How founders can prepare for late-stage fundraising from the start

Raising $250 million in a fourth round of funding may seem like a distant and unnecessary distraction to startup founders pitching investors for their first $1 million in seed money. But that doesn’t have to be the case, according to many founders and venture capitalists. In their view, founders should strategize later-stage fundraising from the beginning.

While on stage at TechCrunch Disrupt, startup founders should start thinking about their follow-on rounds before they get their first funding, said Saadi Khan, co-founder and CEO of Aven. This strategy allows founders to determine how much capital they will likely need as their startup grows.

“We are a capital-intensive company; we offer consumers asset-backed credit cards,” Khan said. “We need large amounts of capital to scale our business, and we will need very large amounts of capital to grow. From day zero, we knew we needed an intense group of investors that we wanted to work with over a long period of time.”

Founders who understand how much capital they need can focus on finding the right investors for an early round while building relationships with later-stage investors of the same flavor.

Leila Preston, head of growth at Generation Investment Management, said startups should start building these relationships at least two years before they need capital.

Preston added that starting these relationships early gives investors time to get to know the business and the market in which it operates. It also gives investors a peek into the company’s growth.

Some later-stage investors — such as Generation Investment Management — can add value to a company long before investing, if they think the idea is promising, Preston said.

“When we attend, even in Series A or B, we have done the homework so that we have an additional conversation that is worthwhile,” Preston said. “What are your milestones?” “What does success look like to you?” As an entrepreneur, (if you) are able to articulate that, you can go back and say, “Yes, I was able to achieve my milestones.”

Xia Yang, partner at IVP, agreed and added that later-stage rounds are closing faster than ever. Giving investors time to get to know your company beforehand helps both sides, Yang noted.

“It definitely helps to get to know these people earlier than you think you need to,” Yang said. “When you’re actually nurturing, you’re talking to people you know you probably get along with, or a couple people who have already thought about your work a little bit, etc. So it definitely helps to think about it in advance.”

Yang added that when early-stage companies start talking to later-stage investors, they don’t necessarily have to share all their numbers or metrics yet. Instead, they can share the overall direction of the company and the overall vision for what you’re building.

Startups looking to find these late-stage investors should start by shifting to their current cap schedule, Khan said. Existing investors in the company can connect the founder to other venture capital funds — his early investors introduced him to Khosla Ventures, which led the company’s Series E round — which may be a good fit or have worked well for investors at the cap table in the past.

“At any stage of fundraising, we were always thinking about the next group of investors,” Khan said. “We try to build relationships in the pre-round with an investor who is really focused on the next-stage round. Sometimes we let them in as a token check to actually start establishing a relationship.”