Quick Navigation:
- How to Raise Venture Capital as a Founder
- Where to Start: The 4 Key Questions to Ask Yourself
- James on Early Stage Valuations
- Ready to Raise? Do This First
- Types of Investor
- What to Look for in an Investor
- Red Flags that Indicate you Should Walk Away
- How the Capital Raise Process Plays Out
- Capital Raise Meetings Breakdown
- Typical Investor Mix
1. How to Raise Venture Capital as a Founder
Raising capital is a full-time job for at least one of the founders, for a period of months. Knowing who to talk to, what to expect, and what to look out for comes with time and experience.
Where to Start: The 4 Key Questions to Ask Yourself
When you decide that you’re going to raise capital, the first thing you want to do is to work out these 4 things:
1. How much do you want to raise? | • Only raise as much capital as you need for the next 12-18 months maximum.
• If you raise too much, you’re just giving away more of your business than you should, and you’ll find it a lot harder to raise large amounts at an early stage
• If you raise too little, you’ll have to start the whole capital raising process over again, within a matter of months |
2. What do you need the funding for? | See here for more details on this |
3. What do you intend the timelines of the round to be? | I’d usually allocated at least 3 months for this, from stat to finish |
4. What is your pre-money valuation? | • This may change later during Term Sheet negotiations, as investors will invariably value your business lower than you would ideally like
• The size of pre-money valuation you can command is very much dependent on the wider investment market and macroeconomic conditions.
• As a rule of thumb, at very early stage you probably won’t get a valuation higher than 20x your Annualised Recurring Revenue (as of 2025). Your product has to be pretty special for investors to go higher than this
• That means that if you’re repeatedly making $10,000 per month from customers, $10,000 x 12 months x 20 = your maximum pre-money valuation will be around $2.4m |
James on Early Stage Valuations
You also shouldn’t over-value your business at an early stage, as you run the risk of having to raise a ‘down round’ later, if the market shifts.
- For example, if you value your business at 30x your ARR, at a pre-money valuation of $3.6m, and you manage to convince an investor to invest at that price, you might count that as a big win.
- However, the next time you raise capital in 12-18 months’ time, even if your monthly revenues have increased by 50% to $15,000, the market may have shifted and investors may only be willing to invest at 10x ARR - meaning that even with your 50% revenue growth, your business is now only valued at $1.8m.
- Raising money at this price would mean you, and all your existing shareholders would have to take a HUGE hit in terms of dilution and what their shares are worth.
- So value your business carefully and sensibly, based on what you think your revenue growth will be, and being prudent about where the investment market might be for your next round in the future
🚨 Ready to Raise? Do This First
You’ll need to inform any existing shareholders of your plan to raise capital - and give them the information on the ‘4 questions’ above.
Your existing shareholders will usually have a ‘pre-emptive’ right to a proportion of the value of what you’re raising, based on their percentage shareholding (depending on your existing shareholder agreement with them). For example, if you’re raising $1m in new capital, and one of your shareholders currently owns 10% of the equity in your business, they have the right of first-refusal over $100,000 of the round.
Right at the start of your capital raising process when you announce your raise to your shareholders, ask them to indicate if they’ll be taking up their pre-emptive rights for this round. They may not confirm straight away - which means there’s always a little balancing that needs to happen during the round as you try and confirm exactly how much is available in the round for net new investors.
