Filling Your Fundraising Funnel
In last week’s post, I shared a template for setting up the perfect fundraising CRM.
This week, I’ll walk through how to fill your fundraising funnel and put yourself in the best starting position for success.
The Basics of Herding Cats VCs
Fundraising is far more of a science than many people realize. It’s been nearly 20 years since the tech accelerator went mainstream — first with Y Combinator and then Techstars a year later. Today, we have nearly two decades of data and iteration around fundraising best practices. While there may be slight nuances between different approaches (e.g. YC’s emphasis on “the coffee meeting”), by-and-large the process for raising major VC funding rounds is well understood.
The objective of fundraising is (obviously) to raise capital. But taking it a level deeper, the goal as a founder is to run an effective, efficient fundraising process. Get the money in the bank and get back to work.
What does that mean in practice?
It means that you’re trying to move as many investors as you possibly can through your funnel at roughly the same pace.
Believe it or not, if your company is compelling to investors* and you run a strong process, you should expect to receive multiple term sheets (the famous “over-subscribed round”). And if your company isn’t compelling to investors — for whatever reason — having more investors in the mix means more feedback (more data points). Getting more feedback in a shorter timespan makes it easier for you to identify what the issues are and course-correct.
* Note: I will not dive into what makes a company compelling to investors in this post
I’ve personally helped hundreds of founders raise Pre-Seed, Seed, Series A and Series B rounds (plus raised a few myself) and it’s not actually that difficult for founders of strong startups to solicit multiple competing term sheets. The difference between a strong finish and limping along usually boils down to how much preparation they did before taking their first meeting.
In fact, whenever I meet a founder who is struggling with their fundraising process, the root cause is almost always a lack of preparation.
What Does it Mean to Prepare?
When getting ready to fundraise, the majority of founders focus their efforts almost exclusively on their pitch.
Don’t get me wrong, that’s absolutely essential. In fact, in my experience it takes 2 - 3 months of iteration for most founders to get their story straight (but I’ll leave that for future blog post). The problem is, many founders dedicate an incredible amount of effort to perfecting their pitch and almost none to identifying potential investors.
What good is a perfect pitch if you have no one to deliver it to?
Let’s start with some rules of thumb:
Before you send a single email or take your first call, you should have a fully-researched pipeline CRM with a minimum number of qualified target investors:
Pre-Seed: 100 – 150 qualified target investors (a mix of angel investors and VCs)
Seed: 80 – 100 qualified target investors (mostly VCs)
Series A: 60 – 80 qualified target investors (all VCs)
Series B: 40 – 60 qualified target investors (all VCs)
What is a “qualified target investor”?
I can’t tell you how many times a founder has shared their target pipeline with me and it’s been immediately apparent that 50% or more of the investors they’ve listed don’t invest at their stage.
For first-time founders (particularly those without prior experience in startups), it can be incredibly difficult to figure out which VCs are appropriate for them — especially with multi-stage funds moving towards earlier stages. As a result, many just head to Crunchbase and download a list of the “top” investors and throw them into their spreadsheet (kind of like when high school students apply to college based entirely on those annual “top school” rankings).
Aside from wasting time on meetings that will never go anywhere, once all of the “not qualified” investors are removed from the pipeline, the result is a funnel that’s way too small. For example, if you’re trying to raise a Seed round and 40 of the 80 investors in your CRM only invest at Series B or later, you’ll quickly find that you’re not talking to enough investors. This will leave you scrambling to fill the funnel mid-process, causing you to lose momentum.
Qualified Target Investor = an investor who has previously invested in companies of your (i) stage, (ii) industry and (iii) geography
What is a “fully-researched pipeline”?
The template I shared last week for the perfect fundraising CRM?
You need to fill in every single column (except for typical check size) for every single qualified target investor before you send your first outreach email.
The data you fill in will inform your fundraising strategy from the moment you start, so it’s essential that you do this work beforehand. Here are some sources you can use:
Investor website: location, target partner, similar investments, competitive investments, investment stage, typical check size (sometimes), fund size
Crunchbase: location, investment stage, fund size
LinkedIn: target partner (VCs will often list the deals they led on their LinkedIn profile), potential introducers (mutual connections)
If you’re doing this right, you can expect to spend 10-20 minutes per firm on research, which means 10 – 20 hours (or more) to populate your fully-researched pipeline.
