Startup Funding

The Funding Funnel is a system that helps you reach your goals.

As a Founder/CEO, you follow each prospect through the sales funnel. So in the fundraise, you should track investors through the funding funnel.

As you hear about, contact, and meet investors, you need to keep track of those investors throughout the fundraise. As you introduce your deal to them, take them through the stages of awareness, interest, desire, commitment. It’s the very same process as sales. It takes seven touches to close a sale, so it takes seven touches to close an investor.

Scott Adams once wrote:

“Losers have goals, winners have systems.”

The Funding Funnel Stage 1: Awareness

Identify and contact an initial list of investors.

Start with an ideal investor profile; categorize them by type, revenue, and sector.

Type of investor: family/friends, angel, venture capital, family office

Sector of interest: tech, healthcare, CPG, other

Revenue Stage: pre-revenue, some revenue, > $500K, >$1M

You can…

Research investors on LinkedIN, Crunchbase and other sites to find out more about them

Prioritize the investors based on who is the best fit for your deal

Make contact with them

Look for companies the investor has funded and gain an introduction from one of them. Try cold email as a last resort

In the initial contact, keep it short and make clear what you have to offer and why it’s a good fit for the investor.

Quick tip! One technique to gain attention is to use the “I’m not raising funding now but will be in 3, 6, or 12 months” and ask permission to keep them informed.

This allows you to follow up with the investor but there’s no ask for funding, advice, or introductions.

This also relieves the pressure on the investor who is anticipating an ask that requires their capital, time, or reputation respectively.

To do:

Create a list of investors and set up your task list to add ten investors per week on the list when contacted.

Continually add to this list and consistently reach out to potential investors daily.

The Funding Funnel Stage 2: Interest

Build investor interest by showing a growth story.

First talk with prospective customers,

Gather their concerns and understand their desired solution,

Take this information to your investors to show how you are engaged with a prospective customer.

Quick tip! In showing the growth story, pre-revenue companies may find it challenging since revenue is not yet rolling.

One way to handle this is to focus on closing your initial customer even with custom work.

These are often called Anchor Customers in that they will pay for a custom version of what you intend to build.

Demonstrate the story of identifying the customer’s needs, proposing a solution, building the product, and closing the sale. Then follow up with how other prospective customers are interested in your solution.

This makes for a compelling narrative as it shows customers going through the full process.

Create a series of updates to send out every 15 days showing how sales, team, product, and fundraising are continuing to progress. Show your startup in motion.

The investor wants to know you are in the market and can generate revenue.

If you don’t have a customer, go get one.

Do custom work if you need to but get to revenue to demonstrate product and market validation. The product works and people will pay for it.

Don’t show up empty-handed. Forecasts will get you nowhere.

To do:

Set up a mailer template and distribution list and schedule a date on the calendar to send out two mailers per month.

The Funding Funnel Stage 3: Desire

Demonstrate momentum to create investor desire (FOMO).

Continue adding investors to the funnel and sending mailers 2 times per month.

Show how other investors are in the deal.

If you have a lead, then highlight the lead investor; make clear why that investor invested in your deal.

As you go, show the number of other investors following the deal and those who are joining.

Investors want to know they are not the only ones in the deal. There’s a reputation risk for the investor if no one else comes in and investors don’t want to lose face in the community as it hurts their chances for future deals.

Highlight the interest, committed, and invested amounts in the raise.

Interest means the investor has quoted a soft-circled number for investment.

Committed means they firmed up the number and have said yes.

Invested means the funds are in your bank account. These numbers are going up with each update.

What if an Investor passes?

If along the way an investor gives a formal “pass” on the deal, then move the investor to another list as “passed” as it will help you keep track of investors’ status. Mark the date and revert back to the investor after 3 months with a short update. If you have substantial traction the investor who passed may change their mind and join especially if other investors are now in the deal.

To do:

Include in your bimonthly updates to investors the interest, committed, and invested amounts showing steady progress to the fundraise goal.

The Funding Funnel Stage 3: Commitment

Open the dialog about investing interest, and get specific!

Once you have interest, begin work on closing commitment by asking if they are interested. If so, ask what they like about the deal and what concerns them about the deal.

Get the risks out on the table to discuss.

Follow up with updates to show how you mitigate the risks in the deal.

Every investor has concerns. It’s important to surface those concerns and address them.

With the concerns addressed, ask if they would consider an investment. If so, what range of investment they would entertain.

With a range, continue to answer their questions and update them on your progress to narrow the range to a specific number.

Continue to confirm their number as you give updates to see if it has changed.

Remember, break it down into baby steps.

Quick tip! You can incentivize investors to expedite the process by offering additional warrants and other incentives if they do so by a certain date.

Once they commit, ask them to sign the terms sheet as funding is contingent on passing due diligence.

After signing the terms sheet, ask for the investors’ diligence process and provide the appropriate documentation.

It’s important to ask the investor about their due diligence process:

What documents are required, what steps do they take, who in their organization will do the work, and how long it typically takes.

This helps set expectations and reduces the ‘how is it going’ calls. Once they finish diligence, send them wiring instructions.

In short:

After you’ve had an introduction and talked with the investor either in person or on the phone, it’s important to follow up the investor to answer questions, update about progress, and walk through diligence.

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