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1:15 – Mistakes Swiss founders make repeatedly.
4:20 – How to find the right evaluation.
09:58 – How much money should an early-stage company raise?
21:47 – How should a startup team deal with an investor?
29:12 – How often does Daniel check-in with his investments?
How to fundraise as an early stage startup, by Daniel Gutenberg.
Valuation
Fundraising means putting a price tag on your company. Especially for first time founders this may not be such a straightforward process. Therefore, it may be tempting to look at the valuation of your peers for guidance. This can however lead to an unhealthy upward spiral of ever higher valuations which are completely unsustainable. Consequently, you risk for your next round to be a down round. This casts a bad light on your ability to make realistic estimations and can also be a source of serious demotivation for the founding team. Therefore, instead of going for the highest valuation possible it may be advisable to consult with a range of experienced investors on how they would value your company based on their experience.
How much money to raise
The next difficult numbers question is how much money to raise. The general wisdom here is to always raise for achieving your next milestone. This may be a beta product, a certain number of customers or similar. The milestone should be defined in a way that it will allow you to attract new investors based on it. Once you determined the amount of financial resources needed to achieve the milestone, you’ll want to raise double that, since it always takes longer to get there than you expect. Also consider that it will typically take you between 3 to 4 months to close an investment round, so the round should give you runway for at least a year or better more.
Establishing contact with investors
The best way to establish contact with potential investors is through their network or portfolio companies. Send a comprehensive business plan, covering all important areas of business such as the team, go-to-market strategy, competition, etc. Try to focus on the underlying logic rather than on the exact number of office chairs you will be buying in the next 3 years. Also try not to exceed 20 pages with the entire deck. For a first meeting, be prepared to talk about yourself and your track record. At a very early stage it is as much about you and your ability to execute as about your business idea.
Managing the process
Fundraising is like a sales process. Much of the success is based on having a broad enough funnel and a well structured process. Don’t expect your investors to manage the process for you. Be clear on the timeline and the next steps.
Structuring investors
Think about how to structure your investors. You will most likely want more than one in order to minimise risk exposure. You however also don’t want too many since this will make managing them time-consuming and cumbersome. Also beware of large numbers of „non-professional“ investors, aka friends and family. While they may be a viable source of funds, it’s important to structure their contributions in a way that their participation will not hold you back once you enter a high growth stage.
If you have a variety of investors lined up to choose from, don’t hesitate to do your own due-diligence, for example by talking to CEOs of their portfolio companies.
After the round is closed
One of the sensitive and tricky questions which often comes up after a successful fundraising round is how much the founders should now be paid. Daniel Gutenberg’s view on this is clear: „if you really believe you are building a unicorn, then investing every cent you have into it is the only logical way to go.“ This decision will likely depend very much on your personal situation, particularly if you are supporting people besides yourself, e.g. a family.
With regards to your investors, don’t be surprised if they decide to take a more hands-off approach and are not looking for an active role in the company, for example on the board. They will most likely be heavily involved again once you see an exit or similar on the horizon.
“Raise as much money as you need to accomplish your next big milestone – and then show that to as many investors as possible.”
“I invest in only 1% of the startups I look at.”
“You can only be a unicorn if you believe that you are one.”
“I only invest in people who are far more intelligent than myself.”
If you would like to listen to more conversations about fundraising, check out our episodes with Cris Grossmann and Verena Kaiser.
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