Here are my 6 key tips for raising your first startup funds to attract investors, negotiate term sheets, and plan for a successful exit.

An old colleague I originally knew from the military recently contacted me with questions about financing a new startup. He did so because he knew I had founded Yonder, a B2B SaaS company, and took some funding from outside investors.

Here is the advice I gave my colleague.

1. Start with warm intros

If you are new to the startup world, it’s hard for your pitch deck to catch the right people’s interest. There are so many investors out there, and there are even more newly founded startups vying for seed capital.

When we founded Yonder, I did the same as my colleague did: I reached out to some of my colleagues who had founded startups before and asked them about their investors, which ones they could recommend, and to which ones they could make warm intros. I ended up getting to know two of our three institutional investors through warm intros, whereas the remaining institutional investor and the angel investors came from my personal network.

2. Find a lead investor

Once you have grabbed the attention of your potential investors, the next step is to pitch your idea or product. I am not going into this part of the fundraising journey, as every pitch is different.

But let’s assume you got through the pitches and at some point, one of your potential investors says they want to move ahead and create a term sheet. That’s a critical moment for your seed funding — usually, potential investors ask who your other investors are. If you don’t have a lead investor, then it’s hard to attract other investors. But as soon as you have a lead investor, other potential investors want to join the party.

3. Stay humble with the valuation

Once you have found your lead investor, it’s time to set up a term sheet for the upcoming financing round. The parameter in the limelight is usually the valuation, which defines how much dilution the founders’ shares will experience.

Don’t get me wrong, the valuation is important, but it’s not the only parameter in a term sheet. Furthermore, valuing a young startup is not an exact science. So I would strongly advise you to stay humble with the valuation. When we founded Yonder, people still believed in unicorns, and it would have been too easy to accept high valuations and large financing rounds. Six years later, I am very grateful that we resisted this temptation. Read on, points 5 and 6 below will justify my thinking.

4. Don’t forget the other terms

The valuation is important, but it’s not the only important parameter on a term sheet.

Pay special attention to the liquidation preference — this parameter governs who gets the invested money back before the exit proceeds are distributed on a pro-rata basis amongst the shareholders. That’s important if the exit proceeds should be lower than in your wildest dreams — which might happen when your fantasies meet reality. The liquidation preference can be either founder-friendly or investor-friendly, or investor-friendly up to a certain valuation and then founder-friendly beyond that valuation threshold. In any case, as a founder, I would be careful with the liquidation preference. Because if you have to sell the business at a lower exit valuation than anticipated, you still want to see your fair share of the exit proceeds as a founder.

5. Don’t underfund, don’t overfund

When we raised our first financing round in 2019, we were oversubscribed by 20–30% of the round size. We cut the tickets of some investors and kicked off a few investors for good. Whilst not allowing all interested investors to join was a good decision, retrospectively we shouldn’t have cut the tickets of those investors we took on board. The additional cash would have given us more freedom of action.

Just like overfunding, underfunding is a common problem in the startup world. Because founders are ambitious, they think they can build a growing and profitable startup with very little investor money. My experience is that everything takes longer and costs more than anticipated, even if you’re diligently managing your costs.

6. Begin with the end in mind

Whenever you raise funds, think about the exit. Every investor who gives you money expects a return sometime in the future.

If you start with crazy valuations during your financing rounds, it will be extremely hard to achieve a return on your fantasy valuations from back then. Remember that investment round valuations are on paper only, whereas exit valuations are paid in full, in hard cash.

If you accept investor-friendly liquidation preferences and you have to exit the business earlier than you anticipated, you will not see much of the returns as a founder.

If you give ample veto powers to your investment directors and you want to exit your business earlier than originally planned, your investors can potentially veto the deal because they’d rather wait a little longer to get a better return.

And last but not least, one piece of advice to all the founders who raised money in the frenzy years of 2019 to 2022: It ain’t 2022 anymore. Valuations have dropped both for investment rounds and exit valuations.

You can’t evade reality.