Fundraise like a Sales Executive

"The secret of change is to focus all of your energy, not on fighting the old, but on building the new." ― Socrates

Aug 31, 2023

During 2020 and 2021, over $22BN of financial capital was invested into ca. 1500 European Series A companies that had $0M to ca. $2.5M of revenue with each funding round varying between $4M to $50M.

Many of these businesses will require additional funding in Q4 or during 2024 to continue growing as cash runway extensions and bridge capital from existing investors and lenders dry up.

Historical data from 2018 shows that only 1 in 3 investor-backed companies will successfully scale to the growth stage.

With this impending fundraising cliff and 2024 budgeting cycle kicking off in early Q4, how can a scale-up CEO best prepare their business to attract the right new investors, reasonable terms, and valuable Board members in a ‘new normal’?

While effective storytelling and running a process certainly guided many companies to raise large funding rounds at high tech valuations during the 2018 to 2021 boom, it is clear that we are no longer living in that bubble. Money is no longer free; and the financial markets have reverted back to the fundamentals of assessing risk-reward when it comes to investing and deploying capital.

Having worked with over 100 businesses since 2007, including one-third in the early and growth stage, I have observed a common pattern amongst those that successfully convince many investors (and those that fail to fundraise). In working closely with revenue leaders, I learned that building a repeatable, predictable sales motion actually holds a lot of parallels to a well-executed fundraise and exit strategy. In fact, I am certain that businesses which build a scalable, efficient growth engine focused on mid-market or enterprise businesses are also the ones that are able to create a lot of value for all shareholders during a new funding process.

So what are the top reasons that lead to a successful fundraise? They can be summarized into the following:

Clear and well-defined strategy
Deep customer relationships and understanding of market needs
Detailed planning and strong project management
Effective storytelling
Continuous investor and stakeholder management

I will share more details on each of these, including key questions that help frame each topic.

When investors want to better understand your market opportunity, the timing is often more or at least as equally important as size. As soon as a business raises capital, the clock starts ticking and every unproductive month is very costly to a business.

Defining and measuring the Serviceable Obtainable Market (“SOM”), Serviceable Addressable Market (“SAM”), and Total Addressable Market (“TAM”) using real internal data and publicly available sources ensures a business is resourced appropriately while also held accountable to performance expectations for the near-term (SOM), medium-term (SAM), and long-term (TAM).

In a similar fashion, understanding the internal needs and aligning use cases - specifically, working capital, predictable growth, and experimental growth - with different sources of funding allows a business to raise from the right investors (or lenders) on appropriate terms with invaluable support and network going forward.

Key questions to tackle early before a fundraise:

What is the purpose of external funding? Is it for working capital, predictable growth, or experimental growth? To better understand different business funding purposes, refer to articles So what are you fundraising for? and The Science of Financing a Software Startup (Part 1 of 2).
How long will it take to see measurable results for the capital raised? What does this operationally translate to for our go-to-market strategy?
As a business, how much do I value flexibility vs. cost of capital for the business need in which I’m raising capital for? For a deeper dive on this topic, refer to The Science of Financing a Software Startup (Part 2 of 2).

Deep customer relationships and understanding of market needs

Since 2013, ca. 3100 funds have raised capital to focus on early and growth stage investing across Europe and the US. NB: This figure excludes family offices, strategic investors and generally any funds that do not report data to Preqin (quite a lot in Europe). To speak with each fund for an hour, a CEO would need to dedicate more than a full working year. So who should you really be spending time with?

Investment funds are businesses with a complex, interdependent set of stakeholders and decision-makers. Founders often forget or underestimate the second and third order consequences of systemic incentives.

Majority of institutional investors (aka “Fund Managers”) - VCs, growth equity, private equity, hedge funds, real estate - raise almost all of their money from other investors (aka “Limited Partners” or “LP”). On average, about 3% of their own money is invested in the fund. To cover costs of running a fund, investors are commonly paid 2% of active assets under management each year, of which two-thirds are people’s salaries (i.e. investment and platform teams). The reward for identifying the right businesses to invest in is 20% of the profits after a minimum cost of capital is met - commonly 8% (aka “return hurdle”) with the expectation of profit being at least 2x over a fixed 5-10 year horizon (sometimes longer). Top-performing VC funds distribute a lot more than 3x return - often targeting 5x or higher - though what really matters is absolute € or $ returned to LPs, as well as certainty on capital calls and distribution. The risk of capital loss can vary from a low single-digit % to more than 60% of a fund. Certain funds also have the ability to recycle capital. These key inputs can make a significant difference when it comes to capital efficiency and deployment predictability.

