A New Model for Start-Up Fundraising


As they prepared to make their funding pitch, Waze’s founders knew they had a valuable solution to a common problem. Their technology would present a map showing drivers which route to take to reach their destination. But by collating the driving speeds of all their users, the app would also pick the routes that avoided the worst traffic. Users would get where they wanted to go. They’d arrive in the fastest way possible. And roads would become more efficient.

But the founders also had a problem. They didn’t actually have a map of any of those roads.

Waze’s technology would rely on real-time data from other drivers using the app to calculate road speeds and determine alternative routes updated constantly during the drive. But the maps themselves would also be built using data collected from drivers.

And because Waze wasn’t active yet, the founders had no data… and therefore they had no maps to show potential investors.

If an investor wanted to see the application in action, the only streets the app could show were the handful of streets the founders and a few volunteers had already driven.

So before the pitch meeting, the founders learned the home addresses of the potential investors in the room. They then made sure that they mapped the distance between the meeting room and each of the investors’ homes. If an investor wanted to see a working prototype, one of the founders would ask the investor for their address, type it into the app and present a route.

The investor would see how the app worked. They’d feel the satisfaction that comes from knowing the app would help them get home. And they’d pay less attention to the fact that the app could only help people who wanted to reach their home.

The ploy worked. The company was funded… and sold to Google in 2013 for over a billion dollars.

Waze’s solution to the challenge of fundraising was unique but the problem is universal. To turn a good idea into a good product, fundraisers have to go cap-in-hand to venture capitalists and hope that someone likes the idea enough and has enough confidence in the team to pour money into that cap.

And then they have to do it again. The first round will provide the seed funding that lets the team get the product up and running. If the product works, the company will need further rounds of funding in order to grow and scale. And if getting funding during the seed round is hard, future rounds are little easier. Some studies suggest that as many as 80 percent of start-ups fail to raise their Series A round.

One group of researchers though, believes that they have a process entrepreneurs can follow as they try to raise money. Shoon Chan (Timothy) Hor, Artemis Chang, Rui Torres de Oliveira, and Per Davidsson of the Australian Centre for Entrepreneurship Research and the Queensland University of Technology, reviewed the literature describing fundraising. They coded what they found, framed a set of design principles, and in 2021 built a process that entrepreneurs with digital companies could follow as they try to acquire financial resources.

In effect, they built a fundraising workflow.

The Pitching Process

The researchers build their system on the CAMO knowledge format which emphasizes Context, Agency, Mechanism and Outcome. Context, the researchers argue, is the world of funding. Knowing why, when and how to raise funds provides Agency, while strategic clarity, investor-readiness, and process-savviness are the Mechanism that increase the likelihood of a successful fundraising Outcome.

Strategic clarity means understanding why the company is raising funds by elucidating its goals, values, mindsets, and expectations.

“The need for an entrepreneur to think through strategically about why they are raising equity capital may seem obvious,” the researchers write, “because the venture needs the investment. The internal motivation driving that is, however, more critical. The need to raise capital to survive is different from the need to raise capital to scale.”

That’s particularly important because raising equity also means losing control and aligning the founders’ agenda with the agenda of investors and other stakeholders.

“If entrepreneurs are not strategically clear why they want to raise their Series A and are not able to articulate their business goals, next steps, expectations, and exit strategy, they are unlikely to get past the first meeting,” the researchers warn.

Investor readiness means only talking to investors when the company is at a stage that can meet investors’ requirements. The company’s technology needs to be ready to scale before the start-up moves onto Series A funding. But its management also needs to be prepared enough to lead that scaling effort and the start-up must have identified a market ready to receive and use the product.

The question of when a company is ready has no straightforward answer, the researchers state, a declaration that might surprise entrepreneurs. Founders of start-ups are more likely to believe that they’re always ready to meet potential investors and take on more funds. Or at least try to.

Process savviness is the footwork involved in prising funds out of the hands of investors. It’s the networking and the connection-building, the elevator pitches and the publicity, and an awareness of how to engage funding sources so that they’re more likely to loosen their purse strings.

Discovering the home addresses of the venture capitalists in the room and making sure that your mapping application can list them is one example of process savviness.

Strategic Clarity, then, provides the Why of a Series A funding round, the reason the start-up needs more money. Investor Readiness delivers When. It dictates the moment the founders take their eyes from the screens and head back to the meeting rooms. While Process Savviness explains How to make the pitch, what to say and the tone in which to say it.

The researchers took those insights and used them to build a process that unfolds over time. It starts with “triggering,” the Why and When of Series A funding. Founders need to think about what they’re trying to do and why they’re trying to do it. And they should review metrics such as cash flow, runway, growth and revenues to choose a moment to head back to the funding rounds.

They might find, for example that they can provide a good reason to look for more funds: to scale a product that’s already built. But the answer to When might be “not yet” if the product hasn’t yet shown it has the momentum to scale. At that point, the company might want to bootstrap, crowdfund or look for some kind of bridging loan instead of collecting rejections for its Series A applications.

After triggering comes what the researchers call “Networking-Engaging-Pitching.” This is the How. The researchers break the phase into four interrelated activities: organizing network ties, engaging funding sources, establishing legitimacy, and pitching. As soon as the seed round ends, the founders should be using their networks to identify potential Series A investors, sharing their story with them and updating them on their progress.

Investors, say the researchers, should have “enough information to keep them interested but not so much that they can evaluate your company and decide.” That decision comes in the next stage.

Pitching starts by scheduling pitch meetings tightly. Pitches need to be refined based on feedback, delivered in a way that creates urgency, and they should be followed up closely. At the same time, the networking and searches for new potential investors continues.

“The visual presentation of pitching as a connected circle implies that one can move back and forth between networking, engaging, and pitching,” say the researchers. “For example, a venture may decide to re-evaluate its readiness to raise funds and to stop pitching after engaging with and getting feedback from potential investors.”

The aim is to get at least one signed term sheet from an investor, which triggers the next phase: negotiating-closing. Much of that work, particularly the due diligence, will be performed by the legal team.

Planning Your Series A Fundraising

So if you own a start-up with seed funding under its belt and you’re thinking of growth, you need to take a moment to first think about the reasons you want more investment. Ask yourself what your company is trying to achieve and why it’s trying to do it.

Those questions are likely to be easy to answer. A harder question will be whether this is the right time to start looking for more money. A start-up will always need more funds. But the company needs not just to have created a working prototype but be in a position to do something with the money it’s about to receive. The time to ask for more Series A funds isn’t just when you’ve created your product but when you can also see that your product has a market and an appeal.

Throughout this time, you should also have been working your networks, meeting with potential investors and making sure people know what you’re doing and how you’re progressing. By the time you’re ready to pitch, you should already have a list people you want to speak to so that when you walk into the pitching room, those people already know who you are and what you’re doing.

And if you have their home addresses that you can add to your product, that might count as smart preparation too.

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