Planning your Raise: Timing, Pricing, Prep, and More!
Figuring out when to raise your venture round can be intimidating, but there are plenty of tactics to make the process a whole lot smoother.
We sat down with Allison Myers to talk about the nuances of planning your raise. Allison is Co-Founder and General Partner of Buoyant Ventures, an early stage venture fund investing in digital solutions to climate risk.
Before you land on a timeline for your raise, you have some work to do. Get clear on your goals for the business over the next 2-3 years, how much capital you’ll need to achieve those goals, and what you’re expecting out of this specific fundraise (total amount, target dilution, types of investors you want to bring in, etc).
Some specific areas of consideration:
- Build a reasonable budget and pro forma model that showcases how you plan to employ capital to reach your strategic goals. If you don’t know how to build a budget or model, this is where spending a little money on outside help can go a long way. The earlier you are, the more estimating you will be doing. Be careful not to be overly optimistic or over engineer the result.
- Plan for multiple scenarios: think about the levers you can pull to ramp up spend or cut burn; understand how those actions may impact your goals. These should all be clear assumptions you can manipulate in your pro forma so you can easily test the impact of changes on your future growth, revenue, etc.
- Remember that you’re likely getting some (if not all) of your assumptions wrong, so make sure to build in a buffer (both on your fundraising target amount and the timeline for close). Generally, you should build in anywhere from 10%-25% of extra room in case you underestimate key spend areas.
- Keep in mind that whatever timelines you set for your raise will likely not play out as planned. VCs are aware of this, and can take advantage by pushing the envelope a bit to make you take concessions at the end. Setting up your close date upfront is a nice target, but it won’t likely pan out as you expect, so prepare accordingly.
- If you’re close to hitting some major metrics as a company (like a big ARR milestone, profitability, etc), consider how you are building this into the story you are sharing with new investors and offer to let them speak with customers if appropriate. Alternatively, if your existing investors are excited about the progress being made consider doing an inside bridge round with them. This will buy you time before going to the broader market with a whole new fundraise.
- Venture capital is impacted by a lot of external and macro factors. Make sure you understand how rising inflation, dropping public valuations, new legislation, and broader concerns about macroeconomic decline impact your business and your potential fundraise and adjust accordingly. Not only will this help you plan, but understanding these factors will show a greater level of rigor to your prospective investors.
Getting ready to raise
Once you’ve decided that you’re ready to raise, you can begin crafting your approach. Here are a few questions to ask yourself before diving in:
- Is your team ready? Fundraising can take up MOST of a founder/CEO’s time, so you need to be sure your team is equipped for your effective absence. Are roles clearly defined? Does your leadership team have the resources or direction they need to operate while you’re 100% focused on the raise? Are key partners informed that there will be a shift?
- Is it the right time of year? There’s a seasonality to venture– summer and the end of the year are not ideal times to raise because of how many people are away, so spring and autumn tend to yield better results. Your business might also have seasonality depending on what you’re selling and to whom – think insurance, for example - you don’t want to be an absent CEO during an important time for the company.
- Is your narrative rock solid? Fundraising is as much about the fundamentals of your business as it is about the narrative you put out. No matter how good you are at storytelling, make sure to run your deck and story by a good number of people (insiders and outer perspectives) who can give you candid feedback on what works and doesn’t. It’s especially helpful to get VC perspective, so try to run your deck by folks that aren’t a target for the round– they can give you the most impartial feedback.
How to price your round
Pricing your startup in the early stages is both art and science. In some circles, your target valuation is a product of how much you’re trying to raise, with founders often targeting dilution between 10-25% per round. However, there are a number of tools you can use to get more empirical with setting pricing for your raise:
- Resources like Pitchbook and Crunchbase can help you get a sense of how the market is responding to companies like yours. Identify 10-20 similar companies in related or adjacent sectors that have raised in the past 12 months, and you’ll get a range of valuations that can serve as a starting point.
- For post-revenue companies, valuation is often driven by historical performance and projected growth. Industries have common multiples you can lean on at different stages (10X of ARR, etc) to suss out your prospective valuation. You can get at this data by (a) searching online (Crunchbase, Pitchbook, press releases, etc) or (b) talking to active investors in the space.
- Valuations are also driven by your potential exit value, and how that would translate to a return multiple for early investors. If you are building a company that will be worth $5B in 10 years, you will end up raising at a lower pre-seed valuation than a founder building a $100B company. Don’t forget, this potential exit value is derived from your narrative and projections, so making sure you have a rock solid story counts a lot.
Keep in mind that VCs will be more conservative when it comes to your projections and milestones. However, the actual “discount” they apply will vary depending on the founder, the business, and the macro environment. For example, promising to quadruple your team despite a difficult hiring landscape might give the investor pause. If they don’t think it’s feasible for you to grow your team that quickly, they might also be skeptical of your revenue projections which ultimately impacts your target valuation. VCs will spend meaningful time reviewing your people and marketing costs as well as your management model in order to judge the validity of your numbers. You should plan to project out 3 to 4 years from the date of investment for Series A, and 5 to 6 years out for Seed.
Dealing with allocation targets
The ratio of your fundraising target amount to the target valuation may present challenges for some institutional VCs who have target ownership percentages. For example, if you are only planning to raise a million dollars, but your target valuation is 50 million, most VCs will not get the allocation they typically seek. Consider your goal for raising and if you’re thinking big enough in cases like this. If you find yourself in this position, consider:
- Increasing your total fundraise amount to better meet allocation targets (10-20%)
- Raising from a source other than an institutional VC: raising debt or getting a few angel investors on board could help you accomplish the same goals.
- Or, last but not least, if you still feel like you have a valid reason to raise from institutional investors, try and bargain with your targets. If they’re truly interested, many will be willing to make concessions. They may not go down from an ownership minimum of 10% to 5%, but often may meet you in the middle.
Dealing with no’s
At some point, you’re going to get a no. In all likelihood, a lot of no’s. This can be a tough pill to swallow, but there’s still value you can get from this outcome. There are a few ways you can make the most out of a rejection:
- Ask for feedback. The greatest thing someone can offer you is feedback on what didn’t work for them and how you can improve. This may even open up room for you to come back again in the future when you’ve made some progress or changes. Keep in mind that you should take feedback with a grain of salt, as they may not necessarily be direct with you. However, getting criticism where you can, could help you adjust for your next pitch.
- Ask for introductions. Maybe your company wasn’t a fit for this VC, but could very well be a perfect match for another in their network. Ask if they have any recommendations for where you might be a better fit– whether it’s a different stage, a more/less niche space, etc. A warm referral from a VC who passed is still often better than a cold email.
- Steel yourself, but not too tight. Getting rejected is never easy, so it’s helpful to prepare yourself for the fact that it can be a very emotional process. Be mentally ready for the disappointment, but don’t steel yourself so much that you’re robotic during your pitches and diligence conversations. Building genuine connections with the folks you are pitching can have other unintended consequences: it adds a layer of fun to a process that’s otherwise super taxing. If you’re at the pre-seed or seed stage, this will likely be the most challenging round to fundraise for, so pull in your supports to lighten the load. Lean on other founders, advisors, your team; leverage all the tools at your disposal to maintain composure in the face of rejection. It helps a lot :)
Allison Myers is the Co-Founder and General Partner of Buoyant Ventures, an early stage venture fund investing in digital solutions to climate risk. She is also a Board Advisor to Michigan Climate Venture, the first student-led climate impact fund. She received her BA from Dickinson College in International Business and Management and her MBA from University of Michigan. Allison is based in Denver, Colorado.