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G137 Fundraising: Early-stage Fundraising Strategy

George Morgan
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Fundraising: Early-stage Fundraising Strategy

 2020-01-17: by Jonathan Greechan


This a guide designed to help Founders raise capital from early-stage investors, particularly angel investors.

Raising Your First Round

Raising your first angel or institutional round of capital as a new Founder is a daunting, frustrating and extremely time consuming experience. You are searching for a needle in a haystack, while herding cats and blindfolded. Like any activity, you can master it and succeed.


Before you even begin, you need the following: (1) a strong idea vetted with solid market research, (2) a prototype, a patent or a proof of concept for the final idea (3) a simple and scalable financial model that shows at least ten million in revenue after 3 years, (4) a strong 10 to 15 page investor presentation, (5) an incorporated entity with a smart capitalization table, and (6) the ability to quit your job and live for six months on savings while you conclude the financing and launch the business.

Setting Expectations

You should assume the following, whether they come true or not. You will meet with well over one hundred people and pitch your business hundreds of times. It will take over 20 hours per week for anywhere from three to nine months. You will become frustrated many times and think about giving up.


At the earliest stages, a huge part of the investor’s decision to invest is based on people, you and your team. The key to securing an investor will center around your ability to network and develop relationships, articulating a coherent vision that excites potential investors, and being extremely knowledgeable about your industry and knowing what it will take for you to succeed. Your job is to make investors feel confident that your company is on track to success and that you’re the person to lead it.

Fundraising Materials

In order to go fundraising, you will need to prepare high quality, presentable, clean and clear fundraising materials, including: (1) a one-pager that highlights key facts about your company which will be used to introduce you to potential investors, (2) the pitch deck (10-15 pages) that you will use when presenting to investors, (3) backup slides to your pitch deck that contain more detail on your business (4) financial assumptions model showing how you are thinking through cash needs and your expectations for growth.

Advisory Board

Early on, an advisory board can help fill the expertise and knowledge gap in your team by providing relevant advice, making introductions, lending credibility and generally challenging assumptions to help you drive your company forward.

You want to assemble an advisory board (3-5 advisors) that have already been successful in key areas where your company has identified expertise gaps.  Your advisors should compliment your strengths and compensate for the areas in your business where you have blind spots and are less confident about making important decisions that are important to get right in the crucial formative first few months.

Have your advisor(s) serve as your initial filter for feedback and insight as you prepare and iterate on your fundraising materials.

Getting started

The initial step in raising your first round is knowing exactly how much funding your company will need in order to achieve meaningful milestones for your company and your investors at specific points in your growth trajectory.

How much should you raise?

Raise as much as you can.  Your primary objective should be to adequately fund your company so that you have the necessary resources to reach the next set of significant milestones.

You’ll have to determine which milestones are the most meaningful to your company’s growth and potential investors at your stage.  Remember, milestones are about moving your company from one stage of risk to the next.  You will want to create a timeline of key milestones along with a cash milestones that includes an additional buffer to help you get through to the next fundraising event (usually 3-6 months).

Who to Target?

Most Graduates are still at a pre-angel or angel investment stage, so you should immediately stop trying to pitch venture capitalists. Here are some guidelines on when and who to pitch:

  • Friends and Family: Always!
  • Angels: You pitch angel investors when you have a functioning prototype used by a small subset of the target market and at least one full-time person working on the business.
  • Venture Capitalists: You pitch venture capitalists after you have closed at least $500,000 in angel investment, you have a few people working on the business full-time, and you have a finished product that is gaining significant month-over-month market traction.

It’s very easy to get meetings with venture capitalists, famous angels and seed-stage funds, like First Round Capital, Open Angel Forum or Ron Conway. Once a professional investor looks at your deal and does not invest, you will never get a second chance and word spreads among the investors that you are weak.

Investors keep spreadsheets and notes on everyone they meet, even casual encounters or meetings at events. They say “no” on their tracking sheet , and then they say “maybe” or “interesting” out of their mouth to make you go away happily. They are processing between 2,000 and 4,000 opportunities per year, and all the local investors know one another because they co-invest in deals together.

You may also get incoming calls from junior people at venture capital firms, called “associates,” that appear very interested to learn about your company. The associates are doing diligence on investments in competing businesses, and do not have any interest in your company. These are untrained and overzealous interns asked to find everything out about a market by a “partner” in the firm looking to do a real investment in a competitor.


The Goal

The single goal of your fundraising efforts is to find a “lead investor.” This individual or entity will set the terms and the price for an investment into your company that other investors “follow.” The reality is that most investors do not want “lead” a deal unless (1) they really like working with the founder, (2) they think that the business is a sure thing, and (3) they can add some day-to-day value in scaling the operations. It’s important to understand why investors don’t want to lead a deal.

