In this phase we will build a long list of 100 potential investors. 100? Really??
Yes, really. We will start with a sad intro story, analyze the position of investors, and then start the work. And in upcoming phases make sure that you can efficiently handle the process despite the high number of contact points.
This phase is a lot of research work and sweat, but if you push hard you can get it done within 1 week. As always, considering that as a CEO this will not be the only thing on your plate.
A short, sad intro story: How average founders raise money
This is a story we see all the time. In fact, this may be how average tech founders across the world approach fundraising:
A team has a great business idea and decides to raise some money to accelerate progress. They approach a few parties (the uncle of a friend who is a rich businessman, the local VC who was introduced by an advisor, and a few more characters). First discussions look very promising, with some of the investors telling them that they are “highly interested in this case”. However, months of tedious discussions follow – and after six months the last of the potential investors tells them that “despite seeing huge potential he unfortunately needs to pass”. Team morale is down, and some decide to accept the job offer of an established company. After all, everybody in the team is well qualified and has options.
Without meaning to, the founder/CEO has just killed her startup. And what’s worse is that it was completely unnecessary.
Understanding investors: “Wait and see” is often the best option
Let’s change perspective, and analyze the situation of an investor:
Her pipeline is full, with 100 cases currently in early stage evaluation. Eliminating cases that are not of interest is relatively easy: in some cases the product does not look promising, the market is too small, the team not really convincing, and there’s not enough traction.
After having eliminated 70% of cases, the hard work starts: getting involved with the team and the business case to ultimately make an investment decision. While analytical factors remain relevant, psychology becomes equally important. Two factors play a key role: firstly no investor wants to make an investment that in hindsight seems stupid. Secondly, nobody wants to miss the next unicorn.
So the process works as follows: interested investors will keep asking you questions and follow the progress of your company until they are forced to make a decision. This is the case once you have enough signed term sheets to credibly tell them that you are about to close the round.
This may be a bit simplified, but it’s not far from the truth. In many cases we received endless questions from investors – there is always one more thing to check, one more expert to talk to, one more document to work out.
While this may seem irrational, it’s actually not: the speed and excitement you can create around a financing round and the interest of other investors is a good indicator of a startup’s future success.
Here are the three take-aways for founders:
- Make sure your teaser is good enough to enter into discussion with the investors. Phase 5 described how to do this.
- Once doors are open, you want to create excitement, speed, and show that investors need to be fast if they don’t want to risk being left out. We will talk much more about this in Phase 7 and 8.
- Once doors are open to build such traction, you will need to talk to many investors. Similar to B2B sales, fundraising is a numbers game. You want to create excitement, speed, and show that investors need to be fast if they don’t want to risk being left out. We will talk much more about this in Phase 7 and 8.
Clearly, talking to a few potential investors only will not be enough. The next steps will tell you how to build a long list and make sure that the right parties are on it.
Which investor categories fit best?
Before creating your long list you want to evaluate which investor classes are the best for your upcoming round. At the end of this subchapter there is a survey which helps you establish the right mix. Here is a short overview for you to fully understand each category:
Family, friends, and fools (FFF)
- Explanation: As suggested by the name, these are people from your personal network. You may be able to raise a few thousand, maybe a few hundred thousand dollars from them (unless your father is a sheikh or Mark Zuckerberg). It is thus only an option in very early financing rounds.
- Pros: There is mutual trust, which may simplify formalities and shorten timeline.
- Cons: Mixing private and business can lead to ugly situations if things go wrong.
- Recommendation: Only raise from FFF if A) the other person knows that things may not work out as planned; B) you don’t endanger family/friendships (envision a meeting where you are going to tell an F that your business is failing – this should feel ok); and C) if your relationship is stable (the husband of your sister can create trouble if they get divorced, and so can the “Fool” who invests euphorically after a few beers). If you fully understand these points, it is ok to raise from FFF.
Business Angels (BA)
- Explanation: BAs are private persons who invest part of their wealth into startups. There is a broad spectrum of business angels – from the middle manager of a bank who passively invests USD 20k into a startup every few years, up to the Chinese unicorn founder who invests into dozens of startups and supports them actively on their growth path. Having said this, business angels are typically relevant in (pre-) seed rounds, if a few hundred thousand USD up to a low seven digit investment is needed.
- Pros: Business angels can be your most helpful supporters for building your startup – even more helpful than the most renowned VC. In fact, the abundance of savvy business angels may be the key reason that ecosystems such as Silicon Valley or Shenzhen have become so successful. Think about it: Do you think having Elon Musk as a private investor in your seed round would help you find other investors in later rounds? Attract great talent? Open doors to strategic partners? Exactly.
- Cons: Just as business angels can be the most helpful investors, they can also be the worst. They can be choleric, make irrational decisions in future rounds, get involved on an operational level or make your life as CEO difficult in other ways.
