Insights from a Tech VC - Fundraising & Finance

Insights from a Tech VC - best practices in Fundraising & Finance

As active Seed Stage investor, we see it as our responsibility to provide 360 degree support to our portfolio. This includes advice in strategic decisions as well as support in everyday operational tasks. We have been building up Tech companies for over 20 years and we learned a lot from each challenge and obstacle we were faced with during those times. Today, we pass this knowledge and experience on to our portfolio companies to help them succeed on each of their individual missions. 

When we meet a new team, we first need to understand the technology, product and vision of the founders. Then, we get to work on commercialization.

Our daily business at Freigeist includes working with our founders on commercial activities such as marketing, sales and business development as well as finance and legal. 

Finding the right commercialization strategy

In order to come up with the right commercialization strategy, you first need to define your ideal customers and the key problem you solve for them. Since we’ve accompanied many teams in finding their product market fit, we can provide valuable experience in this area. We then take a look at the different possible revenue streams, market size and competitors. Furthermore, we examine the current marketing and sales channels, as well as the defensibility of the product. IP is a very critical and often difficult process, and it is crucial to find the right balance between pushing forward on product development and production, and securing the IP of the most innovative features as early as possible. 

After zooming in on the value proposition, current traction and growth potential, we take a look at the implications of our commercialization strategy on the organisation on the cost side. From our experience, it helps to use the financial model as a tool to structure your commercialization strategy and capital requirements.  

Knowing your Financials

Having a solid financial plan is essential not only to keep an eye on your finances but also with regard to fundraising and talking to potential investors. The structure of your financial plan depends on the type of business and product, if it's B2B or B2C, if you’re selling software or hardware. But in general, we would advise having a financial plan for the next 24 months on a monthly basis, and after that, at least on a quarterly basis for another three years. 

Every investor knows that it is extremely difficult to accurately foresee the future of a growing startup for more than 12 months and no one expects you to, but having a rough plan for a longer period of time can show potential investors whether your startup can be scaled. You want to show potential investors where you’re heading and what your vision for the future is. 

From our experience, a good financial plan includes a Profit Loss Statement, a Cash Flow Plan, Revenue streams based on customer categories or channels, team and fix & variable costs.

The cash flow plan should be on a monthly basis for 18-24 months. Revenue streams should be divided into subcategories or categorized by customer size for SaaS startups. Regarding the team, you need to have an idea of when you will need to make which key hire and put aside the money for that. Do not use macros or external links, as they will most likely crash your Excel.  

Taking a look at your financials can give you a good idea of whether you have the right revenue model and pricing in place, and at which point you might have to raise further equity financing. From there, you can more accurately plan how your marketing and sales channels will scale over time and which milestones you will need to reach at what time in order to attract further funding at certain stages. 

Of course, we also take a look at alternative or additional financing options like access to debt or other non-dilutive financing instruments. 

While we always want to have the big picture in sight, it’s equally important to keep track of the weekly and monthly progress, which we do with the help of KPIs and OKRs. Having scaled up several teams in the past, we value the importance of organizational structure, clear processes and the right amount of management tools.

Fundraising: Finding the right investors 

Given our focus on early-stage tech companies, equity funding is an important part of our work with the teams. Especially in deep tech, the seed funding we provide will usually only last 12 - 18 months, and then further funding rounds are needed. This is one of the reasons why on average we only do two investments a year - we want to make sure that, particularly in those 12 - 18 months, we can offer hands-on support to the founders in reaching the relevant milestones to attract further funding. 

This also includes supporting the teams on putting together a solid presentation and financial model. Being investors and screening countless pitch decks in our deal flow ourselves, we know exactly what your pitch should include, and how to clearly communicate your technology, product, roadmap, market, commercialization and team. 

Not only do you need to figure out how to pitch your startup but also to whom. We can help you get in touch with the right investors. As active seed investors, we believe that every funding round is an opportunity to bring additional know-how, experience and network on board. So it’s very important to thoroughly consider who would be the right investor at the current stage. In addition to that, you’ll also want to think about the long-term financing strategy. Raising too much funding from too many parties early on can lead to complications in fundraising down the road, as most investors (as do we) prefer a clean, lean captable. So you always need to think about what the cap-table will look like after the current and future financing rounds. Depending on the situation you’re in, it might also make sense to issue a convertible or go for a priced round. When choosing who to reach out to, you also want to ask yourself if investors can support in future funding rounds.

Support in fundraising rounds 

Once our portfolio company has found the right investor for a fundraising round, we support through due diligence and help negotiate fair and balanced terms. This is usually an intensive and delicate process. It is important to understand, which terms really matter and how to handle things like governance and reserved matters, liquidation preferences and down-round protection, right of first refusal, tag-along, drag-along, as well as a fair warranty regime. 

Not only do these terms need to properly align the interests of the current parties, they also need to provide a solid framework for future financing rounds. Fundraising can be a very time-consuming undertaking, with pitfalls that can potentially derail the process or even the whole company somewhere down the road. That’s why we prefer to build on experience and a trusted network for the different funding stages to accelerate this process and avoid these pitfalls.

Supporting our teams hands-on - sometimes even in interim positions

Our unique financial and legal setup at Freigeist gives us the extraordinary flexibility to support the teams hands-on – as they need it. At Lilium for example, we were still in the process of recruiting the commercial team back in 2017, when the time was right for their Series B fundraise. So our CFO Marc supported the Lilium team as interim CFO. As active seed investor such opportunities are among the most rewarding moments. It was a great honour to be able to accompany the $ 90 million fundraising round with such an outstanding founder team. Looking at how far Lilium has come since then, we feel humbled to be a part of this success story.

Of course, filling in as interim manager can only ever be an intermediate solution and our end goal is always to get the right talent on board, which we talk more about in our article on HR & Organization. Yet, we’ve learned that finding the right people can take time, and we will support operatively as much as possible until you have the right team around you to support your mission. Besides our own team, another important asset we bring to the table is our founder network. For every decision, there is somebody in our portfolio who has already done it or can at least provide relevant experience. So we make sure that the teams are well-connected among each other, and we’re very happy to see the ongoing support within our portfolio.

If you want to join the Freigeist family, you can find more information on our investment focus, as well as career opportunities on our website. We look forward to getting in touch with you!