In this phase you will schedule 50+ investor calls and go into a due diligence process with 20+ of them. Your objective is to get term sheets signed asap. This typically takes 4-8 weeks, and will be a full time job for you as the CEO. Fully focus on this and delegate all other tasks to your co-founders and the team.
Opening remark: Be prepared for many "no's"
Most investors you will approach over the coming weeks will say “no”. In fact, even if you are the most successful fundraiser you will get a “no” in 90% of the upcoming discussions. This can be a new experience for some founders, especially the ones who have had brilliant (academic) careers before.
Hearing “no’s” can drain you of your energy – and even create hard feelings: “Investor XY just doesn’t f**ing get it, and I have wasted so much time with them...” We’ve been there many times. But if you’re prepared, you will be able to cope with it much better: Learn from the “no’s”, keep pushing, and eventually you will get your “yes”.
- Free up your agenda for the coming four weeks: things are gonna get intense.
- Get ready for many "no's" (By meditating? Kickboxing? Smoking medical marijuana? We’re not sure. But knowing it will happen is already very helpful.)
Get as many intros as possible
Introductions are hugely important in startup fundraising. This is unfortunate, because it’s the quality of a project that should be relevant, rather than the management’s network. The system is also problematic in terms of diversity (Guess what: white males are on average better connected to the – drum roll please – white male VC community!).
However, the culture of introductions has some rationality to it. First, investors argue that the cases introduced via their network are of much higher quality than the ones they receive via cold email. Second, they argue that if you can’t get an inroad to them you will probably not be able to build inroads to strategic partners or key employees you want to attract in the future.
So whether you like it or not, getting intros is important. If you could get strong intros to all 100 potential investors, you would most likely only be able to talk to 90 of them (assuming you’ve done your research and got the investor scope right). If you don’t have any intros, you need to expect a much lower response rate.
Here’s how to proceed:
- Share the list of 100 selected investors with your current shareholders, board members, startup CEOs, advisors and friends, and ask them to get back to you if they’re in contact with any of them.
- Reach out to colleagues who are connected to these investors on LinkedIn (you should have already checked this in the last phase).
- Reach out to startups a target investor has invested in, and ask them for advice (you are reading correctly: advice, not an intro!): A well-written LinkedIn message from CEO to CEO often works. Something like “Hi X, we are just starting our Series Y round (see deck attached for some insights). Investor Z would be a great investor for us. Would you be willing to jump on a short call and tell me about your experience with them? This would be super helpful. Thanks, [Your Name]”.
Depending on how well networked you are, you should be able to get intros to 20-50% of the investors of your long list.
Once someone agrees to make an intro, you should make it very easy for them. Write one short sentence for them to forward and send them your teaser. Your colleagues will eventually send out a message like this:
“Hi X, a colleague of mine is building startup Y (www.startup.com). They tackle problem Z and have gained a lot of traction. Attached is a short deck with some further insights. I thought this could be interesting for you. If so I am happy to make an introduction. Best, [Their Name]”
As with any intro you should do double opt-in, meaning both parties approve before making the connection.
Note: It can be helpful to have LinkedIn Premium during this phase. Get a 30 day free trial if you don’t have it.
- Get as many intros as possible.
Prepare emails for investors to whom you can’t get an intro
It will obviously not be possible for you to get an intro to all 100 investors. But with a specific, personalized email you should be able to get through to many of them even if you don’t have an intro. It should be short, and already in the first sentence make it clear that it is not a mass email. Such an email could look like this:
“Dear X,I have been following your investments in startup X and Y, and heard great things about [Your VC Company].
Our startup (www.startup.com) tackles problem Z and has gained a lot of traction. Attached is a short deck with some further insights. We are thinking about raising a Series [?] round, and feel that you would be the perfect investor. Would you be willing to jump on a short call to discuss?