- Recommendation: Getting business angels into your company in early rounds is a big “go”. However, it is crucial to do your own due diligence on them – and don’t be afraid to say no if you have a bad gut feeling. Getting the round oversubscribed is crucial to do this: we will make this happen over the coming phases …
- Explanation: The difference between family offices and business angels can be blurry. To take the example from above – unless you are the cousin of Mark Zuckerberg, he would most likely refer you to his family office. People who are worth more than one billion USD typically have one. Having a family office changes dynamics: While the owner still makes the final call, there will be a professional team analyzing your case. The role of the owner can vary strongly: Some family offices do little more than paperwork, others work like a full-fledged private equity company, with the owner only being involved in strategy.
- Pros: Family offices can be great startup investors. They can be super visionary and loyal, especially if they are emotionally involved and like what you are doing. Last but not least, some family offices have the financial means to follow up in subsequent rounds up to an IPO.
- Cons: The big advantage of family offices – loyalty and emotional attachment – can also play out the other way out. In case trust is lost, a family office can let you down, even if this is irrational from a pure financial perspective. Besides, family offices are notoriously difficult to find; some of them don’t even have a website. So getting access to the right people can be challenging.
- Recommendation: Selected family offices should be on your long list – whether you are in (pre-) seed stage or in later stage.
- Explanation: Equity crowdfunding has become a big thing over the last decade. While investments in tech startups used to be an option for wealthy people only, it is now possible to invest as little as 10 dollars into startups. There is a wealth of platforms allowing tech startups to raise money on their platforms (see the most important ones here). Startups typically raise a few hundred thousand dollars via equity crowdfunding, or at best a few million. There is usually a success fee of 3-8% of the money raised (paid either by the startup and/or the investors).
- Pros: Equity crowdfunding can make fundraising much more efficient. If the uploaded documents are great it is usually possible to fill the round without any further work. An automated process with predefined timelines is able to manage the entire diligence process up to closing. Plus, you will get hundreds or even thousands of ambassadors – people who directly or indirectly (behind a legal construct) become shareholders of your company.
- Cons: “Fundraising at the push of a button” sounds fantastic. Unfortunately things are a bit more complicated. First, you will need to pass due diligence of the crowd equity platform. While this is easy on some platforms, others are as selective as VCs. Once you are approved, you will need to work out great documents and marketing assets, bring in your own investors to get initial traction, and execute a great campaign throughout the duration of the fundraising to make it happen. Once the money is on your account you will need to keep investors updated and happy, which is easy if things go well but not so easy in challenging phases. Last but not least, be aware that you will become a “semi-public” company – with chances being that your quarterly reports will be shown directly or indirectly to anyone interested, including competitors.
- Recommendation: If you are doing a seed-round – and especially if you are in the consumer space – you should have crowd equity platforms on your radar. Especially in the US, Israel and a few European countries there are established platforms that can be attractive for startups. Make sure that you already have commitments of 20-50% of your funding target to create traction and buzz within the first 24 hours after the case is launched.
Venture Capital (VC)
- Explanation: VCs are the most important players in startup financing. Based on a long tradition in Silicon Valley, they spread around the world over the last few decades. They are positioned between business angels who finance the very first phase of startups and Private Equity companies which come in once a company generates substantial revenues and starts to get profitable. Typical VCs will invest from a few million to a few ten million USD over the lifetime of a startup. Thanks to massive funds raised, some of the big VCs can keep participating in funding rounds up to IPO.
- Pros: VCs can be invaluable partners of a startup. Most are founder-friendly, reliable and supportive. They frequently take board seats, open their networks and provide support in strategy, recruiting and fundraising.
- Cons: While being rational, VCs can also be tough. If things don’t go according to plan there will be pressure to enact management changes up to replacement of the CEO.
- Recommendation: Unless you raise less than USD 500k or more than USD 100m you will want to have VCs in your long list.
Corporate VC (CVC)
- Explanation: Unlike traditional VCs, which typically get their money from third parties such as pension funds, a CVCs belongs to a (large) corporate. The healthcare industry especially has a long tradition of CVCs, ever since pharmaceutical companies realized that investing into biotech startups can create substantial overall value. This has become mainstream; many of today’s multinational companies have a venture arm. Some focus on strategic investments into startups they want to acquire at a later stage, others focus on financial returns and tick in a way similar to traditional VCs.
- Pros: An investment by a CVC can bring great credibility. Say you are a tech company and Samsung Ventures invests in you – this would show the world that your technology has big potential, right? Plus, an investment from a CVC may create the possibility of an attractive cooperation with the CVCs mother company.
