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This post is part of our Field Guide to DTC eCommerce Capital. Click the links below to read more chapters from the guide.
Once you grow to a certain size, you may want to consider institutional investors. Institutional investors rent capital from other investors who are called limited partners (LPs). As a result of these relationships, there are even higher expectations and more complex processes involved. Institutional investors include pension funds, insurance companies, private family offices, sovereign funds and endowments and other managers of money.
Two important concepts to understand when considering whether to raise equity capital from institutional investors are “the next round” and “the exit.” The investor at each stage is asking themselves how likely it is that your company will have an exit worth betting on. Next, they are asking themselves how likely it is that you will get the capital along the way in order to reach that exit. It’s rare for a company to raise a single round and have a big exit. More common is the alphabet road of A, B, C, D, E funding rounds necessary to reach the scale of exit needed to make investors happy.
As a result, investors at each stage are always considering who may fund the next round. So what you may not realize when you are pitching seed-stage investors is that you are often indirectly pitching Series A investors, too, because the seed stage investor is feeling out their buddies about whether they’d do a follow-on round.