5 Questions You Should Consider Now
You feel like you and your start-up are in the best position to raise capital – now what? We’ve put together a core set of questions we think you should answer before you set out on your fundraising journey.
Before you decide how much capital you want to raise, you should think about the following two things: (1) how much runway you have left and (2) what your next milestones are. Answering the first will allow you to understand how much capital you should raise to extend your runway by a reasonable amount, typically around 18 months. The second question should be used to identify the sum of capital that will enable to you to achieve these milestones - which should ultimately help you raise the next round of capital later down the line. As for figures to help guide your decision-making, a small seed round can be anywhere from around £100,000 to £5000,000, a mid-sized round being £500k - 1 million and larger first-time rounds being between £3 and £5 million.
Choose an amount that you believe will enable you to achieve your goals and milestones to help you raise the subsequent round, that you know how to spend wisely to achieve those milestones, and that results in a level of dilution with which you and your co-founders are comfortable with. You should also leave yourself some margin for error, as inevitably not everything will go exactly to plan. Typically, the amount you raise should equal the capital required to operate for around18 months. Important to also keep in mind is between your Seed and Series A round, you usually want to prove (1) your customers want your product and (2) you have found a reliable way to scale the business – so the amount of money needed to take you to these key milestones is usually seen as the right amount to raise.
Choosing your investor is one of the most important things you can do as your relationship will span multiple years – so it’s important you pick the right investor for you. If you’ve decided that raising up to £200k is right for you, perhaps Angel investors are a better fit. Thankfully, there’s a great number of active UK angel investors and networks such as the Angel Investment Network, 24 Haymarket and more, which you can find in our List of Most Active UK Angel Investors.
Raising from a VC is a good idea if you’re looking to raise above £200k – but there are three things you need to keep in mind:
1. Do they invest in start-ups that are at the same stage of growth we’re currently in?
2. Do they invest in your industry?
These are all important, especially question 3 as this could provide a great insight into whether these are people you could build a long-term relationship with. 3. How important is location?
At an early stage, accessibility is important. Having local investors means that you will be able to meet more frequently with them and they’ll likely have a strong understanding of your ecosystem. Not to say that international investors won’t be beneficial for you – they’ll certainly be able to open doors to their network of contacts, carry a wealth of experience and give you access to new markets when you are ready to scale. Also note that given the changes Covid-19 ushered in on the way VCs interact with their portfolio and potential investments, perhaps you will be able to communicate as clearly with international investors as you would do with their local counterparts given the popularity of video conferencing tools e.g., Skype and Zoom.
| Raising capital takes, on average, 3 to 6 months
As highlighted in Brad Feld’s and Jason Mendelson’s book, Venture Deals, choice is power – so it might be beneficial to target a few investors. Assuming you are raising capital from VCs, having several of them interested will help you in a series of ways:
i. Create a competitive process between VCs
ii. Gives you a great look at how each VC operates and what their investment process looks like.
iii. Allow you to better negotiate the terms of the deal
The first two points are especially crucial in helping you decide how your fundraising timeline should look.
Your fundraising timeline is key for successful your journey to raising capital. If you choose to pursue multiple VCs, it’s important you initiate these conversations with your potential investors all at the same time. VCs have different investment processes – so it’s important to use Q4 to understand each of their processes and use this information to line them up as close as possible to avoid having different VCs interested months apart. This should synchronize your receipt of term sheets from VCs when you’re close to the finish line.
All in all, the reasoning behind your decision to raise your first round is extremely important if you want to successful secure start-up funding. If you’ve already considered the questions and you’re certain this is the perfect time to raise capital, then be sure to take a look here for an insights into the things you need to consider once you’ve made the decision to raise.
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