What You’ll Learn In This Article:
- Why you should start fundraising for Series A immediately after seed-funding and 6 months before you require Series A funding at the latest
- Why securing too much investment can be a disadvantage, diluting your shares in the company and moving the goalposts you need to “succeed”
- Why warming investors up is the most important thing you can do for your startup’s future
Finally! You’ve pulled it off. All your hard work and product development and business plans have worked out — you’ve secured seed funding. But as the dust settles, you might find yourself asking, what now?
We’ve posed your most pressing post-seed funding questions to investment experts: Robert Kusche from IBB Beteiligungsgesellschaft, hubraum’s very own Investment Director Florian Steger and the CEO and founder of data virtualization startup Contiamo, Michael Franzkowiak.
I’ve secured seed funding. When should I start preparing for the Series A funding application?
Robert: The usual cash runway (VC slang for the period of time the respective startup can survive on the money they raised) is between 12-24 months. In the best case scenario, you’d start the fundraising process six months before the company runs out of cash.
Florian: You should be reformulating the strategy for the next round the moment the money hits your bank account. That doesn’t mean you need to go out and close the next round immediately, but it makes sense to build a relationship with potential investors long before you approach them for money.
With these kind of relationships, you should be figuring out what kind of KPIs and numbers you actually need for the next round. Go speak to investors and say “If I want to secure funding from you in a year from now, what do you want to see? A certain amount of customers? Certain revenues?” Hitting those pre-set goals makes it a lot easier to check back in after a year about money.
Michael: Ideally you’d start preparing as soon as your product has taken the next step and there is proof that you can deliver the product you envisioned. You’d have traction with customers beyond some proof of concept or an initial trial period. Finally, you would ideally have also been able to get some great people to join your team, demonstrating that you can attract great talent and grow the organization.
The whole fundraising process is about entrepreneurs telling a story of what has already happened and how the story will continue. They have to find as many ways as possible build trust in that story: numbers, testimonials, product demos etc. to prove they are where they say they are; market forecasts, well well-thought-out business plan, roadmap etc. to show that there is a clear way to go where they want to go.
How much money should I be aiming for in terms of Series A funding?
Florian: Whatever number you calculate, add 50 percent of that amount for a buffer because the costs will always be higher and your revenues will always be lower — so to stay on the safe side.
Robert: Staying on the safe side makes sense! Startup founders should aim for a sum that is large enough to reach the next future milestone(s) within the next 1-2 years, whatever the relevant metrics might be. So it is crucial to raise enough capital based on a decent valuation. This said, one should avoid raising too much capital because every euro of equity is dilutive, meaning for every euro you raise, startup founders transfer a piece of their company and thereby a fraction of the upside potential to the investor.
Another issue is that the more capital founders raise, the higher the valuation needs to be to maintain a functional cap table structure. Hence, if the valuation is (too) high, the company needs to hit their goals or even outperform their plan to “grow into” this valuation and to have any chance of closing a follow-up financing round.
I have just enough money to hire one more person. Which department should I be hiring in?
Robert: It really depends on the skillset offered by the staff you already have. The next (key) hire should bring complementary skills to the table.
Florian: It makes sense to think about fundraising as proving a hypothesis. You come up with an assumption: that your customer needs this or that or that you can make money with this or that. You’re then trying to prove this assumption to be true. As such, I think you need to figure out what sort of people you specifically need to take this next step.
What sort of investment should you be aiming for? ie. venture capital firms/angel investors/equity crowdfunding
Michael: I believe that – if you haven’t done so before – a Series A is a good opportunity to bring an investor on board that can provide more than just “dumb money”. That means choosing an investor who knows your industry, has a proven track record supporting companies in it and can challenge and support you in the right way. The type of the investor is less important (although crowdfunding will rarely be that knowledgeable investor with experience in your industry).
What’s the best way to get in touch with investors?
Robert: The best way to get in touch with us and other VCs is via a warm intro through a mutual contact, whether that person is a business angel, a startup founder we’ve previously worked with or via other interested VCs. However, if you don’t have access to those networks you can send your deck to an investor (our typeform is here to submit your pitch deck),you could try to call them or you could attend relevant events to meet them in person. It’s worthwhile reaching out to try to get an intro, so check out LinkedIn if there are any mutual contacts who can help. If you want to learn more about IBB Bet then go check out our blog and/or website and we would be happy to hear from you soon.
Florian: The beauty of looking at funding from the perspective of building relationships (rather than directly approaching people for money) is that getting in touch with investors can even work via emails or LinkedIn. After all, there’s no pressure. You can reach out to them, you can ask if you can include them in your email list — it’s a softer way of getting in touch and you can even do this “cold” if you don’t already have an existing relationship. It’s a bit like dating – if your first question with dating is basically, “do you want to marry me?” then your prospects won’t be too high. But if you have a pre-existing relationship, if the other person has some context for who you are, that’s helpful.
Regarding where I’m based — here at hubraum, we only do co-investments ie. we always need another investor to invest alongside us. We are a strategic investor so we want to focus on the value we can bring to the startups from what we know at Deutsche Telekom. It’s good if there’s another VC who’s focused on the financial side and we can focus on the strategic part of connecting the startup with Deutsche Telekom.
Feeling inspired? Hit the button at the top of this page to apply for an investment or send us an email to schedule a meeting to discuss your idea.