factor in their feedback.
2) Diligence — This is the bulk of a fundraise and there are a series of don’ts, especially three:
Don’t advertise your warts i.e,. get investors comfortable with the challenges in the business. The alternate tactic is to scare off lukewarm investors immediately, that works if you have a large pipeline of potentials and/or conviction you will close the round soundly.
Don’t reveal your full pipeline of potential investors. Sharing everything with everyone at this stage is a recipe for disaster because it can invariably create signaling issues. If an investor who is not fully bought in yet hears about others who are backing out it can shake their conviction. Instead of disclosing names, what you could and probably should do is describe the type of investors engaged with you in terms of focus and stage.
Don’t set the terms of the round unless you are absolutely certain the market will receive it well. You signal enough by sharing how much money you are raising because VCs can calculate roughly your expectations. For instance 20-30% dilution is typical in the series A so a $5M round would be a $25M post on average. In general it’s best if your lead investor prices the round, which will obviously be a subject of negotiation.
3) Partner Meetings — This is the stage you want to get to as quickly as possible. VCs in theory are partnerships that operate by consensus, with one person championing the deal and convincing the others to support. If you get into a partner meeting then it’s likely in your interest to share the milestone with other potentials as a way of moving those conversations forward.
4) Re-calibrate — Keeping control of the process is the key for a fundraise. A simple exercise that can save much grief is to have a spreadsheet listing all the investors you want to talk to. If one falls through the cracks then uplevel another, basically make sure you are engaged with the right number at any given time. If you have gone a month without a partner meeting then it’s also a good signal to re-calibrate i.e., check whether style, substance or market conditions are the barrier.
5) Term Sheet — You will likely get a verbal term sheet before getting an actual piece of paper. You will also likely have a limited time to think about it and once accepted, not allowed to shop around. So there will be a very small window where you can use the fact you have a term sheet to push conversations with other lead investors. Revealing the exact identity of the term sheet has a high potential of backfiring on you but it’s okay if you think that piece of information will help seal the other deal. In general what you want to do is share the terms you have and argue for why you would still want another term sheet from the potential.
Originally published on “Data Driven Investor,” am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.