5 Things Founders Should Know Before Raising Venture Capital

October 6, 2017

Venture capital is a tough game. Venture capitalists are expected to be conservative in their investments and say no to over 95% of the startups that even get the chance to speak to them. Fundraising can seem like a complex and intimidating process, and it is. Ironically, most founders trying to raise venture capital set themselves up for failure before they even give their pitch.

If more entrepreneurs knew about the pitfalls to avoid and how to prepare for fundraising, more founders would succeed at raising money. Here, we’ll explore 5 things founders should know before raising a dollar of venture capital.

Don’t Raise Too Early

In the land of startups, it’s easy to fall into the trap of thinking that you should raise venture capital ASAP. Many first-time founders try fundraising way too soon and attempt to approach the “big dogs” before they even have proof of concept or an MVP (minimum viable product). After spending some time trying to get VC’s to take them seriously, these founders realize that they need some form of traction before a reputable VC firm will take them seriously. Don’t be like them.

Get some traction before you even think about raising venture capital. If your R&D costs aren’t high, spend a couple months building your product, getting users, and proving that people want what you’re working on. Put in the sweat equity. In summary, before you focus on raising a seed round, focus on getting your first couple of paying customers or first thousand users.

Be Prepared For Dilution

With successful people like Mark Zuckerberg retaining 25% (or more) of their company at their startup’s IPO, founders are inspired to be protective of their equity. The problem with this is that rookies think of equity dilution the wrong way. It’s true that as a startup closes more rounds of funding, dilution slowly decreases the founders’ equity and they gradually own a smaller portion of the company.

Simultaneously, a company’s valuation increases as the founder’s equity decreases. Essentially, instead of having a large piece of a bite-sized pie, as a company grows, founders get a small piece of a pie that’s getting bigger and bigger. Owning 15% of a 100-inch pie is better than owning 100% of a 1-inch pie. If startup founders want to raise venture capital, they should expect equity to inevitably decrease when they raise.

Remember That It Takes Time

Fundraising isn’t only difficult, but it takes a lot of time. If you’re part of a small team (and you probably are), the founders will need to fundraise themselves. This is how it should be anyway. Running a startup is already a lot like trying to save a sinking ship and with a small team of 2-4 people, it’s especially difficult for one founder to transition from sales or product development to focus solely on fundraising.

To make raising venture capital even more difficult, closing a round of seed funding at the very least will take a a couple of months. Depending on the nature of your startup, how far along you are, how much you’re raising, and a few other variables, closing a round of funding could take over a year.

Details Matter

Startups tend to have very little structure at first. Although this is totally fine for most things at the early stages, fundraising intentions should be clear-and-cut at the beginning. When you’re bootstrapped and you’re using your own money, you can do whatever you want and lack external clarity is less important. All of that changes when you decide to take someone else’s money to grow your startup.

If you want to be taken seriously, it’s important that you’re able to communicate exactly why you’re raising money, how much money you’re raising, what you’ll do with that money, how long that money will last you, etc. Make the rough financial projections, learn the lingo, and figure out exactly what you need before knocking on a VC’s door.

Don’t Try To Get Investors To Sign an NDA

If you try to get an investor to sign an NDA for you, expect a reaction like this one.

Just don’t do it. Unless you’ve engineered a revolutionary piece of technology that’s actually a breakthrough in a particular industry, no investor in the world will sign your NDA. Instead, they will end the meeting early and send you on your way. Ideas are a dime-a-dozen and if the investor you’re speaking to is really experienced, they’ve probably heard of a similar idea before. On top of that, it’s considered disrespectful to expect an investor to sign an NDA.

Startup success is based on execution of an idea, not the idea itself. Raising a round of financing is not easy. There are a lot of factors to keep track of, while at the same time, you need to make sure your company doesn’t run out of money. But if you know and understand these 5 things about raising venture capital, it may be just a little easier for you. Good luck!

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