3 Hot Tips to Succeed with Your Seed Round from a Previous VC Investor

We are really excited to present Melinda Elmborg, our new Accelerator Co-Lead, she is a super sharp previous VC investor. In this article, Melinda is telling her own story and sharing her top three VC secrets.

Hi, I’m Melinda!

I started my career as a Venture Capital Investor at the French VC firm Daphni, it’s a fund of €260M that invests in seed and Series A startups.

As an investor at Daphni, I met a lot of entrepreneurs which was very exciting! But after a while, I realized that you actually only invest in about 1 % of the startups you meet. I had to say “No” to hundreds of founders!

I didn't like doing that, because I felt that I was just wasting their time instead of helping them. I knew I had so much more to give. So… to be able to actually help startups, I switched careers to become a startup coach. That's how I started Startup Action.

After meeting hundreds of tech startups and their founders, I've learned what works and what doesn't. Based on my learnings, I've developed The Startup Action Framework that guides first-time founders to launch, grow, and raise capital successfully.  

My strongest area is of course helping founders with fundraising. As a previous investor, I can share all the juicy details of what is happening on the other side of the table.

I help startups to develop their pitch deck and help them to create a strategy for finding the right investors. Also, I do a roleplay with founders where the founder is pitching to me and I am the investor. After “the pitching” I give founders detailed feedback - we are going through how it went and what should be improved.

Ever since I became a startup coach  - my mission is to democratize access to venture capital for startup founders. I’m here to bridge the gap between founders and investors. Now I’m super excited to be a part of Fast Track Malmö to coach the founders in the program on how to raise funding.

So let’s get right into it, shall we? Crab a cup of coffee or tea and prepare yourself for some quality reading. Here, I’m sharing my top three VC secret tips with you, based on my own experience inside a VC firm.

 

Tip 1: Fundraise like a pro

To go out and fundraise as a first-time founder is really hard. And if you do it wrong, it can end up costing you your entire company.

The thing is - in 99% of cases, investors will act friendly in meetings and will seem positive about your startup. During a meeting, they might say, “This is interesting, it fits into our strategy,” or even “We could maybe invest €1m.”

The big mistake here is to take that friendliness and discussion of possibilities as a commitment and stop talking to other investors.

Normally, as a founder, you just need to have a pitch deck which is slightly better than the average to get on the phone with the investor!

The ugly truth is that the conversion rate can be less than 1% from the first meeting to the term sheet. Those are slim odds for a founder. So why does this happen?

First of all, investors tend to be extroverts, as their job succeeds or fails based on the network of people around them.

Secondly, investors will never make a decision based on only one meeting, or even two. Some of them might even be meeting you just because they want to milk you for information about the market — and end up investing in your competitor.

Getting all that information, whether from you, online, or other connections, takes time. It’s not until then that the investor can be confident enough to give you a clear “Yes” or “No.” Until that time, all that you’ll get is “Yeah, maybe!” And in most of those cases, that “Maybe” will lead to a “No, not this time.”

Fundraising is not like dating. Go ahead and be unfaithful. The investor is dating multiple founders in parallel — so you should do the same!

It’s not until you have the engagement ring on your finger that you can truly start to settle down. And even if you have a term sheet, you still want to keep your options open. When you’ve signed the shareholder agreement and you’re walking down the aisle, then you’ll wave all other investors goodbye.

Tip 2: Know what you’re worth

You already know that when you raise capital, you do that in exchange for a % share of your company. The % share depends on the valuation you agree on with the investor.

It is all good when you as founders own 100% of the company. But if you give away too much capital in early rounds of fundraising, you can end up in a situation where you have no more capital to give in exchange for more capital in the future.

You then become unattractive to future investors.

When it comes to setting a valuation of your startup, there is one rule of thumb:

In each fundraising round you do, you want the pre-money valuation to be at least 4x the amount of capital you raise.

This means that if you’re raising 100k, the pre-money valuation of your company should be at least 400k, but preferably 900k. If you’re raising 1M, your pre-money valuation should be at least 4M, but preferably 9M.

That way you give away a maximum of 20% of capital in each round, so you have equity left to offer future investors.

Here you have the results of a survey that we did at Fast Track Malmö a while ago with 25 investors, investing in different stages. For Series A it showed that if the founders own less than 41% of the company, they won’t invest. And you don’t want your startup to end up in that situation!


Tip 3: Use your metrics

When the investor gets what your startup does, it’s time to share some proof that you are successful in doing this. So try to find metrics to brag about - it’ll show the investor that you really know what you are talking about.

The best is if you can put a growth chart - a chart that is pointing upwards to the right. Feel free to experiment with different metrics you have at your startup.

You’ve got three options for metrics to show your growth:

  1. Revenue (or MRR if you offer subscriptions, or GMV if you have a take-rate).
  2. A number of actions taken by your users on your platform.
  3. The number of active users.

Remember that your average growth per month needs to be 10 % or more to be attractive to investors. If you’re at 20 % month over month growth, your startup will be really attractive to investors!

If you don’t have any metrics in your company that is growing 10 % or more month-over-month, you can look at other metrics that are impressive. The next best would be to present a flattened retention curve or something else that shows how people who start using your product love it and keep on using it.

If you don’t yet have users, you need to show traction and potential some other way. You can instead brag about any waitlist or quotes from interviews.

Your metrics are the best evidence that your startup goes in the right direction so use them wisely. Don’t let the investor doubt when you actually have great numbers to prove you’re a great investment case. Besides, it’s always fun to gather and analyze all your startup achievements  - it’ll work as an additional motivation and energy-boost for you and your whole team!

If you’d like to get my coaching in nailing your pitch and raising your first round from VCs - go ahead and join us in The Fast Track Malmö program!


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