Best, [Your Name]”
Obviously you should send the email to the investor’s personal email address – email@example.com is worthless. Spend a bit of time researching it if it doesn’t show up on the website or on LinkedIn. Email is typically better than a message via LinkedIn or other social media channels.
- Send customized emails to all investors to whom you can’t get an intro.
Go out, and try to schedule 50+ calls
Now that you have approached 100 investors via intro or a specific email, things start to get exciting: the first feedback begins to arrive – both positive and negative.
Write a kind email back if you get negative feedback. Don’t challenge negative answers – it usually does not make sense to argue and fight, unless there is a misunderstanding that can easily be resolved. Try to keep in contact for future financing rounds where you believe it would make sense. If the response is positive, you can schedule a call! Celebrate every positive feedback. Things are moving forward.
Make sure the first touch point is a video call, not a phone call or a meeting. While you should obviously not be rude if an investor explicitly proposes calling you on your mobile or meeting you for coffee, a video call is by far the best option.
While tools like calendly make scheduling appointments very efficient, we tend not to use them to arrange first investor calls, as this feels a bit “salesy”: investors want to feel special. So propose a few time slots (if they have not already done that), and make sure your Zoom, Microsoft Teams or Google Meet subscriptions are up and running.
Always block 30 minute calls which start at the full hour. Block the 15 minutes ahead of the call for preparation, and the 15 minutes afterwards for minutes / recap. Doing this will enable you to schedule 20-40 investor calls in one week. Try to schedule all initial calls within a two week window.
- Write a kind email response every time you get a "no".
- Arrange a video call every time you get a "yes"!
Script for first calls with investors
A 30 minute call is very short. It is a bit like speed dating – it gives both parties a good idea of whether it makes sense to spend more time together or not. While you obviously want to excite the investors and maximize chances of moving on to the next stage, eliminating parties with whom the match is not good enough is equally important. Believe us: we have spent lots of time with investors just to find out at the end that they will only close their next fund in 9 months.
So here is how to structure the 60 minute window that you have blocked in your agenda:
Preparation (15 min)
- Go through all the information you have assembled about this investor in your long list / CRM.
- Revisit the investor’s website and make sure you are up to speed regarding what they do (if it is a VC, make sure you understand the person’s position within the organization).
- Open the person’s LinkedIn page: do you have any contacts in common? Do they have a technical or a business background? Any startup experience?
- Remember your arguments for why you think they would be a great fit for your financing round.
Investor call (30 min)
Structure the call into three sections:
- Introduction (5-10 min)
- Thank them for doing the call, and tell them why you are excited about it (e.g., mention their investment in another cool startup in your space, the great feedback you have heard from person XY about them, …)
- Tell them that you have a hard stop at 30 minutes, and that you are looking forward to telling them more about your case and investment round. But before any of this, you should kindly ask them to introduce themselves.
- Make sure that the following points are covered in their intro (ask about them if not):
- Sweet spot in terms of company stage and ticket size (confirmation of your own research).
- Do they like to play an active role in investments or not? Do they typically lead the round and/or join the board? (again, this should be a confirmation of your own research).
- How many investments do they plan to make over the coming 12 months? (this provides valuable insights regarding the cash they have on hand, and the probabilities of you getting it).
- How deeply have they looked at your specific industry? (ask them explicitly whether they have looked at financing rounds of direct competitors in the past, and, if you have time, about how they see the industry evolving).
- Quickly introduce yourself, including how you got to this startup (storytelling is important here – have a compelling story for this!)
- Pitching your case (10-15 min)
- Ask them whether they want you to go through your teaser or whether they want to directly jump into questions.
- State how much you would like to raise (this is written on one of the slides). Tell them that you want to raise at a pre-money valuation of X and standard terms. This is not written on the slide, but very important to mention here! You don’t want to spend lots of time with an investor just to find out at the end that you are not on the same page in terms of valuation. If they ask what you mean with “standard terms” you will respond “1x non-participating liquidation preference, weighted average anti-dilution, and other terms that they would expect in such a round”. Sounds good, right? It’s great that you’ve thought about that stuff on your own term sheet. Investors will feel that you know what you are talking about.
