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How to Raise VC Funding: 6 Key Strategies

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At this moment in time, fundraising as a new company can be particularly challenging. While there is a tremendous amount of VC money up for grabs, much of it is being pumped into existing companies. In part, this is due to network bias—in this pandemic era, it’s just harder to get to know people over Zoom. So founders without existing networks—including disproportionately more women and people of color—aren’t getting as much funding and it’s taking them more time to secure that funding.

As a tech co-founder and CEO with a somewhat unconventional background in public policy, as well as a relatively recent immigrant to the U.S., I’ve learned how to build a network among VCs and raise funds from the ground up. To date, our company, Sorcero, has raised $16.5 in funding, with our most recent Series A round raising $10.5 million

As most founders will tell you, this process takes time, commitment and a thick skin—when you’re starting out, you will hear “no” from VCs far more than you will hear “yes.” But, if you’re truly obsessed with the problem your business solves, you’ll never quit. Here are 6 key strategies I’ve learned along the way to help fellow tech founders successfully navigate the hurdles of fundraising.

 

1. Pick your funding mechanism

First off, it’s important to make a decision about whether your company really needs and would benefit from venture capital, because not all companies will. VCs typically want to fund a company that will get them a 10x ROI when the company exits. The exit is less about profitability and much more about the potential for continued growth and market capture. If your chosen market affords you a big enough total addressable market (TAM) to reasonably get to $100 million ARR over five to seven years, you’re probably the right company for a VC to consider. If this is not the case for your business—or if you’re still in early days and aren’t sure—raising funds from high-net-worth individuals, angel investors or friends and family may be a better path for you.

During our founding in 2018, we completed an initial $1.7 million pre-seed note round, raising from both friends and family and two VC funds. These funds accelerated our growth significantly and allowed us to test multiple markets, build our core product and technology, and begin to hire the right team. The data from these efforts indicated we had a massive TAM and lots of space to play, so we raised a subsequent $3.5 million round in 2020. Through this process, we not only found a fantastic set of supporters and investors, but we also learned about the numbers that really matter to VCs.

 

2. Stand out with key numbers and a compelling demo

If you only focus on three elements of your pitch to potential investors, let it be your, “why does this matter,” your numbers and your demo. Truthfully, you don’t need anything else. Earlier-stage companies (Seed, Series A & B) must have a compelling story accompanied by a great “why” for investors to care. This not only indicates the size and quality of the target market but also speaks to the founders’ passion and dedication to solving this problem. A compelling story helps bolster a lack of statistically significant numbers which is true in the earliest stages of a startup.

Get clear on what numbers are materially important at each stage of your company’s development and let them speak for themselves.

The 10 most common numeric metrics VCs look for are: 

  1. Annual contract value (ACV)
  2. Net dollar retention (NDR)
  3. Cost of acquisition (CAC) 
  4. Cost of goods sold (COGS)
  5. Duration of the sales cycle 
  6. Churn/rate of renewal 
  7. Total pipeline value 
  8. Compounded annual growth rate (CAGR) 
  9. Earnings before interest, tax, depreciation and amortization (EBITDA) 
  10. Payback period magic number, which is a payback period of less than one year

If your numbers are good, they will demonstrate the value of your company, the growth you’ve achieved, and where the business is headed in a precise and undeniable way. The important thing to remember is that many of these numbers become more material as your company gets older. When Sorcero was six months old, VCs asking us for churn, for example, would never get a good answer.

Your demo is intended to prove to VCs that you have an actual product, to demonstrate how the product creates value for customers, and, if possible, the uniqueness of your technology. The overall goal is to tell the story of your company in a way that is compelling and that tangibly communicates to an investor the value you can build together.

What if an investor doesn’t bite right away? What if your numbers aren’t exactly where you want them to be? One of the key lessons I learned in fundraising is the power of demonstrating improvement. After an initial conversation with a VC, I would often go back to them 30 days later, with a better set of numbers. This kind of visible improvement—showing that we had hit or exceeded our goals—made a tremendous difference when it came to winning the attention of VCs. 

