Raising a $250 million Series D round may seem like a distant and unnecessary distraction for startup founders pitching investors for their first $1 million in seed money. But it shouldn’t be, according to several founders and entrepreneurs. In their view, founders should plan from the beginning a strategy for these later stages of fundraising.
Aven co-founder and CEO Sadi Khan said while on stage at TechCrunch Disrupt, startup founders should start thinking about their next rounds before raising their first round of funding. This strategy allows founders to determine how much capital they will likely need during the growth of their startup.
“We are a capital-intensive company, providing asset-backed credit cards to consumers,” Khan said. “We need large amounts of capital to scale, and we’re going to need large, large amounts of capital to grow. From day zero, we knew we needed an intensive set of investors that we want to work with for a long time.”
Founders who understand how much capital they need can focus on finding the right investors for an early-stage round while building relationships with like-minded later-stage investors.
Lila Preston, head of equity development at Generation Investment Management, said startups should start building those relationships at least two years before they need the capital.
Starting these relationships early gives investors time to get to know the business and the market in which it operates, Preston added. It also gives investors a look at the company’s growth.
Some later-stage investors — like Generation Investment Management, Preston said — can add value to a company long before they invest if they think an idea is promising.
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“When we show up, even in Series A or B, we’ve done the homework to be a worthwhile additional conversation,” Preston said. “What are your milestones?” “What does success look like to you?” As an entrepreneur, [if you are] able to articulate that, you can go back and say, “yes, you were able to hit the milestones you set.”
Zeya Yang, partner at IVP, agreed, adding that later-stage rounds are closing faster than ever. Giving investors time to learn about your company beforehand helps both sides, Yang noted.
“It definitely helps to get to know these people earlier than you think you need to,” Yang said. “When you’re really growing, you’re talking to people, someone you know you probably get along with, two people who’ve already given your business some thought, etc. So it’s definitely useful to think about it beforehand.”
Yang added that when early-stage companies start talking to later-stage investors, they don’t necessarily have to share all their numbers or metrics yet. Instead, they can share the general direction of the company and the overall vision of what it is building.
Startups looking to find those late-stage investors should start by turning to their existing capital slate, Khan said. A company’s existing investors can connect the founder with other VCs—his early investors introduced him to Khosla Ventures who led the company’s Series E round—that would fit or have worked well with investors at the table in the past.
“At any given stage of fundraising, we were always thinking about who the next set of investors would be,” Khan said. “We try to build relationships in the previous round with an investor who is really focused on the next stage round. And sometimes we let them come in as a token check to really start building a relationship.”
