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7 Crucial Steps to Take Before a VC Fundraising Round

Kison Patel

Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.

CEO and Founder of DealRoom

Experienced startup founders all tend to look back at their first fundraising efforts with some discomfort.

Even with a good business idea, the venture capital fundraising process can be a difficult one to negotiate.

However, regardless of where your company is in the process - Series A, Series B, or, if you’re lucky, further down the line - there are some steps you should take before beginning a fundraising round.

Experience has shown that the following steps are absolutely crucial to take before a VC fundraising round.

DealRoom help dozens of companies to prepare for the fundrasising process and in this article we'll look at what are the crucial steps to do.

Preparing for venture capital fundraising

  1. Develop and harness relationships
  2. Ensure you’ve got the right team
  3. Know the answer to: ‘Why now?’
  4. Refine your pitch
  5. Have an ambitious and justifiable valuation
  6. Own your sources & uses
  7. Follow up on rejections

1. Develop and harness relationships

If your company’s burn rate gives you a cash runway of about a month, unless you’ve stumbled upon something that’s going to change the world overnight, you’ve left it too late to start your fundraising process.

Introduce yourself to the interesting (read: relevant) venture capital firms well before you need them. Let them know your company exists and have them join your mailing list. Then, when it comes to setting up meetings, it should be a far easier process to beat off the other startups looking to grab their attention.

And if they can’t fund you, they may be able to point you in the direction of a VC firm that can.

Read also
Venture Capital Deal Structure & Terms: Complete Guide
How to Get Your Startup Acquired: 7 Vital Steps

2. Ensure you’ve got the right team

Look around your team and try to find its weak link. If it’s you, great. Then your hiring has been a success. Assuming you’re not up for firing yourself, ask yourself who your second weakest link is.

How could they be improved?

Ultimately, what’s their weakness and what brought them to your team in the first place?

When it comes to funding companies, many VC firms spend as much time scanning the resumes of the team behind the companies as the business model itself.

Venture capital firms won't want to put their money into a setup which is clearly a case of ‘jobs for the boys’. Closely related to this, jump at any chance you can get to bring outstanding advisors on board. 

3. Know the answer to: ‘Why now?’

When looking at the steps to undertake before funding, many advisors caution:

“ensure it’s the right time.”

It’s hard to argue with the rationale, but ultimately, there’s only ever one answer: ‘Because we need more cash.’

We suggest reframing the question somewhat. Startup founders should instead know the answer to ‘why now?’

Or in other words, be able to convince the investor that they’ve got to invest in your company now or risk looking back several years from now and regretting not doing so.

There’s another good reason for reframing this issue in this way: If you can’t come up with a good answer to ‘why now’, it may be that your startup needs more work before fundraising.

4. Refine your pitch

The perfect pitch is one that gets you money on the first time of asking. The pitch decks that won companies like Uber and Airbnb their first round funding were remarkably simple.

Slick but simple.

What they had more than anything was a strong message (i.e. they answered the ‘why now’ well). A good pitch leaves the reader in no doubt that the business will be a success.

Whisper it, but nobody is interested in exactly what icon you use for bullet point number 5 or whether your timeline is presented horizontally or vertically. What matters is what each one conveys. The presentation is just a medium to do so.

5. Have an ambitious and justifiable valuation

The valuation will ultimately determine how much money you ask for in return for equity in your business. It’s good to be ambitious - in fact, venture capital investors expect valuations to be a little on the high side.

But don’t scare them away with an unrealistic valuation. An unrealistic valuation tells them a few things, none of which are particularly good for you: primarily, that you’re a dreamer, and that you don’t have a good grasp for numbers.

If you’re not from a finance background, bring in someone who is (see: “Ensure you’ve got the right team” above), and make the valuation a part of the story rather than something that takes from it.

This person should perform preparation for the venture capital due diligence to make sure your valuation is correct and you have all the documents prepared for the fundraising round.

vc due diligence playbook

6. Own your sources & uses

Closely related to the valuation, is the sources and uses. No investor gives money without knowing exactly where it’s going.

This usually goes to one of four categories:

  • (i) technology
  • (ii) hiring
  • (iii) sales and marketing and
  • (iv) working capital.

The more detailed your explanation of how their money will be used, and by extension, how this fits with your company’s growth, the better your chances of achieving funding.

One point to note: this is never an exact science but with proper financial planning, you can get reasonably close to showing where the money is going.

7. Follow up on rejections

Every rejection is a chance to learn something.

After you’ve met an investor that turns you down, use the opportunity to see why they turned you down and learn something about your business, its industry, and/or investors that you may not have known about.

Think of this as free consulting from an experienced investor in the industry. If you walk out of your VC meeting and don’t follow up with some questions, then it will ultimately have been a wasted trip.

But following up and getting to the nub of the issue - however blunt - could ultimately provide you with a pivot for your business to become far more successful.

data room for vc fundraising

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