- Last but not least, tell them why you think they would make great investors of your startup. This shows them that you have done your homework, and know what you want.
- Discussing next steps (5-10 min)
- Now is the time to ask them about some initial feedback: What do they think about your case? Hopefully they like it! If they have concerns, you can directly address these with them, or get back to them after the call with further insights.If positive: Discuss the next steps to fully understand the process going forward (next steps, milestones, typical timeline until final investment decision). Also find out whether they would be interested in taking the lead.
- If they need additional information (which is usually the case if they are interested): Propose sending them your long deck / information memorandum, and depending on the questions they have, also offer open access to your data room. Ask whether it would be ok for them to sign an NDA.
- Explicitly agree on the immediate next steps: E.g., “You will get our information memorandum later today. Until when can I expect to get feedback from you?”
Write up / to do's (15 min)
- Summarize/structure the notes you took during the call. This should not take more than 5 minutes, but it is crucial to do it!
- To do’s coming out of the call: Ideally you can do this directly right now (e.g., sending out an NDA or the information memorandum). If work is needed (e.g., adding one more slide to your information memorandum with insights they specifically asked about) you may need to leave this for later.
- Duration of the first call: Sometimes calls can take longer than expected – especially if it is a good call. Having said this, don’t worry about stopping the meeting after 30 minutes and telling the investor you need to run to another meeting. This makes you look in control of your busy schedule, which is positively seen. You can always schedule another call if needed.
- Speed of execution: If you promise investors additional documents or insights it is crucial that you send them over asap. 24 hours is expected, if it is substantial work max 48 hours. Speed of execution is crucial for an investor’s decision process.
- Start doing investor calls - you will soon be an expert at pitching your round!
From the first call to a signed term sheet
The process from a first call to a signed term sheet can differ substantially from investor to investor. Many elements play a role in it, with trust being the most important one: If a successful serial entrepreneur calls his former investor, it may take as little as a phone call to get a signed term sheet. Most often things are a bit more complicated, and investors start conducting due diligence.
The due diligence process can take anything from a few days to a gazillion years. In many cases it lasts until you tell the investor that you are about to close the round, and that they need to take a decision within X days.
So why not just tell them that you are about to close independently of whether this is true or not? Nice try. But this can go terribly wrong if you are not able to walk the talk. And it can quickly break trust, the key currency of startup financing. So we don’t recommend doing this as long as you don’t feel confident that you really are able to close it. Signed term sheets are needed for this. We will discuss in the next phase how to play this out.
How about telling them that you need their feedback until date X? Setting a specific date can backfire. If you don’t have enough commitments until the communicated date, investors will feel that you are not able to execute according to plan. So be very careful with this. Rather than giving them a date, we recommend saying “we are just starting out but want to close this round as soon as possible”.
Lead investors vs non-lead
Conventional theory goes that you fully focus on lead investors first, and that once you have one, you fill the round with others.
While this sounds straightforward, things are a bit more complicated. First, many investors are willing to take the lead or also co-invest with others. Second, the more commitments you have from investors who want to participate, the easier it will be to find a lead investor – and accelerate the timeline.
So it is important to ask all the investors in the first call whether they would take the lead in the round. “Taking the lead” typically means that they will make a substantial investment (at least 30% of the total round), take a key role in the due diligence process (often providing a DD report that is available for all investors), lead the final contract negotiation, and join the board.
While both lead and non-lead investors will want to do their due diligence before making any decisions, the process differs a bit:
- Lead investors: They will typically propose a term sheet at the end of the first part of their due diligence. So don’t send them the version you have prepared in Phase 5. Having said this, the investor will most probably ask you about some key terms you are foreseeing (after all, you already told them in the first call what kind of pre-money valuation you are expecting, and that you want “standard terms”). Bring these points up as you move along, or potentially even send them your version of the term sheet. But if you do, tell them that you have elaborated this version for the discussion within your team, the board, and existing shareholders. Eliminate the signature page at the back of the document and write “Initial proposal for discussion with investor X”.