- Cons: While an investment by a CVC may open certain doors, it can also block others. To stay with the previous example: do you think Apple or Huawei would want to work with you if Samsung Ventures owned a good part of your startup? A CVC could block a future exit – especially if they have a major stake and/or right of first refusal.
- Recommendation: In some industries (such as biotech) there are many highly experienced CVCs, with a history of fruitful cooperations and established terms that will accelerate rather than block companies. In other industries you will need to think hard whether there is more to lose than to win if you get a strategic investor on board. Having said this, we feel that adding CVCs to your investor long list often makes sense: starting the discussion can help you understand the incumbents’ thinking, priorities and key people. There is not much to lose – if you have other parties who want to invest, you’ll still be able to decide. And if the CVC is the only party who wants to invest, you will be happy to have started the discussion in the first place.
Private Equity (PE)
- Explanation: Any company that is not quoted on a stock exchange belongs to PE. However, while VCs focus on startup companies, traditional PE companies only start to care about startups once they reach substantial revenues (USD 10m or so, at the very least) and start to become profitable – or at least have a profitable core business.
- Pros: PE companies can enable massive financing rounds – in some cases enlarged with debt. This can create big growth opportunities, including options to acquire other companies.
- Cons: Private equity companies typically want to see fast growth and a clear path to exit – which can be a trade sale or an IPO. Even more so than VCs, they will take harsh measures if execution is not according to plan.
- Recommendation: You should only consider talking to PE companies if you have more than USD 10m of revenues and a profitable core business. It is possible to make use of some creativity regarding the “profitable core business” – investment bankers will know how to position your company in a way that makes it look investable to PE companies.
Depending on what you do, there may be additional categories – e.g., impact investors (a growing field of investors who strongly focus on the social/environmental impact of their investments), sovereign wealth funds (assets owned by a state, aiming to reach long-term value in strategic sectors), and others. However, these can be viewed as subsegments of VCs or PEs with some special characteristics.
- Decide which investor categories you will exclude from your long list, and prioritize the ones included.
Choose a tool to manage investors
You will soon have a list of 100+ investors, and will need to document calls, to do’s, and to move investors from one stage to the next.
There are different ways of doing this: if the fundraising is done by a single person, a Google Sheet or Excel may be enough. Here's a template
for how you can structure this.
The downloadable list has the following columns:
- Category: FFF, business angel, VC, etc
- Name of investor: Directly link this to their website
- Industry match: Check whether the investor lists your business segment on the website, and/or whether they have done investments into similar companies.
- Investment stage match: Let’s assume you are planning to do your Series A Round. If they only do seed investments, there is no match – and no reason to contact them for now.
- Geography match: Let’s assume you are a startup in Canada. Again, you want to make sure that this is in the scope written on the website, and/or that they have done investments in Canada before.
- Potential investment: Let’s assume that you want to conduct a USD 10m Series A. Write down in this column how much an investor could bring to the round. If they say they only do co-investments, it would be USD 5m. Some investors may like to participate in A Rounds but only be able to invest USD 1m – enter this amount.
- Stage: This is an important column, as it shows where in the process you are with an investor. You will find stage 0-7 in the template, with explanations on the top row for what each stage means. While you can adapt the exact description of the stages, it is important that you have a good overview of where you stand with each investor.
- Intro: Write down whether you know someone who can make an introduction to this investor. It is ok to leave this open for now – we will address this in detail in the next phase.
- Next steps: Write in a short remark – also ok to manage this in your personal to do list.
- Write-ups: Most entrepreneurs hate to do this, but it is crucial to keep the overview. Take 5-10 minutes after every call/meeting to write down the most important points of the discussions incl. to do’s and next steps. You will soon do hundreds of investor calls – and unless you have the memory of an elephant, you’ll be very happy if you can quickly check what was discussed in previous calls. This is also helpful for future fundraising rounds, where you will use the same list as a basis. Let’s assume an investor passes on the current round because they would like to see more traction – it would be perfect to get back to them in two years and refer to this.
If several people are involved in the fundraising effort, you may want to use a more sophisticated tool than an Excel or Google spreadsheet. Integration of emails and the efficient scheduling of tasks and calendar entries may come handy. If you don’t already have a CRM system you might wanna check out the following solutions:
- FounderSuite: Helpful tool, includes a (US-focused) investor database
- Gust: Similar to FounderSuite, includes a (US-focused) investor database
- Eldorado: Similar to Gust and FounderSuite, includes a (France-focused) investor database
- Pepicon: As above, includes a (Sweden-focused) investor database
- Streak: CRM for fundraising (and other activities), integrated into Gmail
While SaaS software obviously has low entry barriers, you want to make sure that you select a tool that you will keep using for years and over several financing rounds. We ourselves got off to a euphoric start with SalesForce and other sophisticated CRM tools in the past only to discover that a simple spreadsheet, consistently used, does the job just as well. So think about what is right for you, and then make an informed decision. Stick with it over time, as any future migration can be quite painful.
