4 Steps to a Successful Fundraising

An article we liked by Marc McCabe offering practical advice for navigating the fundraising process – courtesy of Lenny Rachitsky’s blog:

A Playbook for Fundraising

For an early stage founder, fundraising is one of the most nerve-racking parts of the job.

It’s incredibly opaque, asymmetrical, and is often the difference between having a company and not. Even the most experienced founder may have only fundraised 5-10 times in their life, while VCs engage in this process daily.

Nonetheless, it’s also a very exciting time for a founder. Very few people ever get the chance to raise millions of dollars from top tier VCs. As a result, I often see founders rush into the process, setting up investor meetings before they’re truly prepared and end up with a bad outcome. This is a missed opportunity because the fundraising process is a great forcing-function for getting you to think deeply about your business and where it’s going.

Over the last decade I have personally helped dozens of companies raise capital, from pre-seed to Series C rounds, and through these experiences I’ve seen a lot of effective, and also counterproductive, fundraising patterns. I shared many of these learnings in a lengthy podcast interview a year ago in, but with a prod from Lenny I felt like now was a good time to revisit this topic.

This guide is for founders of technology businesses who have raised their seed round, and are thinking forward to their next fundraise. It’s most relevant for Series A, but a lot of the same concepts apply for seed rounds, Series B and to a certain extent Series C. While most tech businesses can benefit from this guide, there are plenty of exceptions, especially companies with products which take a long time to get to market, and companies raising capital outside the US. Consider yourself caveated.

Ultimately, fundraising is an exercise in building trust. Every week we read about new Series A, B and C rounds. We hear about pre-emptive offers and blank check term sheets from prominent investors. All of this can lull us into thinking raising capital is easy. Yet, each partner at a fund generally only makes 1-3 early-stage investments per year, and their career is ultimately staked to how successful these investments are. Each investment is incredibly significant to each fund and in order to convince a fund that you are worthy of that big check, you need them to feel incredibly confident that you will take the money and use it to take your business to a new level, whereby you could raise future funding and ultimately build a huge business. With that in mind, let’s get started with how I like to manage the various steps from thinking about fundraising to closing.

I typically break up a fundraising process into 4 steps:

Preparation
Outreach
Navigating the process
Partner meetings + closing

Let’s walk through each of these stages one by one.

Step 1: Preparation

First, you need to figure out why and when you should raise a round. Maybe this seems obvious, but rather than looking at new investment as an opportunity, many founders only start fundraising when they are running out of money. VC’s don’t invest because you’re running out of money – they invest because they believe their equity stake will be worth a lot more in the future.

When you should raise a Series A round is a blog post unto itself, and I’m not going to go in depth here. The truth is that there isn’t just one factor that will say you’re ready to raise Series A. For example, in SaaS, it’s common that companies that have achieved $1M ARR are told they are ready, but growth rate is a factor as well, and ARR doesn’t always apply for consumer focused businesses.

Generally the way to think about whether you are ready for a Series A is whether you’ve proven a credible value hypothesis. This is a combination of factors including...