- Non-lead: You can tell them that you are in discussion with various potential lead investors. Tell them that based on the latest discussions the terms should be in line with the document you are going to send them. Send them your own term sheet early on in the process. Much better to find out early on if they take issue with anything written there – and obviously it’s great if they finally sign it!
As described in Phase 5
, the term sheet should not be a magical document. The size of the round is a strong indicator for valuation (experienced early stage investors know that investors will get around 20% of the company). All other terms should be as simple and standard as possible; this is in the very best interest of everyone.
Efficient management of the DD process
Considering you are talking to many potential investors, it is crucial that you manage the due diligence process efficiently. You don’t have time to discuss every aspect of your business personally with each investor.
Fortunately you prepared for this in Phase 5
: you have a solid information memorandum and data room in place, which should answer pretty much all questions investors will have. These two things will be the working horses for the weeks to come.
Here are the key points to handle the process efficiently:
- Do as much as possible via IM and data room: Investors often ask specific questions during the first call and the upcoming process – things like where they can get further insights. This could be your attrition, the split of your sales channels, or your go-to-market plan for a specific market segment. Some of these things you may have already covered in your information memorandum or in the data room – great! For other questions you will want to create a new slide or upload a new document to the data room. It is up to you whether you add a specific slide to the information memorandum master presentation or not. But make sure you keep these slides handy, as five other investors will probably ask you for the same thing over the coming weeks.
- Do well prepared calls, prevent meetings: Any physical meeting has the tendency to take at least one hour, often even more. Fortunately video calls have become an accepted alternative – and contrary to what happens with conventional phone calls, it is possible to connect also on an emotional level via a video call. So go for well prepared video calls as often as possible. Have a clear agenda in any meeting, send preparation document(s) upfront, and explicitly agree on “to do’s” for both sides. Note: one physical meeting per investor may be ok if this is pushed from the investor’s side. You would ideally arrange this as a last step before signing a term sheet. Try to have them come to your own office, as this is more efficient (more traditional investors will want to see your office and “feel the spirit” before making a final decision).
- When should you introduce other team members? Some investors will want to get to know the key persons in your team before signing a term sheet. This makes sense – especially in the early phase, where there are little further proof points beyond the team. Having said this, you want to be very protective of your teams’ time. If possible, try to push this to the very end of the process, as a final step before signing the term sheet. And try to do it via video call rather than a meeting, with explicitly defined questions ahead of the call so your colleagues are well prepared and confirm the good impression the investor already has.
- Provide good news, and build a relationship with key people: You brainstormed a pipeline of good news in Phase 5. Now is the time to play this out. A short message to investors who are in DD with news such as “Hi X, we just reached a new daily revenue record yesterday! USD xxx. Hope your internal discussions are advancing well. Best, [Your Name” can be invaluable. Plus, doing short calls with them every once in a while is great to build trust and be close to their internal process. They should become fully convinced that you are building a great company!
- How should you handle investors who constantly keep you busy but don’t move forward? This has probably happened to every experienced fundraiser - investors who keep using your time, asking for endless calls and documents, but despite this don’t ever seem to come to any conclusion. Ultimately, the best thing to do in this situation is to feel confident that you can close the round based on signed term sheets from other investors (see next phase). If this is not the case, you should ask very specifically about their decision timeline: What do they need to make their decision? If they don’t move forward with tangible actions (e.g., signing an NDA, getting an internal approval, signing a non-binding term sheet, …) you should put them on the backburner. Be nice, but don’t spend more time with them until you are about to close the round. This is when you can send them the final information, e.g. asking them to make a decision within a week (you will be surprised how super slow investors can suddenly speed things up once FOMO kicks in).