That’s a lot of time. I know.
But I promise you that it will pay dividends when it comes to running a high velocity fundraising process (which is what you want to do).
The secret? You don’t have to wait until just before you start your fundraising to do this. Create your CRM early and fill in the names of potential investors as you learn about them. (You can also have someone junior help with the research, though in my experience there’s value in the founders doing it themselves.)
Do I really need that many target investors?
For 99% of startups, yes.
Just like with first dates, most investor interactions will end after the first meeting. Not because of anything inherently bad, but because it’s just not a match. The investor might not like the space, they might have already made a similar or competing investment (or have been burned by one in the past), or they might simply (and unfortunately) be distracted that day.
Fundraising is a numbers game. If you assume — without judgement — that the majority of investor meetings will end in a “no”, then you should understand why it’s essential to fill your funnel to the brim: in order to stack the odds in your favor.
(One thing worth noting is that it’s common to have an increase of 30% or more to your funnel after you start your process. Some investors who aren’t a fit will introduce you to other investors. VCs who heard about you through the grapevine and reach out cold (really!). But you can’t count on that to reach capacity — you need to make sure your funnel is adequate from the start.)
How Do You Actually Fill Your Funnel?
If you haven’t done it before, it can seem daunting to come up with 100+ qualified target investors. But it’s actually not that difficult.
Here’s an easy process to build up your pipeline:
1.Start with Your Dream Investors
This is the easy one. Start with all of the names of investors that you dream about having on your cap table. We all have them (just make sure they actually invest at your stage).
2. Look at Companies You Admire
Next, look at all of the companies you look up to. They could be products you use, founders you follow on social media or companies like yours from previous generations. Figure out who their investors are by looking up funding announcements they made in the past and add them to the list.
3. Add Lesser-Known Funds
Many founders stop after the first two steps, but in reality you should just be getting started.
Today, there are more than 1,000 early-stage VCs in Silicon Valley alone – the vast majority of which you’ve likely never heard of. These include solo GPs, operator angels, micro VCs and rolling funds. They might not be household names, but many of them are incredible investors who deliver significant value-add.
Shai Goldman maintains an excellent list with over 700 VCs whose funds are less than $200M. Crunchbase is another great source for target funds.
4. Ask Your Network for Suggestions
Finally, ask your network (existing investors, trusted advisors, etc.) for their suggestions. This can add a number of high-quality targets, many of which will come with strong introductions from the person who made the suggestion.
Activating Your Network
The last step in preparing your pipeline is the first step in leveraging your network: figuring out who can introduce you to your target investors.
This is another step that too many founders leave until the last moment.
What’s the problem with that? Simple: if you don’t have any obvious introducers, you haven’t left yourself any time to find one.
(Aside: I won’t go into the debate around the appropriateness of warm introductions, other than to say that they make a meaningful difference in fundraising success, so you should do everything in your power to secure them.)
Here’s how you do it:
1. Share your CRM with your Trusted Network
Share your full CRM with your trusted network of investors, advisors and fellow founders. Ask each of them to fill in their name beside any investors they can introduce you to (along with some context of how they know them).
As part of this outreach, ask them to fill in names of investors that aren’t on your list (step 4 from above).
2. Decide who the “Best” Introducer Is
Look through your spreadsheet and decide who should make the introduction for each firm.
In some cases, it’s really obvious (e.g. if you have one superstar angel investor who can get into every door). In others, you’ll need to decide. In all cases, make sure that there is exactly one introducer (to an investor, it looks spammy if multiple people send you a similar outreach).
3. Fill in the Blanks
Most founders will find that their network is able to provide introductions to 40 - 60% of the the qualified target investors they’ve identified.
Once your network has filled in everyone they know, it’s time to think about how you can get to the rest.
In many cases, you can find potential introducers using LinkedIn. In others, you’ll have to get creative (building relationships with founders in their portfolio, reaching out over social media, etc.). The further in advance of your fundraise you do this, the more time you leave yourself to find paths to your target investors.
And with that, you should have a robust pipeline of fully-researched, qualified target investors.
Next up: an introduction to high-velocity fundraising.