In our new ‘Raising Funding for Your Startup’ blog series, we’re taking you through six steps of raising funding. The sixth and last blog is dedicated to the long-term founder/investor relationship. Learn about cash flows, updates and why early-stage startups should talk to VCs.
Long-Term Founder/Investor Relationship
After the celebration
You have closed your round! After the celebration, you should realize that closing a deal is not a one-time event. You have concluded the round, but now a long-term relationship starts. Involving your investors, and giving updates, is essential. Try to find a rhythm in providing new information to your investors. Create a format and force yourself to do it, for example, every month. Always remember that there are multiple rounds. Investors can see the next funding round coming because you tell them about your progress in your updates. Of course, it can’t be all good news: investors have the right to the truth about how things are going since their cash is at risk. Good news, as well as bad news, should be communicated steadily. Imagine if an investor doesn’t get an update from you for a year: even if you now give a full update, and things are going well…. the trust is still reduced. If you come asking for another funding round then that conversation is much easier if you built a steady relationship of trust over time. Generally: if you involve your investors actively in your company then they can feel comfortable recommending an investment to their friends also.
Content of updates
One of the main things you should focus on is your cash flow. Always be aware of your revenue and costs. Startups often run out of money quicker than they expect. Sometimes there is a setback and the need for a next funding round occurs sooner than expected. Of course, information about your cash position can be highly commercially sensitive. You don’t want that information in the hands of strangers. On the other hand you need to make investors part of your decisions as you go, otherwise, a call for capital might come as too much of a surprise. Of course in your updates, you should always emphasize the regular updates about your development. In particular, you should find a convenient and consistent way of reporting your growth to them. In addition to this regular business update, you usually also ought to update them on the following topics: 1) management appointments, so the addition or exit of key team members 2) large expenditures, where what is defined as large depends on the size of your startup, and 3) material changes to the capital structure: for example when an investment round is completed, or a large loan is attracted.
Why early-stage startups should talk to VCs
You probably won’t have VC investors until you have grown substantially. However, it is a smart idea to be prepared for them from the beginning. If you already know what metrics they are focussing on, you can work towards them. For example, some VCs demand an X monthly recurring revenue, or a growth rate of X month on month over the last X years. If you build a strong relationship with the VC’s analysts early on then they may start to accept regular updates from you. That means that when you finally get to the point that you are eligible for an investment they have already built familiarity with you. It means you can move towards attracting funding much faster. Of course, then the VC funding game starts, which is somewhat different than that of the angel funding game, which these blogs are about. But don’t forget your Angels! They got you to where you are, and deserve a fair treatment.
We hope you liked our ‘Raising Funding for Your Startup’ blog series. Stay tuned for more knowledge.