Leading a round comes with a lot of responsibility, but no extra financial reward (usually). The lead investor sets the terms, bears various legal expenses to close the deal, does time consuming “due diligence” on the company, takes an unpaid advisory or Board of Director role, convinces other investors to join the round, and answers a lot of questions by other investors. Worst of all, the lead normally gets the largest share of the headaches and blame if a company fails, all with the same economics as the “followers.”

You can find a lot of interested investors for a round, but you need to find one lead.

The Perfect Lead

The reality is that finding a lead boils down to an absolute confluence of circumstances. You need to find a person (1) that is interested in your market segment, (2) that you have a good relationship with, and (3) that has the time and resources to be a lead investor in your company. Finding three out of three is only possible with either extreme luck or careful planning. Let’s look at each of the three situations that creates a lead.

Interest in your Market Segment

The most common way to find “interested investors” is to go to industry and networking events where other people from your market segment will be. This process can start before you are formally fundraising. Keep in mind that angels and professional investors interested in a market segment go the events where others in the market segment are, so it is worth the price of admission to attend them. At these events, you should exchange contact information with as many people as possible. Try to get every card that you can.

Take all of your cards and sort them. Identify people that have either made investments before or have a lot of contacts in the industry, which you can check by looking at LinkedIn, and mark these people as a “1,” or high value target. Mark any classic connector, such as a banker, consultant, or lawyer as a “2,” and then mark everyone else as a “3.” Enter the information of all of the 2’s and 3’s into a tracking sheet. You should have at least 100 people on this list, which is your Target List. Building this List should not take longer than a few weeks.

Meeting hundreds of people is just one way to find an interested lead. The best and the hardest way to find investors interested in your market segment is to make your market segment “hot” and then have the investors come to you. If you take this approach, which is not possible with every segment, you should always be thinking about actions that you could take that will generate stories in the media. The media becomes your fundraising tool, and you should spend more time getting to know bloggers and reporters than investors.

A Good Relationship

Entrepreneurs kiss a lot of frogs before they find a lead investor. You want to close the investment and get going, but most lead investors want to get to know you first. Given this dynamic, you want to maximize your facetime with people that are likely to be a lead investor or to know a lead investor, and you want to minimize your time with everyone else. In fact, it’s not very important to identify “follow on” investors in the beginning, since you can’t close anything without a lead.

Once you have your industry target group, develop a regular, but not intrusive, follow-up strategy. You may want to invite the group out to have a beer. You may ask some of them to try out a new feature in your product. You could ask for a recommendation on a business advisor. For the best in the group, ask for advice, since most investors appreciate being asked for advice. Find a way to engage with the industry target group once or twice per month.

Don’t ask for investment. Build the relationship. There are a couple ways to broach the topic of needing investment without appearing desperate after a few business or social interactions and after a comfort level is established. One way is to discuss expansion plans that you have, which often leads to the question, “how you are you planning to finance the expansion?” Another, more direct way is to ask, “do you know anyone who might be interested in investing in the business?”

Time and Resources to Lead

There are a lot of individuals that may be interested in investing in a round that do not want to lead a round. Why? Because there is time, money and headaches associated with leading a round, but rarely is there any economic benefit to being a lead. Let’s take a quick look at hassles involved in leading a deal and some ways to overcome them.

To lead a round, an investors must invest time to understand the company and the founders, which is referred to as due diligence.  Professional investors complete formal due diligence by doing background checks, remodeling the financials and even checking source code. Angel investors tend to do more informal due diligence by speaking with customers, partners and team members. The process can be time consuming, and there is no financial reward. It makes sense to offer lead investors a Board of Directors or an advisory board positions with equity compensation ranging from 0.5% to 2.5% after they make an investment as a way to make up for due diligence hassles.  The positions should be contingent on the round closing. Too much knowledge about your company may be a source of inaction. Just say, “we would like you to be a formal advisor or Board Member if you lead the round.”

An investor that decides to lead a round will most likely incur legal expenses drafting or reviewing a proposed term sheet and final deal documents. These fees, which can be in the tens of thousands of dollars, regularly get deducted from the final investment, but not all deals close, leaving a lead investor with a big legal bill and nothing to show for it. Companies can help to overcome this expense for a lead investor by discussing the deal terms up front, and then having the company counsel develop the term sheet and closing documents, versus having the lead investor do the work. Then, the lead simply needs to review the documents and make changes, saving significant costs. Generally, it is better to control the document drafting. Just say, “let’s discuss the terms that you would like to invest with, and we will be happy to have our counsel draft something for you to review.”

