The Five Phases of Fundraising

by Morten Lund, repeat entrepreneur based in Denmark, the chairman of LundXO and Tradeshift, and a prolific seed-stage investor. Backer of many of the most successful technology startups to come out of Europe, including Skype, BullGuard & Zyb.

I’ve had the pleasure of being on both sides of the venture fundraising equation, having raised money and, later in my career, invested it. I can tell you that it isn’t easy.

I’ve found that entrepreneurs seldom know what to expect during the fundraising process, not just on a procedural level, but also on an emotional level. They believe that their idea is amazing and that they’ll quickly find financiers that want to invest. They think of the financing as an event, a gateway they’ve got to pass through to get to their dreams.

Fundraising is better thought of as a journey. And the journey has multiple emotional phases. These phases aren’t necessarily the same for everyone, but most first-time entrepreneurs go through five distinct emotional phases. Understanding where you are in your fundraising journey can help you get through it easier.

1.      Outrageous Optimism

“Venture capitalists are going to love this.” Your idea seems like a real winner. You love it, and your friends think it’s the most brilliant thing you’ve ever done. Maybe you’ve gone through the process of making a business plan and charted out how your company is going to grow revenues to a billion dollars in just five years after getting venture funding. You feel great.

To raise venture capital, you’re going to create a target list of the investors you want to be involved. You look up who invested in Google or Facebook — or whatever the equivalent is in your industry — and decide those are the investors who would naturally be interested in your “next big thing.” You start scouring your network for people who can introduce you to those powerful investors.

2.      Tempered Optimism

“This is going to be harder than I thought.” Maybe you were able to get in front of those high-powered venture capitalists. If so, congratulations — you’re remarkably well-networked. But if you’re like most people, you didn’t come anywhere close to their pitch meetings. Did you send them a business plan? Sorry to say, but it went into a black hole. It’s a well-known fact that Kleiner Perkins Caufield & Byers gets over 3,000 unsolicited pitches via email each year.

Even the entrepreneurs who get in the door at a well-respected firm seldom walk out with a term sheet in hand. Venture firms are often looking for something very specific, and whatever that is may not be what you’re pitching. And no matter how attractive what you’ve got is, if it’s not what they’re looking for, no deal gets done.

You realize it’s time to broaden your search for capital and start developing a process for contacting firms, setting up meetings and following up afterwards to push for a deal. I don’t know what the current count is, but at one point there were 9,000 active venture capitalists investing in the world. Now is the time to extend your network and work to meet them.

3.      Perseverance

“Oh my god, this is the hardest thing I’ve ever done.” I heard those exact words from a successful friend of mine when he was raising venture capital. He met with 87 different venture firms over the course of four months and had multiple meetings with many of them. Some days he’d have breakfast with one venture capitalist, morning meetings with another, lunch with a third and two afternoon meetings across town. He was also trying to get his business off the ground at the same time.

At least it’s easier to do in Silicon Valley, where many firms have offices close to each other. In Denmark, it’s much harder. I had to travel to Germany, France, Italy, Switzerland, U.K. and even to the U.S. when I was raising money.

I’ve seen a lot of entrepreneurs change their pitch at this point to try to make it more alluring to venture capitalists. They’ll add “components” that are hot right now. It’s “X, now with a big data analytics component,” or it’s “X, now with a location-based social component.” It’s easy to get distracted by the buzzword de jour when fundraising and think that by tacking on a hot concept it will make your company hot by association. The truth is that buzzwords seldom, if ever, strengthen an entrepreneur’s original idea, and the kind of venture capitalists that they impress aren’t the ones you actually want to work with.

Winston Churchill offered particularly good advice for entrepreneurs in the middle of a long fundraising: “If you’re going through hell, keep going.” The important thing to remember during this phase is that perseverance pays off. Each “no” that you hear from a would-be financier brings you closer to hearing “yes.”

4.      Deal Optimism

“Finally, someone is ready to give me money. This is going to be great!” A lot of deals get done in desperation and are lamented for years afterward. Some entrepreneurs get to a point where they’re ready to jump into a long-term business relationship with anyone willing to sign a check. They close their eyes and hope for the best.

The truth is that if one venture capitalist is willing to do a deal, others may be willing to do it too, even some who said “no” earlier. It always makes sense to circle back around to the people who you had good meetings with and give them an update before you sign a deal.

It’s important to remember that the relationship between an entrepreneur and his investors only improves when everybody’s making money. If your company hits any problems — and all companies do — shaky relationships become a real liability. You want to be sure that you can see beyond your optimism and only work with an investor that you trust, respect and want to do business with.

5.      Returning to Business

“Money’s in the bank. We’ve succeeded!” Congratulations, you’re one of the few entrepreneurs that connect with early stage venture capital. You can use the money you’ve raised to start growing your business.

But it’s too soon to do a victory lap. Successfully raising money is just one step on the path to creating your dream business. It’s an important milestone, but it’s not the destination.

Morten Lund defies easy categorization with a career that’s carried him across industries and into the heart of revolutionary digital transformations. He’s started and run advertising agencies, technology companies and venture capital firms. He’s one of the most prolific startup investors in Europe and has been to bankruptcy and back in the pursuit of world-changing free enterprise.

Morten sold his first company to Leo Burnett when in his early 20s, ran leading European antivirus company BullGuard in his early 30s and began investing in technology startups. His seed-stage investment in Skype helped the company build a prototype of its revolutionary communications service. Morten took over Danish newspaper Nyhedsavisen and turned it into the largest distribution free paper in Denmark before the financial crisis disrupted the global advertising markets. He’s worked extensively on startups since then, most recently founding lundXO, an accelerator and partner for people with extraordinary new businesses. lundXO companies apply digital and social technologies to radically transform large industries such as banking and insurance.