Types of Investor
In the early stages, when you’re first looking to raise funding, there are 3 main places to raise capital from (ignoring getting funding from your friends and family):
High Net Worth Individuals (HNW):
Angel Groups:
Venture Capital Firms (VC):
Comparing Types of Early Stage Investor
Positives | Negatives | |
High-Net Worth (HNW) | - Fantastic to show faith in your product if they come from the same industry as you - a huge plus point if you can trade on their name to get others involved in your capital raise
- Sometimes require less intense DD compared to the others
- Can potentially underwrite your entire round
- May also bring other HNW individuals to the table | • May have smaller networks compared to the others
• May want to be more of a ‘passive’ rather than ‘active’ investor in terms of inputs
• Can be slightly more risk-averse, if they’re not a regular startup investor |
Angel | - A solid entry-level option for many early-stage startups to get their first cheque
- They tend to follow-on into subsequent rounds (although cheque sizes may be limited)
- The regular pitch nights create a great opportunity to get in front of a group
- You gain multiple individual investors, but as a single entry on your cap table | • Some groups expect you to engage with members individually, in order to get them to invest
• Angels may want to be more ‘active’ in your business, which can often lead to drains on your time
• Follow-on cheques can be limited, as each individual Angel may be investing across many business at once
• Due diligence requirements can sometimes be inversely proportional to the size and maturity of the startup
• Tend to be administrated by one or two people alone - which can lead to bottlenecks |
VC | - Fund sizes are usually larger and therefore can take more of a round themselves
- Tend to invest at later stage (>$1m ARR at least)
- Will likely have a fair amount of ‘operational infrastructure’ to support your business
- Often have dedicated ‘follow on’ funds to invest a couple of times over | • Can be intimidating for first-time founders, who may assume that VCs will always have the ‘upper hand’
• Due diligence tends to be more thorough than the others, with more detailed data requests and analysis required
• Fund mandates can restrict the sorts of business they can invest in
• Those working in VC are there as full-time employees, therefore some VC associates will just book endless ‘catch up’ meetings to keep themselves looking busy, with no mandate to actually invest |
2. What to Look for in an Investor
When choosing an investor, there are various things you should be looking for, to give you comfort they’re right for you. There are also clear ‘red flag’ behaviours which should tell you to think carefully about whether to proceed with them.
Founder-friendliness
Ability to Compromise
Competency
Value-add
Track record
🚩 Red Flags that Indicate you Should Walk Away
In my experience (as well as from talking to other founders) there are some huge red flags of behaviour that should tell you all you need to know about investors. Many of us have shared stories privately of the behaviour of one or two (quite well known) investors in the NZ market who have done things like this:
Red Flag 1:
| Late & Unprepared | Turning up late to meetings, with little or no pre-reading done about your company, expecting you to fill in all the blanks for them. Worse still - not turning up to meetings at all, with no forewarning. |
Red Flag 2:
| Misalignment of Vision | Prior to investing, they propose fundamental changes to your product or service. This is particularly worrying if they are clearly trying to pivot you to being more aligned to their existing portfolio. |
Red Flag 3:
| Fishing for Data | They seem to be on a ‘fishing expedition’. A lot of VCs will do data gathering on behalf of their existing portfolio companies or even potential investments - and they’ll ask you lots of questions about your revenue, how you win customers and what your strategic plans are. You need to get good at spotting these ‘fishing expeditions’, so that you don’t end up inadvertently giving away all the secrets of your business to someone who will pass it to a direct competitor either locally or in a other country. |
Red Flag 4:
| Desire for Control | They want to play a controlling role personally themselves, or keep telling you what to do or that their ideas are superior, or that they have ‘big plans’ for what you’ll be doing next.
