I used to naively believe that building a funding round was easy. You only have to develop a great idea, that addresses a large and growing market and investors will follow. Well it isn’t quite like that. In fact, even an awesome team with a great proposition will struggle to find funding for a tech startup. The competition for capital is incredibly strong and investors are naturally hedging their bets by spreading their investment across multiple opportunities. Many investors will not invest unless someone else takes the lead and there are not enough experienced tech investors to go around. Here are a few pointers to make it simpler to build a round;
Make sure you are ready - There is little point in building your funding round until you are ready. Readiness depends greatly on the amount of funding you are looking for. However, at each stage it is important to have hit certain milestones. It is also crucial to be able to communicate your proposition clearly and demonstrate why it is attractive to investors. Generally, founders raise before they are ready. This extends the time taken to close and damages reputation.
Think strategically and tactically - Plan for a long and complicated process from the beginning. If you are raising a few hundred K from angels you will need to find multiple investors and orchestrate the whole process. It can be a bit like herding cats. You both need to be able to plan the process at a high level as well as acting tactically and decisively at each stage. Allow plenty of time in your schedule to undertake the process effectively.
Target appropriate Investors – Select investors that are interested in your market sector and invest at the stage you have reached. VCs will often state that they invest early, when they don’t. It can still be worth taking half a dozen VC meetings to ascertain what you need to do to be attractive in a years time. This will strengthen your pitch for the angel round. Don’t ask for investment at these meetings. You will look naive. Best ask for advice and listen to what they are looking for.
Find a lead investor early - The lead investor is usually the king-pin for every funding round. In the angel round they will provide the core to build around. It can sometimes be worth bringing in a lead as part of a small pre-seed round. They can help you shape the next round and make sure you are investment ready.
Expect the lead to take an active role - Once the seed round has been launched you will need the support of your lead investor. They can set the term sheet and rally their friends to help fill the round. They can also reassure non-savvy investors that the round is worth joining.
find other investors - Once you have a strong lead investor you will need to spread the net more widely. It is important to learn the difference between real investors and tire kickers. Check linked-in carefully and bluntly ask about their capacity to invest.
Find ways to close the round effectively - It is good to set deadlines and create momentum leading up to them. There needs to be an end point. Ask the lead to help bring the other investors into line and deal with formalities such as term sheets and other legal requirements. Appoint a good lawyer who understands the size of deal you are trying to close.
Think imaginatively - We are seeing more rounds that include angels, micro-VCs, VCs and even crowdfunding. It can even be possible to build rounds with UK lead investors and back filled by US or other overseas investors. In almost every case they demand a good lead.
More mature companies can afford to pay the fees of corporate finance experts to help build rounds and do the necessary deal-making. However, Startups cannot entertain the upfront fees they charge to do this. Platforms such as Dreamstake are making it more cost effective to use a third party to support the process by back-loading the costs and linking them to performance.
Blog by Paul Dowling – Co-Founder of Dreamstake the world’s first tech startup platform to match founders with the most appropriate investors using a unique startup rating system. This allows entrepreneurs and investors to monitor startup progress and inject capital and support when most needed. Startup founders can create profiles on the platform and get direct introductions to investors. We are constantly looking for great early stage tech startups. Investors please contact [email protected]
We have also recently launched an exclusive tech angel investment club in partnership with The Hoxton. HoxTech Angels will run invitation only angel investment evenings every month.