The biggest mistake of your first funding round / Founders’ Network Knowledge

4 Jul, 2016

Our Founders’ Network events might be exclusive to our hand-picked network of digital business founders in the North of England, but we’re keen to share the knowledge and insights from these events with you, our wider audience. Here’s Part 2 in our Founders’ Network Knowledge Series. Over to workshop leader Rob Fitzpatrick…

First a general caution, and then some practicalities.

The biggest mistake of first-time fundraising is starting too early. It’s not a sooner-the-better situation. Fundraising is uniquely distracting. If you start before you’re able to quickly close the round, you’ll significantly slow down your product and traction. Which means you’ll move slowly compared to your peers, which makes you a less attractive investment. But by that point you’ll have less runway, so fundraising will seem even *more* important. It’s a vicious cycle.

To get a clear picture of what constitutes “too early”, it’s helpful to imagine the introduction email an entrepreneur friend of yours might make (an entrepreneur previously funded by the investors in question) to the investors you want to talk to.

Consider this email:

Hey Jake, want to connect you to Rob. He’s a really great entrepreneur with an incredible vision for the XYZ industry. They haven’t launched yet, but I’m sure once they do, they’ll go on to do great things. Hope you guys have a chance to grab a coffee.

If you’ve never been through it before, maybe this seems like an alright intro. It’s warm, it’s complimentary, and it’s never going to work. If you even get an answer, the best you’re going to get is advice, not money.

Now consider this one:

Hey Jake, meet Rob. They launched a private beta about 3 months ago in the XYZ space. Progress so far with ~250 test users:

  • * 3,000 emails on the waiting list (20% growth last month)
  • * 85% monthly retention (up from 65% at launch)
  • * Unclear monetisation, but some promising results from early tests including 2 letters of intent

Hope you guys have a chance to grab a coffee.

Sounds a bit different, right? The first email contained fluff. The second, progress. The first could be a pipe dream. The second is clearly the beginning of a business.

But what if your company doesn’t have a nice bullet-point list of evidence yet? What if it’s still months til launch and you want the money now? In my experience, your best bet is to forget about the investors, tighten your belt, and double down on transforming your potential into progress.

Exceptions exist, but they don’t disprove the rule. If you’re already a proven entrepreneur, you can often raise on a vision. Or if you’re in a particularly frothy industry (e.g. fintech had lots of idea-stage investments recently). But if you’re starting out, the difficult truth is that nobody owes you anything, and they certainly aren’t obligated to hand over their money just because you really, really want them to. You have to show them you’re already winning. And you achieve that not with a polished Powerpoint, but with real progress.

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Assuming you’re past the accelerator benchmark (see below), I’d always suggest you apply to the top-tier accelerators. The applications don’t take much time, so it doesn’t drag you into the time-trap of talking to later-stage investors. Being accepted into one of the top accelerators is pretty much always worth the equity. The application process sees a huge number of applicants and the results are spiky (e.g. the companies that get in are always good, but not all good companies get in), which means it serves you well to apply early and often. They don’t hold multiple applications against you.

For angels and VCs, get your introductions from other entrepreneurs who have already raised from the investor in question. Intros from people who “know” or “met” the investor are worthless. This is one of the main reasons to build your peer support group. You don’t need to be best buds with the source of the intro, but you do need to have known them for long enough that they’re confident you’re worth connecting. A hope and a prayer aren’t enough here either; the introducer has to have seen you make stuff happen.


Before the intros, get benchmarks about the progress you need to raise the amount of money you want. Some very vague rule-of-thumb benchmarks (and remember these vary wildly between industries and countries):

  • Accelerator: £20,000 to £100,000: team, big vision, big market, working prototype
  • Angel: £100,000 to £1m: launched product, happy users
  • Series A: £2m to £10m: extremely happy users, plausible revenue model
  • Series B: £5m+: explosive growth, revenue model

Avoiding investors until you’ve reached the right benchmark is how to avoid this trap. Talking to accelerators before you have a team is a waste of time. Same goes for talking to angels before you’ve launched and seen some optimistic numbers.

Assuming you want to raise money at all, this is the ‘strategic’ part of fundraising. It’s making sure you’re fighting a battle that can be won and that you’re sensibly allocating your time (the most critical early-stage startup resource). For the tactical stuff (which is also super important), just read Paul Graham’s essays on it. Remember that no amount of tactics will help if you’re starting too soon.

Focus on progress over pitching

As for whether you even *should* raise money, you’ll have to make your own call on that. But by focusing on progress over pitching, you may be surprised to find that you’ve become profitable and can delay the investment question until you’re doing it from a position of true strength.

Read Rob’s previous post: How much are you raising and what’s it for? Founders’ Network Knowledge Series

If you’re a startup founder based in the North of England you can apply to join the Tech North Founders’ Network

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