A lot longer than you expect. And probably longer than can afford.
A truism of the startup world is that there are no startup failures, only startups that run out of money.
The key question, then, is how long will it take to raise an investment round?
Among early-stage founders, there seems to be an expectation that a pre-seed round will take a month or two: send out decks, do a bunch of pitches, answer some questions, then sit back and wait for the wires. If only it were that easy. Or that fast.
The truth is that if the stars align and everything goes well, it will take at least 3 months to raise a round. 6-8 months is more typical, and that assumes the startup is actually ready for investment. Most aren’t.
Plan accordingly. You don’t want to be a startup that runs out of money. Here’s what you should expect.
Step 1: Prospecting for a Lead Investor — 2 months
When you start reaching out to potential investors, you’re likely to get a bunch of encouraging responses. You send the deck and schedule a few calls. They’re interested! You’re elated.
If each puts in $100K or $250K, or gasp, $1 million, the round will be oversubscribed in days. You’ve already got the champagne chilling in the fridge. This is going to be easy!
They’re interested, they claim, but when you ask if they’ll invest, they tell you to follow up after you sign up a lead investor.
Finding the lead investor is the first hurdle, and it can be a high one. Unlike the friends and family round where individual investors write checks to support you, in this round, investors are looking not just for good ideas but for good investments. That means valuation and terms matter, and a thorough analysis of the startup is absolutely essential.
The lead investor negotiates the terms with the founders, including the term sheet and investment documents. The lead investor puts in the largest cheque in the round and performs a full diligence process. The lead investor will also serve on the company’s board of directors. (More on the role of the lead investor here.)
Being lead investor is a lot of work and requires a team with technical, marketing, legal, patent, and financial expertise along with deep industry knowledge.
An individual is not prepared to be a lead investor, so even when I see an interesting pitch, I won’t consider it seriously until after the terms are negotiated and the investment fully vetted.
If you’re starting from scratch, identifying a potential lead investor takes at least a couple of months of sending out decks, doing pitches, answering questions, and iterating.
Step 2: Lead Investor Diligence— 3 months
Once you find an investor willing to be the lead, you think you’re almost done. The truth is, you’ve just reached the starting line.
First, they’ll have to negotiate the term sheet with you. Once signed, they’ll begin a detailed diligence process, going through all the materials in your dataroom, interviewing customers and industry experts, and perhaps even hiring consultants to review the technology, patents, or market.
Once that’s done, they’ll work with your lawyers to draft the investment documents. If you’re using a SAFE, it can be done in an hour. Preferred shares, on the other hand, can take a month to create all of the various documents and legal filings.
If everything falls into place, this phase can be finished in 2 months. But inevitably, there’s holdups. Perhaps they want you to refine your financial models. Or one of your corporate formation documents needs amending. Or a customer they need to interview isn’t available now, their lawyer is in New York on an emergency, or one of the VC’s partners is on cruise. You have to wait.
No matter how urgent the funding is for you, it’s not a high priority for anyone else, and looking desperate is counter-productive. Count on the diligence process taking at least 3 months.
Once diligence is complete, the deal is pitched to the investment committee for a vote. Hold your breath because if it fails, it’s Return to Go without collecting $200. Assuming it goes well, the lead investor is on board. Congratulations.
Step 3: Filling out the round — 3 months
You’ve filled $1M of your $2M raise from your lead investor. Now you just need the remaining $1M.
This is the easy part, right? You’ve got 10 investors who said they were interested in investing once you had a lead investor. All you have to do is send them the term sheet and sit back while the cheques roll in. If only…
Of those 10 people who said they were interested 3 months ago, half ghost you now. They might’ve been interested if the terms were more attractive, or the lead investor more impressive, or they weren’t busy on something else, but now that they have to decide if they’re going to seriously consider investing or not, it turns out they weren’t all that serious.
Another 2 or 3 were actually interested, but…well, that was 3 months ago. The fund is fully committed now, or they’ve invested in a competitor, or changed their thesis and are no longer investing in your space. “Sorry,” they say, “we’ll have to root for your success from the sidelines.”
So maybe 2 or 3 of those interested investors are actually interested now. If you’re lucky, one or two might ask a handful of questions, sign the documents, and send in their cheques. That might be $100K, or might be $25K.
So you’re kind of back to step 1. It’s time to start prospecting for fresh investors. But you’ve got a good product, have a lead investor, and have made so much progress with customers in the previous 3 months that the current valuation feels like a steal.
You should be applying to angel groups if they aren’t already your lead investor. (How to get funded by angel groups.) Each group has a slightly different process, but they all follow a similar playbook.
If you apply to my group, your application will go to our pre-screening committee. If you pass their filter, you’ll be scheduled to pitch at a monthly screening session. If there’s interest at the screening, we’ll schedule a deep dive call, and then put together a diligence committee to investigate everything.
If the lead investor did a thorough diligence report and are willing to share it with us, we can conceivably complete our own diligence in a couple of weeks. (If we can’t leverage their efforts, then add a couple of months for us to repeat the full diligence process, so make sure to find a lead investor open to collaborating with others.) Once our diligence is complete, we’ll prepare an internal deal memo and have a member vote on investing.
From the time you apply to our group until the time we sign the documents typically takes around 3 months.
Our group might invest between $200K — $400K. That still leaves $600K remaining in the round. In parallel, you should be talking to other angels, angel groups, and microVCs so that in another month or so, you’ve filled the round.
Congratulations! Your raise is complete. It only took 8 months.
Now that you’ve completed your pre-seed raise, you can move on to more important things. Like prospecting for your seed raise.
Speeding Up the Process
Here’s how to complete the process in 3 months instead of 8:
- Always be prospecting for investors, starting at least a year before the raise. Keep them in the loop with a monthly investor update. Reach out again before you actually begin raising. In other words, start raising before your raise. Then when you meet the milestones to open the round, you’ll already have excited candidates for lead and follow-on investors.
- While the lead investor is doing their diligence, keep working on the follow-on investors. That way, you’ll be able to fill the remainder of the round in a month instead of 3 months.
- Have a complete deal room with everything needed for diligence (full list here). Have detailed financial plans ready for review and discussion. Anything missing will add delay.
- Strategic investors and corporate venture capitals (CVC) can offer incredible assistance with the product and strategy while providing validation to other investors (though see this article for downsides), but are not known for moving quickly. If you plan to have strategic investors in the round, start early.
- Avoid August and December. Nothing happens in those months. Those dead months aren’t included in these time estimates.
Final Tips
Fundraising is frustrating and time consuming. Come prepared.
- Be at the right milestones with reasonable expectations for valuation. Otherwise, you’ll waste 3–8 months and still not be any closer to investment.
- Be tenacious. But not too tenacious. Be patient. But not too patient. Check in frequently with your deal lead to understand where they are in their process.
- Understand that the process takes time and you can’t change that no matter how much you need the money now.
- Don’t look desperate or investors will flee. Nobody wants to invest in a startup that’s about to run out of money.
- Plan your cash flow. The raise will take 3–8 months. Make sure you have sufficient runway to carry you through.
The startup, SüprDüpr, has already burned through hundreds of millions in investment building a prototype teleporter. Now they need to do an IPO before they run out of cash. What corners will they cut to bring their teleporter to market as quickly as possible? Find out in my Silicon Valley mystery, To Kill a Unicorn.