(In which case they’re not backing YOU as a founder, they just want to use your business as a vehicle). |
Red Flag 5: | Equity Asks Increase Annually | They demand an additional percentage in equity of the business for every year they are involved on the board as a director. This is not an acceptable practice, and is often a way that unscrupulous investors try and sneak more equity in your company, over and above what they pay for with their investment. |
Red Flag 6: | Inequitable Legal Representation | They propose that their chosen legal firm represent both sides of the deal - themselves and you. This is particularly tough for first-time founders who may not have already instructed a good lawyer, and it can seem like a sensible option that the investor may tout as ‘resulting in lower costs’ overall. There should never be any scenario whereby a single law firm represents both sides of the deal (regardless of how many ‘walls’ they insist will be in place internally). |
Red Flag 7: | Slow to No | They let conversations drag out for weeks on end, with no real progress being made. Sometimes investors aren’t ready or motivated to invest, but they want to keep ‘digging in to the business’ because they’re generally interested in your space. VCs will need to present to their IC (Investment Committee) internally at some point, to discuss any potential investment in you. If after the first few meetings they’re not talking about the potential for this, they may be just stringing you along. |
Red Flag 8: | Jump the Gun | They put out media releases or public announcements about the deal, before the deal is actually fully signed. This actually happened a few years ago, where in order to get the deal ‘moving along’ an investor put out a media release saying they had invested in a company. The founders had no idea until they saw it online, and quickly had to reign the investor in. Needless to say, the deal did not go ahead! |
Red Flag 9: | Pressure to Sign | They try to get you to sign a deal very quickly, not giving you enough time to speak to other possible investors. If they keep putting pressure on you to sign asap because of their ‘deadlines’, or claiming that they won’t be able to invest after a certain date, it could be a sign that they believe they negotiated themselves such a good deal, that they don’t want you to shop around. The key advice is - ALWAYS shop around. It’s important that you’ve spoken to a number of investors at a detailed level, so that you know you’re making an informed decision as to who you go with. If you can only find one single investor willing to invest and the terms are not favourable to you, it may be that now is not the time for you to raise VC funding. |
If you’re a founder, and you have other red flags that you think it’s worth adding here, for the benefit of other founders, feel free to let the WFW team know and we‘ll get this updated!
3. How the Capital Raise Process Plays Out
Running a capital raise process tends to follow a reasonably predictable formula, with a number of common steps. At the early stage rounds, it’s tough to capture and hold the attention of investors - but slightly simpler to get funding once you do. For later rounds (if your business is successful) it’s easier to get the attention of investors (often they come to you) however their due diligence requirements and internal sign-offs tend to be a lot more involved.
Here’s a breakdown of the main phases of a capital raise, from start to finish:
Capital Raise Meetings Breakdown
Stage | How many you’ll probably do |
Introductions | 25+ |
Initial Meetings | 10+ |
Partner Meetings | 5+ |
Initial DD / Data Requests | 2-3 |
Term Sheet Negotiation | 1-2 |
Legal & Finance Negotiation | 1 |
I’ve seen a few founders condense this entire process into a tight timeframe of a matter of weeks. They’ll send out intro emails along the lines of ‘we’ll be taking meetings on x date, if you’re interested, let me know ahead of y’ - however this takes a lot of confidence and usually can only happen as a later stage business - where traction is clear and a lot of information is publicly available. Trying this tactic as a first-time founder of a business with little-to-no public traction will probably not work.
DON’T BULLSHIT. If you lie in these materials it can have serious consequences for you later down the line. If your numbers don’t add up, don’t try and fudge them to get them add up. (See ‘Financial & Legal Due Diligence’)
Typical Investor Mix
When raising capital, it’s highly unlikely that one investor will take up your entire round. More often than not, it will be a mixture of different investors that you have impressed along the way, who want to invest in the round. Usually, the structure of your round will be along the lines of:
- One Lead Investor (who leads due diligence on behalf of the other investors) and will most likely request a board seat.
- Those that invest along with the lead investor, and get access to their Due Diligence report
- VC funds don’t like letting each other lead, so you’re unlikely to get multiple new (to you) VC funds co-investing in an early stage round
- Usually multiple VC funds investing in the same round happens at later stage
- Existing investors with pre-emptive rights
- Your existing shareholders always have a certain proportional allocation of the newly issued shares that they are entitled to by default.
- Some may choose to forego that right, but others will decide to ‘follow-on’ their investment and purchase their proportional allocation of shares
At the very start of a capital raise, when you tell your shareholders that you plan to raise money, you’ll need to confirm with them whether they plan to take up some, or all of their preemptive rights. This will then give you a clear picture of how much of the round is remaining for incoming new investors to purchase.
👈 Previous - Part 1: Is VC Right for My Startup?
