This is a guest post by Mike Katchen, founder and CEO of Wealthsimple, a low fee online investing platform.
Since my recent post about how Wealthsimple raised $2-million in two weeks, I've been asked how we raised our next round of $30-million just six months after launching our product. While every company's story is somewhat unique, we used several tactics that are relevant to many startups looking to raise capital.
First, a quick note about Seed and Series A rounds of funding. Seed rounds are used to fund very early-stage companies and help get a product to market. They typically range from $250,000 to $3-million and require a good idea in a massive market with a killer team. On the other hand, Series A rounds are about funding growth. They range from $5-million to tens of millions. Companies that raise these types of rounds have usually demonstrated meaningful traction in their market, like 20 to 30 per cent growth of a key metric each month.
Here are a few tips based on what I think we did right.
1. Have one jaw-dropping metric.
While a seed round is about selling a dream, a Series A is about selling traction. To be successful, you'll need at least one killer metric that demonstrates momentum in your market. For Wealthsimple, it was 10 per cent week-over-week growth in funded clients for 20 consecutive weeks. A killer metric does two things. First, it proves that people want your product. Second, it gives your sponsor (e.g., your internal champion at a venture capital fund) something to sell to their colleagues.
If you don't yet have a killer metric to show, don't raise a Series A. Until then, focus on building a product people love. Great numbers follow great products.
2. Your investors don't have to be in venture capital.
We closed our $30-million round with a strategic partner, Power Financial, one of the world's largest financial institutions. I see many entrepreneurs focus exclusively on venture capitalists, and often exclusively on top-tier VC funds. That's a mistake. Strategic partners bring deep pockets, distribution and expertise that can help you grow your business. They have the most to lose from your disruptive technology and the most to gain by partnering. They are typically less experienced venture investors and open to non-traditional deal structures. On the other hand, they can be slower to work with. If you plan to pursue strategic partners, try to get a warm introduction, invest early in building the relationship and make sure you're working with a decision maker.
3. Create options for yourself.
You want to create options to generate the best terms. Getting your first term sheet will take time and require building relationships. It took us three months. From the day we launched, we met regularly with a small group of venture and strategic partners we thought could be a fit. Once we had our first term sheet, we used that to drive urgency with other potential partners. Within two weeks, we had three term sheets and interest from several other companies.
4. Set deadlines to create urgency.
Fundraising has a nasty habit of dragging on. As soon as you have a term sheet, set a closing schedule to drive urgency with potential investors. You don't have to stick to it, but you'll find things move way faster with a deadline. Try to agree on a timeline before signing a term sheet. They often include things like exclusivity and non-disclosure clauses which limit your leverage.
5. Don't stop building.
Most importantly, don't stop building. Fundraising can be a huge distraction. It's important to stay focused along the way. If the deal doesn't work, you still have to build your company. Plus showing rapid progress to potential partners can be very powerful. We met our partner the week we launched. When we met again four weeks later, we had launched two mobile apps and four weeks after that we launched a new business line. The momentum we showed between meetings was one of the most compelling reasons for the investment in Wealthsimple. Execution speed is one of your biggest assets as a startup.
Connect with Michael Katchen on Twitter at @mkatchen.