Every Entrepreneur Will Encounter This Question from Investors When Fundraising. Here's the Right Way to Answer It. Building a roadmap for fundraising a round as a startup founder.
By James Wang Edited by Chelsea Brown
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Why are you fundraising? If you're a startup, the answer seems obvious — you need money. Putting aside the flippant response, you need to retain your rockstar employees, acquire customers, pay for services/cloud hosting/whatever — oh, and also pay your founders so you can all live and still run the company.
That said, if you've ever fundraised before, you'll know that investors aren't exactly clamoring to invest in your company if you tell them you're raising so you can pay yourself, your employees and run your company.
So, what are you supposed to say? Perhaps, "In order to grow 5000%?" That's better, but it's not particularly believable, regardless of whatever number you throw out. At this point, you may be thinking that the answer is obvious. Clearly, you need to describe how you will grow 5000%. But no, that's wrong ... or at least, it's not entirely correct.
Related: 6 Tips for Raising Your First Round of Funding
The goal is to raise the next round
If you're a true startup aiming for meteoric growth, you'll always have a next round — even if that next round is an acquisition or an IPO. That's the nature of the venture treadmill: Taking the equity financing will keep growing the total value of the company more than not taking it. If that isn't the case, you've already exited, you're not a "true" startup and are likely a "normal"/lifestyle business (which is fine, but you have less need to worry about fundraising), or the company is dying.
Needing a next round is essentially definitional for a startup. There's enough significant growth ahead that investment now pretty much always makes sense. While that may be true overall, it doesn't answer the question every entrepreneur will encounter during fundraising: "Why now?"
The crux of that question isn't merely a tactic to draw out more information or delay the round. It ultimately gets at why an investor should put in money this round. Similar to "I will grow 5000%," the answer of "because I'll be worth much more in the future" is not the wrong answer— it's just not specific enough.
What will you do with the money this round?
Now that we've gotten through that:
You're going to grow (5000% or otherwise).
You'll be worth much more next round.
Your target in fundraising is just to get to the next round, not to "never fundraise again" (which implies your growth will cap out quite soon).
This is the roadmap for what you are supposed to say. But more than that, this also informs how you should scale your business and what to prioritize. What you truly should answer for investors is: What metrics will you achieve using the money now to raise the next round?
Related: How My Company Won Over VCs, and Where It Actually Got Us
Why is this the right way to answer — and plan your business?
This is concrete, realistic (because a startup needs to keep raising money), and gives investors a sense of what they are buying. "A rocket ship of a company!" is a naive answer. Better investors want to know what metrics will be achieved, which is to say, what appreciation will I get on my equity/money if I invest now? What valuation appreciation is the investor actually buying with this chunk of money? You can't answer that question unless you nail down what you'll do to get to the next round.
That informs how big the round should be (how much money is required to hit the metrics) and also gives a baseline for evaluating whether or not the price is reasonable (what will the company be worth if the team actually executes and achieves these metrics) and finally, a sense of whether or not it is realistic (do I believe that you'll actually be able to hit these metrics, with this amount of money, and in the amount of time you have until the next round?).
Of course, these answers aren't just useful for investors. They also become critically valuable for you as a founder. It informs how you should execute and what metrics you should prioritize. There's always too little money and too little time in a startup. If a question of prioritization arises later, you'll know what's most important: Those metrics that most impact your next round's valuation and your ability to get there.
Related: 3 Secret Growth Metrics That Matter Most To Investors
This will help clarify your thinking
As an entrepreneur and VC, I find that too many founders think about fundraising the wrong way. First-time founders especially are mystified about what they're supposed to say or show investors to get them interested. And when they're actually in meetings, they get endless questions.
It has made certain founders think that fundraising is purely about presentation skills and charisma. In truth, that's definitely part of it. However, it isn't all of it. And if you get past the early stages of your startup, the weight will be more and more towards the "rational" framework outlined here of "what is the investor buying this round?"
There's no reason to keep raising questions and keep getting frustrated. Align your pitch with the answer to this question, how much money you're asking for by when and your execution plan for achieving metrics to reduce conflict with your investors, frustration in fundraising and short-circuit a lot of the back-and-forth. Happy fundraising.
