The Venn Diagram That Will Change How You Fundraise

Growth is expensive. And cash is king. Yet financing strategy is the most-overlooked component of the business plan.

Financing Strategy is something to think about from the very outset of your business, but this technique is applicable for anyone with a business model that has prospects for a hockey-stick growth curve and/or that needs multiple rounds of capital to get to an exit.

But how will that number magically fuel your growth? Have you critically evaluated what is achievable, against what you need? Hoping you’ll “figure out how to pay for your growth later” is like buying a lottery ticket for your business.

Here’s how to build a strong financing plan that will keep the lights on and impress potential investors:

Step 1: Find the overlap between your cash needs and your ability to fundraise

First, you need to start thinking of your fundraising strategy as an input to your business plan, rather than an output.

A fundraise is the equilibrium point between:

  • the cash you need
  • the check size that investors would write for your business

You’re seeking product-market fit, except in this case the product is your business, and the market is the venture capital market. The task here is to work out what will it take, at each proposed round of funding, for your company (the “product”) to be sufficiently appealing to investors to write the check size that you need (the “market”).

That’s where you get Company/Investment fit.

Let’s look at each side of this Venn diagram more carefully:

A.  Your Cash Needs:

The required check size starts with summing up your cash flows until the next round, but it requires more strategic thought than that.

The real art here is understanding when that next round will happen.

You need to time your next round with a natural “gear change” for the company, where you have achieved enough proof points to justify a round to get you the next set of milestones (for example, expansion to a new market).

You also must build sensitivity around every part of this calculation: assume your fundraise will take six months longer, your CAC (cost of customer acquisition) will be 25% more expensive and your payback period is twice as long as you hope.

This is where you need to get real around cash burn, and potential cash burn, as it applies to the strategy you’ve laid out and the consequential operating requirements. It’s where you can clearly see that a significant competitive advantage can accrue from being able to do things with higher efficiency and/or leverage than competitors.

B.  Your Investability:

The “Investability” side of this equation will depend heavily on your business, but there are rules of thumb (for example – raise 12-18 months worth of cash needs, and keep dilution to 20% in each round). It ultimately comes down to showing strong growth, long-term profit potential and a sustainable competitive advantage. While team is a major factor at the outset when track record is scant, milestones take over greater power as you climb the stages of development. Benchmarks are available for certain business types – Christof Janz has a put together a great one for SaaS businesses.

From there, this becomes more art than science. Look at recent fundraises from similar businesses. Understand where you sit on the Hype Cycle and position accordingly. Most importantly, shamelessly solicit feedback from industry insiders and even failed pitches.

Where your needs and investors needs meet, a check size happens. And that sweet spot is not a number to set in your spreadsheet – this is the limiting reagent of your business strategy and operations. The key question is “what can we achieve with [X] amount of capital in [Y] amount of time?”

Step 2: Do it again

Now, it’s time to extend this thinking beyond your next round, all the way through exit-readiness. Plan out all of the future fundraises you’ll need if your business goes according to plan:

Your business evolves over time – in this case, each fundraise is really a new version of your “product,” which will open up new potential investors.

This step is about aligning your ongoing cash needs with a few discrete fundraising events. Unfortunately, it has all of the complexity from the last step, but now everything is a moving target. Try to project ahead in both your operative markets and the financing markets. Figuring out whether the VC market is moving towards an investor-favored market or an entrepreneur favored market will have a huge impact on your decision-making here.

For example, data shows that the next year or two may be an especially tough time to raise a Series A, so calibrate your plan to have a backup if your Series A takes longer than usual.

Step 3: Iterate

Now, go back and think critically about each of these fundraising events. If any round requires a check size that’s much bigger than your progress milestones can justify, you are lacking “fit” and you need to rethink that part of your plan.

If you’re already running out of cash in your rosy business plan, you’ll never stay liquid when you’re spending real dollars. But this is why we plan ahead!

At this stage, you can adjust almost everything about your business to close this gap:

  • Move financings either earlier or later
  • Adjust your operations plan to reduce expected burn rate
  • Find a way to improve fundraising KPIs, such as user growth rates or addressable market
  • Adjust timing for key (or expensive) strategic expansions
  • Consider supplemental funding sources such as venture debt
  • Reconsider your company’s positioning with investors – this is indeed a factor in every pitch (more on this in a later post)

The key here is to think about your Company/Investment fit, starting from Step 1 that will drive investor appetites.

If you already have investors, this is a great time to surface your concerns about the future pathway and possible stress points.

In addition to helpful feedback on your plan, you’ll gain insight into your investors’ long-term plans for your partnership.

And if you’re lucky, you may even get advance commitments for those future Venn diagrams.

Step 4: Throw the plan out

All done? Perfect. Now forget about it.

No battle plan survives first contact on the battlefield, and no business plan survives first contact with the target market. The financing plan you’ve just built depends on every other assumption you’ve made, and by the time you’re actually doing your Series B, it will be a different universe.

But that’s ok – being a great entrepreneur is not just about planning, but about being able to persevere and adapt when things don’t go according to plan – which is where most fundraises happen anyway.

Why, then, did you spend the effort to build a financing plan at all?

First, because this depth of thought will wow VCs and other investors. It will show in your pitches and supercharge your fundraising.

Secondly, this exercise is the ultimate gut-check for “is this a venture-scale business?” If you’re not, this process will help you understand why most business should not seek venture capital.

Finally, the cash flows to shareholders are the alpha and omega of your startup, and this process helps you see the convergence of the streams. Looking at your startup within the constraints of capital promotes a “cost of growth” mindset. In this context, you’re well-equipped to evaluate your unit economicscost of growthmarketing ROI and other fundamentals of your business.