Even if they didn’t decide to invest at that time, they would often begin to track our company’s performance, and in some cases, offer funding later on. VCs invest in lines, not dots: If you demonstrate constant growth and performance over a period of time, they develop enough trust and are able to de-risk investing in you.

 

3. Focus on relationship building

An essential element of fundraising is relationship building. I mentioned earlier the importance of engaging investors and earning their trust. As in so many areas of our professional and personal lives, these human elements play a large part in our success. Building strong relationships—and maintaining them over time—allows you to become known and trusted amongst VCs. That’s why second-time founders often have an easier time securing funding. However, if you’re just starting out, it will take some time to build your network and foster these relationships. 

The best advice I can give is simply to start putting in the legwork now. The hard truth is that while more VCs are open to cold intros and emails, the vast majority prefer a “warm” intro. The definition of warm,however, can be broad and include common schools, workplaces, interest groups (even baking!), cultural groups and membership groups that are gender- or community-focused. Have those conversations, make those connections—even if you can only meet via Zoom. I have now raised two substantial rounds of capital via Zoom. This is difficult and will take many more conversations to bear fruit, but as the norms around how we do business change, this is becoming more accepted.  If you continue to cultivate those relationships over time and can consistently demonstrate the value and growth of your business, you’ll be able to fundraise successfully and repeatedly—often from the same VCs.

 

4. Demonstrate your expertise

In a specialized, regulated market like biotech, it’s imperative to demonstrate your domain expertise in pitches to VCs. Domain expertise is a curious concept. Expertise ranges from the subject matter (medicine/biology, public health) to operational (has had the same title before) to the business environment (has built or worked at a startup at this stage before). Demonstrating expertise doesn’t only speak to your own expertise but also that of your founding team. If a group of four people can collectively demonstrate the required expertise, it makes it easier to foster the confidence that VCs need to invest in you.

After all, to innovate and improve on what’s currently being done, you have to understand the space inside and out. This requires a deep knowledge of the regulations, the science and how your company will play within the market. If you yourself are not the expert in a particular area, make sure you have folks on your team who are.

 

5. Seek out human capital

With fundraising, we’re obviously looking for financial investment. But I always recommend seeking out human capital from investors, as well. Beyond money, are your investors willing and able to support you with advice and talent? What subject matter expertise do they have in running a business like yours? Some VC funds have an existing platform for providing human capital and resources to the companies in which they invest. Look for funds like these or investors who are willing to make that commitment. After all, once they’ve already bought into the success of your company, you want partners and mentors who will continue to help you drive that success forward.

Remember, depending on the stage of your business, the requirements of your investors change. In the beginning years, you need money, networks, advice and hands-on help on many more things than you do later. Finding investors who are both willing and able to support your actual needs are important. Later on, you are looking at the size of the fund and whether they are life cycle investors (Series X to IPO and beyond). At each stage, try to find investors who are personally and professionally invested in your success. It takes a village to build something of consequence.

 

6. Stay persistent and look beyond big VC firms

For new startups and founders, fundraising is a marathon, not a sprint. It’s also an emotional experience—you will face a lot of rejection throughout the process. So it’s important to stay resilient. Take the feedback you receive and use it constructively to improve your pitches, but never change the DNA of your company to fit a VC. Instead, focus on finding investors who fit with what you’re trying to achieve.

The best recommendation I can give you is to stay gritty and stay in it for the long haul. Double the amount of time you think it will take to raise funds. Look beyond the well-known firms—funding may come from quieter, less-public investors you may not have considered at first. And lastly, look at portfolios to see if a fund represents diverse companies. Are they committed to diversity? Who is going to sit on your board? Ultimately, it’s important to choose investors who align with your company’s values and support your vision. After all, they will become some of the most important partners in building your company’s success.


Dipanwita Das, CEO and Co-Founder, Sorcero headshot

Dipanwita Das is an award-winning technology entrepreneur and AI innovator. She is the CEO and co-founder of Sorcero, a venture-backed AI Saas product startup focused on using AI and NLP to inform critical decisions to improve lives.  Prior to starting Sorcero, Das was CEO and founder of 42 Strategies

  • Originally published March 22, 2022