In addition to these high level risk-reward considerations, there are more than 30 other factors that account for fund strategy. This results in ca. 1000 permutations for an investment fund. For a deeper dive on this topic, refer to the article on How to Due Diligence VCs.

Key questions to understand before an investor meeting:

What is the LP composition of the fund? How much of ‘skin in the game’ do the specialist investors have?
Which year was the fund raised (aka “vintage”)? How many funds have been raised, and are still active? What was the distribution of realized investments?
What are key fund assumptions? New vs. follow on capital? Portfolio construction?

Detailed planning and strong project management

Any business reliant on distribution through direct sales and marketing, especially targeting complex and regulated industries such as Financial Services, should live and breathe the MEDDPICC framework (or other similar ones such as BANT and SPICED).

Fundraising requires a similar approach: creating and aligning the target investor pipeline with the investor funnel which maps to their decision-making process (i.e. user and buyer journey). This includes having a structured approach, for instance having clear entry and exit criterias that trigger intent and movement to another stage, as well as reliable data supporting conversion rates and time between stages.

In order to have a solid plan, a business needs to have done #1 and #2 well - before any execution begins. For a quick overview, refer to Key Tips for a Successful Fundraise.

Key questions to plan through with your existing investors:

What type of investment funds are we targeting for the next fundraise?
What activities allow us to qualify relevancy and intent, build momentum, and solicit terms?
How should we resource appropriately so the business continues to grow during a fundraise, due diligence and post-funding?

Effective storytelling

A compelling investment story involves tying together the customer and people data with financial performance and operational metrics.

This includes having not only top-level strategy on the market need and timing validated by actionable data, but also having a bottoms-up plan that combines proven execution with realistic forward planning. Deeply integrating the annual budgeting, quarterly and bi-annual planning, and monthly and quarterly forecasting processes well in advance ensures minimal business disruption during a fundraise and due diligence process. For details on growth planning, refer to How to Play Offensive in a Recession: Flight to Quality Planning.

Key questions to work through with your team:

What is our go-to-market strategy and what supporting data do we have? Specifically: customer segmentation, geography, penetration rate, acquisition channels, direct and indirect competitors, pricing and packaging, product roadmap
What has proven to be predictable and scalable to date? What educated assumptions do we need to make on future execution? These would include: pipeline, activities, timing, people and non-people resourcing
Who is the best person to articulate a particular data story? How and when do we involve them in the process?

Continuous investor and stakeholder management

Once a business takes on external funding, there are clear expectations set around numbers and execution timeline.

Over the past 1.5 years, the level of accountability to which technology companies, especially scaleups and growth businesses, are held to are much higher. This has in large part been driven by macroeconomic geopolitics forcing influential LPs to value investment conservatism and certainty over unproven risk-taking. What we experienced in the financial markets during the 2007 to 2011 period was a preference for structured investments and proven cash generation, and a shift away from a future promise for return on equity.

In the past month, I have been in regular dialogue with early and growth investors. It is clear that new investment pace is still relatively slow and the benchmarks to unlock new funding continue to shift every quarter.

In times of uncertainty, a transparent and collaborative relationship with current and future investors is essential. It deepens trust which directly impacts the funding lifeline, but also enables a business to adapt to strategic and tactical changes also facing investors.

Key questions to discuss with your Board and future investors:

How has the macro climate impacted you and your business? Capital set aside for portfolio companies? Timing and strategy for your current and next fund?
How does our near-term market opportunity and execution timeline impact how you think about our key business milestones? Balancing business growth and capital efficiency?
When should we decide on our fundraise (or exit) strategy? Dilution and economic impact for different shareholders - in light of lower valuations, structure, and more time and capital required? What are the best funding options going forward?

As we close out the summer and enter into the last month of Q3, it is a great time to prepare for Q4 - often the busiest and biggest quarter of the year.

If you are a startup or scale-up dependent on additional funding to grow faster next year than in 2023, I encourage you to carefully think through and socialize your funding and exit strategy as part of preparing and planning for 2024 and beyond.

In two weeks, we are hosting a 1-hour AMA webinar to answer any fundraising questions you have and to think with you.

If you are interested in joining, please sign up directly via our website.

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