Raising $250 million in a Series D round may appear to be a distant and unnecessary distraction for startup founders who are asking investors for their first million seed dollars. However, in accordance with several founders and enterprise capitalists, this shouldn’t be the case. In their opinion, founders should develop a strategy for raising funds at a later stage from the beginning.
Aven co-founder and CEO Sadi Khan said that while on stage at TechCrunch Disrupt, startup founders should start considering about their later rounds before they raise their first funding. This strategy allows founders to find out how much capital they may likely need throughout the development of their startup.
“We are a very capital-intensive company; we provide asset-backed credit cards to consumers,” Khan said. “We need large amounts of capital to scale, and we will need very, very large amounts of capital to grow. We knew from scratch that we needed to have an intense group of investors that we wanted to work with for the long term.”
Founders who understand how much capital they need can focus on finding the right investors for an early round while building relationships with later-stage investors of the same profile.
Lila Preston, director of growth capital at Generation Investment Management, said startups should start building these relationships at least two years before they need capital.
Starting these relationships early gives investors time to learn about the company and the market in which it operates, Preston added. It also gives investors insight into the company’s growth.
Some later-stage investors – like Generation Investment Management, Preston said – can add value to a company long before making an investment if they think the idea has promise.
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“When we show up, even at Series A or B, we’ve done our homework and we’re a valuable conversation,” Preston said. “What are your milestones?” “What does success look like to you?” As an entrepreneur, [if you are] you can articulate it, you can come back and say, “yes, you achieved your milestones.”
Zeya Yang, partner at IVP, agreed and added that later-stage rounds are coming to an end faster than ever. Yang noted that giving investors time to learn about your organization in advance helps either side.
“It definitely helps to get to know these people earlier than you think you need to,” Yang said. “When you actually raise capital, you talk to people, one person you know you probably get along with, two people who have already thought a little bit about your business, etc. So it’s definitely worth thinking about it well in advance.”
Yang added that when early-stage corporations start talking to later-stage investors, they do not necessarily have to share all of their numbers and metrics yet. Instead, they can share the overall direction of the company and the overall vision of what it is building.
Startups looking to search out late-stage investors should start by using existing cap tables, Khan said. The company’s existing investors might connect the founder with other VCs – his early investors introduced him to Khosla Ventures, which led the company’s Series E round – this could be a good fit or he has worked well with investors at the cap table in the past.
“At every stage of fundraising, we were always thinking about the next group of investors,” Khan said. “We try to build a relationship in the previous round with an investor who is really focused on the next stage. And sometimes we let them come in as a token check to really start building the relationship.”