- How should you handle investors who are very slow and unreactive? Many investors will not give you a clear “no”, but rather tell you that it sounds interesting, and that they will discuss it internally and get back to you. After this you will not hear from them for what seems like an endless amount of time. If you reach out, they will tell you something fuzzy like “we are interested but it will take some more time for us to make a decision”, “we are swamped due to various other investment cases but will try to get back to you asap”, or something similar. Interpret this as a “no”. You do want to keep the line open, because in case you get a great lead investor or are about to close, they will likely still jump on board — but for the time being, you should not spend much time with them.
The role of NDAs
We don’t believe much in the legal value of an NDA, but much more so in its symbolic value. After you’ve sent out your pitch deck and done a first call with investors, they will most likely ask for additional information. You would typically provide this in the form of your investment memorandum. Some may ask about specific information which is in your data room, such as clinical evaluation reports, a pricing research report, the current shareholders agreement, cap table, or other things which you may not want to hand out freely.
This is where the NDA comes in. In the course of this process you will want to ask the investor whether it is ok for them to sign one. While you should feel more relaxed about this if you’re talking to a brand-name US VC, you may not want to move forward when talking to VCs with whom your level of confidence is lower.
While it is best to use the NDA you prepared in Phase 5, it’s also ok to use the investor’s version.
Are you getting enough calls?
Do a first review about 2-3 weeks after going out to investors. Check how many calls you have done/scheduled with investors so far:
Less than 20
Something seems to be fundamentally wrong. Are there any issues in your business – not enough traction, incomplete team, unattractive market, bad product reviews…? If not, is your teaser not compelling enough? Were you lacking intros (check the feedback rate for the accounts to which you had intros), or the cold email you sent out not specific enough? In any case, it is important to take a step back and analyze what is going wrong.
Not bad – your case seems to find interest! Having said this, it is important to further fill your pipeline. There are three things you must do:
- 2nd outreach: Send a reminder to the investors who have not responded so far. This should not seem desperate. Write a message like this: “Dear X, We kicked off our Series ? round two weeks ago and are seeing a lot of traction. Based on your investments into company Y and Z – and the number of positive things we have read about you – we feel that you would be a perfect investor for our case. That’s why we’re prepared to fight for your attention. Would you be willing to jump on a short call with me? Please find the latest teaser attached to this email. Looking forward to hearing from you, [Your Name]”. In case of VCs with various people who could be relevant you may also want to write to another person.
- Add additional investors: Check which investor categories have responded well: Is it VCs? Family offices? Corporate VCs? Go back to your initial long list and include additional accounts in your outreach, with a focus on the categories that seem to be interested in your case.
More than 50
Great! You are on track to get funded soon.
- Check how many investor calls you have been able to schedule, and their investor category (such as "business angel", "VC", etc...).
Are enough parties going into DD?
The second review concerns the rate of investors that move from a first call into due diligence:
Less than 10
Considering you’ve done 50 calls, it is an issue if only 10 are moving into DD. Analyze why this is the case: you have probably gotten feedback from some of them on why they are not moving forward. If you haven’t, reach out to some of these parties and try to understand them. Write an email along these lines:
“Hi X, Thanks for the call and your feedback. We are obviously very disappointed that you have decided not to move forward, but of course fully respect this decision. Having said this, it would be super helpful for us to get (brutally honest) feedback from you: would it be possible to jump on a 10 minute call over the coming days to get your feedback and learn from it? Best, [Your Name]”
Learn from the feedback and try to eliminate the issues. Moving forward without making any changes is highly risky.
Not bad, but we would very much like to see more than 20 parties here. Try to analyze the reasoning of investors who decide to pass. Depending on the feedback, you may adapt your investor pitch and/or add additional investors to your pipeline.
More than 20
Great! Keep pushing hard and you will soon get a first signed term sheet.
- Check how many investors have moved forward to DD.