- Decide with what tool you will manage your investor long list.
Build a long list and pre-classify each investor
Now that you have a tool and understand the different investor categories it is time to start filling in your long list. Below are some tips to kickstart this process. But before starting we would like to make two important remarks:
- Geographic scope: While later stage financing becomes a global game, early stage financing ticks differently. It typically does not make sense to approach US investors if you are a European company looking to do a Seed Round (unless you’re including US investors who have invested in European seed rounds before). Similarly, it does not make sense for a US early stage company to spend time with Asian investors – again, except if they have a proven investment history. Pre-covid we would even have said you should focus on your own city or region in early stage financing. With video calls becoming the standard for the investment process this requirement has been softened very much.
- Efficiency: Considering that there are hundreds of thousands of investors around the world – and you could easily spend hours of research on each of them – you can get completely lost in this process. So your objective is to build a first quick and dirty version. All you do is fill in the name and website on your spreadsheet/CRM, and do a first short analysis on whether you see a match in terms of industry, investment stage and geography (classify each column with “high”, “medium” and “low” – this will make your life much easier in the next step). Don’t take more than a few minutes per investor at this stage, as it is very well possible that your list will be hundreds of rows long at the end of this step. We will discuss afterwards how to boil it down to around 100.
So here is a step by step guide on how to build a great long list:
- Get an existing long list: This is a great kickstart – getting the long list of another startup that is in a similar space. Ask board members, existing investors, advisors, coaches or friends whether they have a long list (of a non-competitive startup) they’d be willing to share. Obviously this is a give and take situation – if you are considered a selfish person, you will not get anything, and if you have a track record of supporting others, you probably will. Note: Some people may not feel comfortable sharing a long list, but can provide the names of specific investors you should talk to – this is obviously relevant as well.
- Crunchbase: This may be the most helpful database for finding early stage investors. Search for 20 startups which are in your space and geography but not directly competitive. Check out what investors they have and add the relevant ones to your list.
- Strategic investors: In case you have not ruled this out, you should analyze the 10 most important established companies in your space. Do they have a VC arm? Have they made any direct investments? Research the key owners of these companies (there are often families, PE companies, or interesting individuals behind them, whether the company is public or private): Are they making any investments? If you talk to industry insiders they will be able to answer many of these questions.
- M&A deals: Analyze the 10 biggest M&A deals in your specific industry in the last decade: Some people (founders, shareholders, investors) will have earned lots of money in these transactions. Research who it was – and your list will be 10-50 rows longer with lots of people who have the money for an investment and know your industry inside out.
- Go through key databases: Soon we’ll provide you with key investor databases that provide open access to investors. Once they're available, you’ll find them here.
- Google research: Last but not least, you may want to finalize your long list creation with some Google research. Depending on where and in which industry you are, you will find some very specific investor lists. Check for startup events in your geography and industry – they often provide lists of dozens of investors attending. Also relevant are local startup organizations, government innovation agencies and investor associations.
At the end of this process you should have a list that is significantly longer than 100 investors.
- Build a long list with (quick and dirty) pre-qualified investors.
Select the 100 best matching investors
You will now have a list with (much) more than 100 investors. It is critical to boil it down now to around 100. Approaching 100 pre-qualified investors with a specific email and/or a warm intro will result in much more traction than sending a non-specific mass email to 300 investors.
So how do you select the 100 most promising investors?
- Select all investors for whom the industry, investment stage and geography match is “high” (see description in last step, and long list template columns C-E). If your list is great, you will have a few dozen investors here whom you should definitely approach. Take 10 minutes for each of these investors: you will want to replace the “high/medium/low” rating with info on other comparable companies they have invested in. Check their LinkedIn page: do you have any 1st level contacts you could directly approach? If not (which is typically the case): Are there any 2nd level contacts that you would feel comfortable asking for an intro to? Fill out this info in the “Intro” column (but don’t go around asking for intros just yet).
- Slowly open up your selection criteria: Change the filter on one of the columns (industry, investment stage or geography match) from “high” to “medium” and continue the research. Do the same as in step 1 – further research and checking for potential intros. Prioritize investors to whom you may get an intro over ones with whom this is less likely.
- Iterate: Continue with step 2 until you have a list of around 100 investors who you feel confident will be interested in your company.
Note: The investment scope of VCs, CVCs and PEs is usually transparently described on their website. Business angels and Family Offices are much more difficult to reach. So you often compare apples with oranges on this list. Make sure all the categories you selected in are represented on your long list. If you see that one of them categories reacts very positively to your pitch, you may add additional investors of this category in the next phase.
- Work on your list until you have a solid version with around 100 pre-qualified investors.