With all of that said, there are two important questions you must ask yourself as a founder seeking funding:
- When should I seek Series A funding?
- What is the process for fund raising?
Since your Series A round will be your first significant round of venture capital funding following seed funding, correctly answering these questions is critical to the next stage of your company’s growth, with a substantial impact on your future.
Are You Ready for a Series A Round?
Unfortunately, due to the variety of business types and the vagaries of human nature, there is no one-size-fits-all answer to the question of when a company is ready for this type of capital investment. For example, while one founding partner may think your company is past ready, another may think you need more time working on proof of concept and gathering metrics to back it up. Then you have investors who may want to jump in with both feet as quickly as possible, while your “perfect investor” is hesitant to put up their cash.
It would be nice if we could simply say, “Once your company has achieved X, A funding naturally follows. This leads to Y, and B funding will follow,” and so forth. However, this is not the case.
“The reason the A is so hard to figure out is that it sits somewhere between these two points [the seed round and the B round], and the point at which it sits differs based on the founders, the progress created, and the amount of time that the company has existed.” (YCombinator.com)
So, “What IS the answer?” you ask.
The Fund-Raising Process
The first bit of advice for raising funds is threefold:
- Do it quickly.
- Do it well.
- Get back to work.
As a founder, it’s not your job to be endlessly raising funds. Your job is to bring a quality product to market and, hopefully, scale it for growth and long-term success. This means you need to get it done and over with as smoothly as possible, then return to your real job – keeping your company headed in the right direction.
Now it’s time to ask yourself anther question: “What would a potential investor fear most about NOT coming aboard?”
There is a great deal of neuroscientific research which shows that human beings don’t like change, of any kind. We’re actually hardwired to maintain the status quo. People are much more motivated by the avoidance of pain than they are by the promise of rewards. So, for you to positively influence the decision of your potential investors, it’s important to first understand what motivates them to invest, and second, why they should invest in you.
Overwhelmingly, the greatest fear of any venture capitalist is that they may miss out on an exceptional opportunity for a significant return of their investment. No VC wants to be “left out in the cold” as others bask in the warmth of the profits you have to share. This is not only good business for them, it’s also human nature (with a bit of ego tossed into the mix).
Take advantage of this knowledge and develop a plan that appeals to this very human characteristic – without being overt about it.
Here, the fund-raising process becomes a bit more technical so we defer to Aaron Harris, a Partner at Y Combinator.
Serial Fundraising Favors Investors
“Early stage startups usually operate in markets that favor investors. This is because the founders of those startups usually pitch investors serially – one by one as they convince those investors to meet and hear a pitch.
“As a founder meets with each new investor, chances are that some information about the company has reached the incremental investor before the meeting. This is because the network of investors is relatively small and often collaborative. Each investor that meets the company therefore has an information advantage and knows that either a) this company has been passed on before or b) this company is gaining momentum.
“This is a great place for the investor to be.”
Parallel Fundraising Favors Founders
“Founders who can reverse the information advantage create markets that favor them. When founders are able to create the same starting point for a large number of investors, the investors are forced to operate in parallel. This means that any piece of information investors get has less time to spread through the network, which forces investors to make decisions on their own.
“What’s more, investors are not able to get a sense of whether or not the market is moving quickly, so they need to make decisions under the assumption that it is. If they don’t operate under this assumption, then they’ll lose their chance to invest in what they’ve come to believe is an outlier because someone else will grab it… This is a significant advantage for founders.” (YCombinator.com Blog)
Clearly, as a founder seeking Series A funding, your goal should be to do everything in your power to create a situation in which your potential investors operate in parallel; thereby keeping the ball in your court (so to speak).
Best Regards,
Jared Toren
CEO & Founder
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