Lastly, the lead investor in a round generally has additional “unspoken responsibilities” and “reputational risk.” The lead frequently recruits other investors and often gets called when something goes wrong with the company.  They can also get more credit than the Founder when then deal goes right, by the way. The best way to overcome the reputational risk is to be a “hot deal” that other investors are interested in. If a deal is seen as bad and fails, that looks bad for everyone. As a company, the best thing to do is time media, buzz or other awareness in the period that the lead investor is making a final decision. The buzz could just be among other investors if there is no public news to announce. Finding a key team member or getting a letter of intent for a partnership is a great way to build buzz. If buzz is not available, just say, “we’ll work exceptionally hard to get other great investors and anyone that you recommend involved in the deal.”

The Lead Quest

Finding a lead investor is much more time consuming than you expect. The best way to do this is as follows.

  • Complete your Target List with at least 200 angel investors that meet the crieria from the previous section. Use real-world events as well as research across CrunchBaseLinkedinAngelList and other resources to build the list.
  • Add the investors from your Target List to a CRM such as Streak to track your interactions.
  • Set-up face-to-face meetings or calls with 25 target investors per week over a three to four week period, and leave time for follow-up meetings in this intensive outreach period.
  • Follow-up with genuinely interested investors using brief email communications to build interest and to plan additional face-to-face meetings. Document and ignore other more casual interest.
  • Establish a strategy to meet and engage with a high-probability lead candidate between five and seven times before asking the individual to lead.
  • Once you have a lead investor with mutually agreed investment terms, return to all other investors with either serious or casual interest and attempt to “circle” additional interest.

After the Lead

Once you have identified the lead investor, you need to “paper the deal” and “find follow-on investors.” Let’s look at each.

Paper the Deal

A typical investment will have a “term sheet” that outlines the various terms of the investment, following by “closing documents” that translate the abbreviated terms into final investment documents.  The majority of deliberation and negotiation for early-stage deals is in the term sheet, so this will be the focus here.

There are two types of early-stage investments, “convertible debt” and “equity.” The simplest option for fast growing technology companies is to take a convertible debt financing, where an investor loans the company money that converts to equity in the next round of financing, usually at a discount to the purchase price for that equity. Convertible debt term sheets are regularly one or two pages, and the closing agreements are seven to fifteen pages. They generally cost less than $15,000 in legal to close. Debt is the most senior security in a company, so the debt holder will take possession of a business if it runs out of money.

The best time for startups to raise debt are: (1) when the company is growing, but not fast enough to get a bunch of new equity investors interested, (2) when unit economics actually work but there is a valuation gap or management does not want to be diluted further, (3) when the company is close to profitable and equity is too expensive or will take too long to raise, (4) the company is more than ten years old and equity investors are tapped out in their older funds.

There are three key negotiating areas of a “debt deal:” how long until it converts if there is no further financing and at what price; the minimum amount to close and the maximum amount allowed; the discount into the next round; and the dividend. The term is normally 18 to 24 months, and the price can vary widely.  The ideal minimum is the amount that the lead investor is contributing, somewhere between $50,000 and $250,000. The ideal maximum is probably between $500,000 and $750,000. A standard discount is 25%, and the dividend can be between 6% and 10%. You may also want to specify the minimum amount that each investor must contribute individually, which is normally $25,000.

Equity investments for early stage companies are more complicated and costly to close, since you need to adjust the capitalization table, set a purchase price and establish a more formal Board of Directors, among other things. The term sheets are between three and seven pages long, the closing documents will exceed 50 pages and the closing costs usually exceed $25,000 in most cases. The big decision is whether you are going to do a round that sells less complicated “common stock” or a more complicated round for “preferred equity.” Since these financings are more complicated with a myriad of possible terms, we will not go into much detail. As a rule of thumb, for “friends and family” seed rounds or basic angel rounds with less than $500,000 to $750,000 invested, you should try to negotiate a deal for common stock to save money and time. The major negotiating point will be the price, and you should be willing to accept any reasonable offer that sells less than 40% of your company after closing. The problem with selling preferred stock in an early investment is that you will then issue you first series of security, normally a “Series A,” and there is a stigma on having too many series of stock, such as a “Series E.” Companies should look to reserve the Series A for a professional venture investor.

Find Follow-on Investors

Angel investors will often express “interest” in a deal as part of an effort to gain more information. When fundraising with angels and other investors, you will “soft circle” investment amounts from interested and less serious investors, and you will “hard circle” investment amounts from committed and more certain investors. As a rule of thumb, less than 50% of money that you soft circle will close, and about 75% of money that is hard circled will close. As you convince investors that your deal is appealing, you will move the investor from “soft circled” to “hard circled.”

