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7 Things You Need To Know When Raising Capital For Your Startup

7 Things You Need To Know When Raising Capital For Your Startup

What are best practices for raising capital for a startup? originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world. 

Answer by Kunal Lunawat, Investor and Operator, Managing Partner at Agya Ventures, on Quora: 

As a VC, here are a few things I have witnessed savvy entrepreneurs do in running an efficient fundraising process. My experiences mostly hinge around seed stage investing and we have looked at quite a few of them this year (625 to be precise). Thoughts below are a combination of reflections from both some of the rather forgettable processes and best pitches we have been a part of.

  1. Don’t get swayed too much by today’s macro. It’s a great fundraising environment right now and there are incentives to raise more than what your company needs. While raising extra cash gives you the strategic buffer (more runway), it also comes at the expense of cheaper dilution. Figure out how much you need, have a range if there’s a compelling term sheet, but don’t end up raising a multiple of what you had originally anticipated.
  2. Find your target VCs. Go after VCs who have a good reputation in the industry, know the space well or will simply be the right mix of critics and champions for your company. This matters a lot more in the early stages of your company and going after purely capital might be short changing what a good VC truly brings to the table.
  3. Treat the pitch as a conversation. For a typical 45 minute pitch meeting, limit the pitch itself to no more than 15 minutes. Open the remaining 30 minutes for a discussion and allow investors to leave the room with a better sense of the company, predicated on having their questions answered during the meeting.
  4. Bake timelines into the process. Leaving discussions open-ended will likely drag them longer than they should. Come up with a reasonable timeline for closing the round (YC companies do this really well), articulate them clearly to potential leads, and follow-up diligently to ensure those timelines are met. Be slightly flexible for investors you really like but treat that more of an exception than the rule.
  5. Data rooms kill deals, especially at the early stage. To borrow from Mark Suster, “data rooms are where processes go to die.” At the outset don’t share ginormous amounts of data with every VC you meet. Qualify leads, get them interested in the company, share what’s material and be very responsive to subsequent questions that arise. The buzzword here is: limited pre-emption, abundant pro-action.
  6. Understand the term sheet, know your BATNA. Upon receiving a term sheet, don’t just focus on the valuation. That’s one very important lever (perhaps the most important one) but there are other crucial ones as well: liquidation preferences, pro-rata rights, board seats, to name a few. Review them for anything that’s off market (YC SAFE notes are great to streamline processes here) and know your walk away point. If you are doing it for the first time, prior to receiving term sheets, create a group of advisors, friends, your legal counsel who have had prior experience looking at these to ensure you don’t end up negotiating against yourself.
  7. Move swiftly from agreeing on term sheet to execution. Typically VCs will issue a term sheet, which after some back and forth, will be ready for execution, contingent on legal diligence. Prepare your lawyers in advance for this – based on experience, scrambling last minute to find documents or execute them is not just a bad look but also stressful for the founders. This is also for the most part a very solvable problem early on in the process

This question originally appeared on Quora – the place to gain and share knowledge, empowering people to learn from others and better understand the world.

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