Step-by-step breakdown of getting financing from your lead investor and why it’s harder than you think.
As a startup founder, one of the hardest truths you’ll face is that startups don’t fail, they just run out of money. The process of raising an investment round is rarely as quick and easy as you might think.
If you’re new to fundraising, you might expect it to take a month or two — NOOOOOO! The reality is that even under ideal conditions it will take at least 3 months. Unless you already have a list of investor friends who would be willing to invest in a heartbeat.
More accurately, you’ll be looking at between 6 and 18 months from start to finish. And this happens while you’re building your company, forging new alliances with other people, attending trade shows, networking, and all that. And that’s assuming your startup is even ready for investment — many are not.
When you start reaching out to potential investors, you’ll probably receive positive responses — people saying they’re interested, listening to your pitch, and giving you hope. But once the dust settles, you’ll discover that no one is willing to commit without a lead investor. The lead investor is crucial because they set the terms of the deal, perform due diligence, and essentially validate your startup for other investors.
Finding this lead investor can be the most difficult part of your raise. Unlike friends and family rounds, where people invest because they believe in you, professional investors want to see a solid opportunity. They are analyzing everything: valuation, market potential and the fundamentals of your business. The lead investor typically puts up the biggest check, negotiates the term sheet, and takes a seat on your board. This process alone can take a couple of months of contacts, introductions and negotiations.
You’ve found a lead investor, great! Are you almost there? No. Now the real work begins. The lead investor will need to perform due diligence on your business. This involves reviewing all your documents, interviewing clients, analyzing your market, and potentially bringing in outside experts to evaluate your technology, patents, or financial models.
Once the term sheet is signed, the legal process begins, which could be quick if you use something simple like a Simplified Agreement on Future Shares (SAFE). But if you’re raising in preferred stock, expect the legal work to take a month or more. And let’s not forget that things will inevitably come up: whether it’s a missing document, an unavailable client, or a lawyer on vacation. Even if you need the financing urgently, others will not treat it as a high priority. The diligence phase will almost always extend to 3 months.
With your lead investor secured, you now look to complete the rest of your round. Here you might think things get easier. After all, you have stakeholders who said they would invest once you had a leader. But here’s the kicker: many of those initial promises will fall apart. Some investors will disappear, others will have moved on to other commitments or may have already committed their funds elsewhere. Of the 10 investors you thought were lined up, only 2 or 3 might still be interested.
You’ll probably find yourself back at square one, looking for new investors to complete the rest of your fundraising. But now you have a lead investor and more traction, which puts you in a better position than before. You’ll want to consider pitching to angel groups and microVC investors, while maintaining momentum with your product or customer acquisition. From there, you should plan for another 3 months of work to close the round.
Getting financing can take time, but there are ways to speed up the process. Here are some tips:
• Always be prospecting: Start building relationships with potential investors at least a year before you need to raise. Keep them updated regularly with your progress.
• Work on secondary investors early: Don’t wait for the lead investor to finish his diligence. Keep conversations in parallel with other investors.
• Prepare your trading room: Have all your financial models, legal documents, and diligence materials ready beforehand to avoid delays.
• Avoid August and December: Investors are usually inactive during these months, so avoid scheduling your fundraising during these times.
Getting financing is a marathon, not a sprint. The process can be frustrating and time-consuming, but it’s vital that you manage your expectations and cash flow to ensure you don’t run out of funds while waiting for financing. Here are some additional tips:
• Stay patient: Diligence takes time, and rushing or showing desperation can drive investors away.
• Keep realistic goals: Investors need to see solid progress and achievable goals.
• Balance persistence with patience: Follow up, but don’t push too hard, or you’ll risk seeming desperate.
• Don’t look desperate: Nobody wants to invest in a company that appears to be running out of money.
Ultimately, getting a round funded is about much more than sending pitches and waiting for transfers. It’s a long, deliberate process that requires preparation, patience, and constant communication with your investors. Plan for the long term and always have more track time than you think you will need.