A typical angel round for $500,000 will have one lead investor for approximately $100,000 or $150,000, two or three $50,000 investors, and six to ten $25,000 investors. You are looking at a minimum of 8 investors and as many as 20 to complete a meaningful round, so you will need to soft circle 40 or 50 investors. You will likely pitch three times the number of investors than you soft circle, and, in the current market, you should expect to pitch 150 investors or more. Generally speaking, you will target a minimum of 5 angels investors for any round of $250,000 to $750,000. For smaller rounds, the lead may only need to invest $25,000 or $50,000. You can continue to recruit investors until the time period of the round ends or the round hits the maximum close amount.

The good news is that a lot of angel investors will express genuine interest in a deal, making both soft and hard commitments. A quick and vague commitment is a common tactic by angel investors to gain more information and to evaluate the working relationship. As a Founder, you need to manage the process and create a sense of urgency. The best way to encourage follow-on investors to participate is to have agreed upon terms with the lead investor and a set closing date. A typical angel round will have a “first closing” and a “second closing.” Some rounds even support a “rolling close,” though this does not provide a sense of urgency. The purpose of a closing is to ensure that all of the paperwork is completed properly by all of the involved parties.

There are three ways to identify the follow-on investors. First, as you are seeking a lead investor, you should identify everyone that might be interested in an investment. Keep everyone in your target group. Second, you should go to angel networks and angel groups AFTER you have identified a lead and papered the terms. The groups are significantly more responsive when there is a concrete opportunity. Third, ask the lead to provide a specific number of potential follow-on investors. You can ask, “we are looking to secure another $250,000, can you recommend five people that might be interested in the opportunity?”

Closing Thoughts

Any successful founder is always raising money. The challenge is to start a formal process to raise capital from a position of strength, versus a position of weakness. Here are some closing tips that will prove very useful.

The goal of every investor meeting is to get to the next meeting. The odds of closing an investor increases geometrically with each phone call or face-to-face meeting. Say or write as little as possible to encourage curiosity and get to another phone call or meeting. Sending a long email with many files is the wrong approach. Over informing in the beginning makes it easy for an investor to say “no.”

Don’t ask for an investment if the answer is a likely to be “no.” Out of frustration or desperation, many founders push investors to make an investment decision prematurely, and the investors generally say, “no.” Angels invest their own money, so saying, “no,” is very easy for them. Wait until you are confident that the investor will say, “maybe” or “yes,” before you ask.

Be conscious of mistakes and refine your pitch constantly. Most investors have no incentive to openly explain mistakes that you make pitching, so you need to carefully observe body language and behavior during your presentation to identify when you make a mistake. Have a piece of paper out and write down what you were saying or showing when you notice bad signs. After you finish your pitch, be sure to ask, “how might I improve my pitch?” Expect to update your presentation with each pitch. It can be dangerous to refine the core idea based on feedback. Start by refining weak areas of the pitch

Good luck!


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Appendix: US Government Funds

The following was written by a Graduate that received SBIR funding.

SBIR are small grants that each agency has available to stimulate commercialization of technology in their area. Each agency has different rules, success rates and amount of money available. The money comes with very good terms. The government does not take any equity in the company. What they expect varies significantly with respect to the agency. These are seasonal grants. You need to look at the Call For Proposals on http://www.sbir.gov and see if your company fits into one of the solicitations and when the deadlines are.

DOD and DOE are two big major players with massive SBIR budgets. They have limited external reviews, therefore they tend to give money to people they already know. They command a significant portion of the federal SBIR budget.

NSF has a much more modest budget and easier to get because they do an independent external review process. This is what we applied. This years CFP is available at http://www.nsf.gov/pubs/2010/nsf10546/nsf10546.htm. Also make sure you look at previous years funded companies and their abstracts. You need to write a formal proposal that fits into the outline described here. You must have a commercializable research in your  proposal. If it gets approved, you get the Phase I money. Phase I is up to $150K. Phase 2 is up to $600K. There is no additional money with Phase 3. Here’s what we have been told:

  1. NSF over funds Phase I. The success rate is about < 10%. From Phase I to Phase 2, the success rate goes to 30%. So there is no guarantee that you’ll get Phase 2.
  2. You must have a research component in your company. Ties with universities help but is not required.
  3. NSF does not like giving money to existing products. So what you’re pitching must be new.
  4. It seems like they are getting tired of funding “pure research”. They have an increasing emphasis on sustainable companies. So your proposal must have a solid commercialization section.

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