We have previously written regarding founders’ choice of entity decisions as well as a number of tips for entrepreneurs to keep in mind as their businesses begin to operate and grow. But for those founders who have eyes on raising additional capital through Series funding rounds, there are additional considerations to navigate before making those venture capital pitches.

Despite an overall market dip, early stage fundraising actually increased in early 2024. Many VC firms, especially in the “hot” market sectors, are active and continuing to fund new deals, either through increased investment into existing portfolio relationships or by partnering with new companies. The approach to raising additional capital can change a bit based on whether you already have investors on your cap table, but some truths extend across company funding history. The money is out there, how can you get it?

Know Your VC Market

It’s not difficult to determine the hot market segments in the VC world. Where does your company fit in? Some VC firms focus exclusively on a specific market (such as biotech). In fact, most VC firms will have a mission statement and published roster of portfolio companies for you to review and evaluate. It is critical to evaluate who your potential investors are, how they can help your company grow and reach the next stage (whether that be an acquisition, IPO or otherwise) and what it will be like to work with them on a day-to-day basis.

Why? The majority of VC investments will come in the form of purchasing preferred stock, but they will also undoubtedly adjust the composition of your Board of Directors as well. Your key decisions going forward will need sign-off from your investors via their preferred stock rights as well as their designees on your Board, so you want to make sure that your relationship is one that makes sense. Keep in mind that your VC partners are not just interested in holding shares of your company — they want an exit and they want their money back plus many multiples, at least 10-15x when you get to the Series A stage of investing and sometimes much greater. They want your company to do well.

Even the most conservative VC firms will miss on a large percentage of their investments with no exit and no return to their limited partners. As a result, their history and knowledge of what works (and what doesn’t) can be invaluable to startup founders.

Know Yourself in Your Role as Founder

Your role and experience as a founder will be critical towards the development of your relationships with investors, customers and business partners, and VC firms are no different. After all, they are investing in you, whether that’s your sparkling personality, your company’s IP, the demonstrated success of your company or your potential for success.

The principals of your VC firm have seen it all, so it is important to understand the path that it will take to grow the company to your desired heights. It is extremely difficult for many founders to relinquish control over the day to day operations of the business, especially in light of the significant success founder-led companies have. You have confidence because you brought these VC firms to the table due to the great work you’ve spearheaded, so the natural tendency would be to want to continue along that path.

Protecting your equity as a founder is a very different exercise than protecting your role in the company’s operations. The former is critical for all founders as a baseline activity, the latter can be negotiated so long as you are realistic about your expectations and your abilities.

Take the example of you and your cofounder taking a dozen VC meetings after bootstrapping your company and gaining some market penetration. If these VCs all tell you that a more experienced CEO or CRO is necessary to help take the company to the next level, you may well bristle and take it very personally. You may keep taking more meetings to see if someone will agree to leave you in charge. Or, you may agree to step back, realize that your talents are better suited to other aspects of the business and plan accordingly. It’s important to “know thyself” in this situation: There is no wrong answer, but every interaction with market funding sources should help propel you to a greater understanding of what it takes.

Know How to Manage Your Cap Table

In the case of founders with just a few small family and friends on the cap table, where the founders still hold the vast majority, an “ideal” cap table would include common shares and (possibly) some debt instruments, whether through SAFEs (simple agreement for future equity) or more traditional convertible promissory notes. But ideal is not always the norm, unfortunately. Mindful attention being paid to every entry onto your cap table is critical if you have ambition to raise VC funds and reach an exit of some kind.

VC firms want to see, to the extent possible, a clean and concise cap table. Most practitioners have witnessed deals fall apart once the due diligence on the existing cap table is revealed. Some of these dealbreakers could include multiple debt instruments with different conversion ratios and conversion caps, onerous preferred terms granted to early-stage investors preying on desperate founders, or even down-round anti-dilution protective provisions that greatly reduce the value of the VC investment dollars.

Imagine a scenario where a VC firm is excited about investing in your company and they have a $10 million appetite, but your cap table reveals $2 million in debt and the debt holders want their payoff. Were your convertible debt instruments drafted in a way that can force them to convert to equity? The last thing the VC firm wants is the first $2 million of their investment going to pay off debts of the company. Or maybe you’ve given preferred stock rights to some of your earlier angel investors and now that the company is gaining traction, they want to have their say. Did you negotiate a pay-to-play provision forcing them to participate in future funding rounds? Do you have drag-along provisions so they can be forced to participate in that eventual exit? Corporate laws related to shareholder rights and your company’s charter will obviously need to be honored, but whenever you are giving someone the right to influence the decisions you can make with your company, visualizing what this cap table will look like to someone who wants to give you a whole lot of money can help guide your decisions.

Know Your Pitch

In addition to the above, the most important thing to master is your pitch. You can land a coveted meeting with the perfect VC firm that you believe will help your company grow to the next level. Now it is time to differentiate. How is your product/solution better than your competitors? Are any of your competitors already in this firm’s portfolio or on their radar? Can you integrate with others in their portfolio or market leaders? Where is the value for the investor? How do you get them there?

For first-time founders, and even most experienced founders, your VC targets will have seen and heard far more pitches than you’ve given. They know the market segment and they also know how to pierce through your aggressive (or otherwise unrealistic) projections. You want their $10 million, what do you plan to do with it? Are you carefully crafting a team growth strategy with this new infusion of capital? How will each of those hires help you to achieve additional market penetration and increase ARR?

Most VC firms will of course want to play an active role in the development of your business, that’s why they’re investing after all. But talk to any experienced VC principal and they will tell you stories of portfolio companies expecting the VC firm to hold their hand through every aspect of growing the business. We’ve all heard of the elevator pitch: distill your message down to the basics. The most efficient and effective VC pitches come from founders and entrepreneurs who can clearly demonstrate the value that the company can provide to the investor, how quickly you can achieve that value and a realistic view of your company, your leadership and your growth path.

Conclusion

The VC market is ramping back up, and competition for these VC dollars has never been greater. Founders who have taken the time to get themselves organized in a thorough and marketable manner will find an easier path to fundraising. There is no perfect route to securing sophisticated investors, but the above guidelines are just some of the ways founders can take steps to learn more about their companies and increase their chances for growth.

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