By Thomas Davies, Chief Investment Officer, Seedrs,

High growth tech startups often need to raise multiple rounds of funding. In a competitive marketplace if you only grow organically by reinvesting your own cash-flow, then you can easily get left behind. Each round of external funding into your company adds much needed cash that can be spent on marketing, R&D and product development.

As your company grows, it’s likely that each round of funding will be larger than the last one and that the valuation of your company will be gradually increasing as you demonstrate increasing traction in the marketplace. This means that you will need to graduate through larger and larger sources of finance as you grow your business.

Companies that have raised an early round on an equity crowdfunding platform are at a significant advantage when they come to raise their additional rounds of financing. With a hundred investors, you have a hundred sources of introductions and connections to VC and large angel investors. You can also use your extended network of advisors, accelerators and other entrepreneurs to help find the right investors for your next round.

Another advantage of having used equity crowdfunding when you come to seek follow on funding is that you have validated your business model with a large show of support from the public. This provides social proof and PR value that can help impress a VC. Venture capital and large angels will take note of whether your crowd of investors are active fans of your product and whether they have been active supporters of your business. Loyal investors can help attract new users, which in turn helps proves your traction to new VC investors.

As helpful as the crowd can be, you also need to make sure that having lots of shareholders doesn’t put off future investors. When choosing a crowdfunding platform, be sure to look for balanced investor protections that are robust enough to protect the crowd while also allowing future investors to add value to the company.

A nominee structure where the crowd’s shares are held by a single representative can be a great way to ensure that your crowd investments are compatible with the big fish who come in later on. Having the crowd investors protected by a single nominee can be the decisive factor in closing the deal with a VC because the nominee can act on behalf of the crowd to co-ordinate consent rights, waivers and pre-emption rounds.

Some of the early investor protections like drag and tag rights or pre-emption rights might need to be waived by the early investors to help close the deal with a venture capital investor. It’s important that these rights are there in the first place, but in some circumstances waiving them can be the best thing for everyone involved because it allows for a large new investor to add massive value to the company. Which in the end is what everyone wants. Without a nominee, trying to coordinate such consents or waivers can delay the deal and even put off the VC investor entirely.

With your paperwork in order and a strong crowd of backers in place, you can accelerate your networking efforts and look for introductions to VC investors. Another good source of VC introductions is the existing portfolio of startups that the particular VC has already invested in. You can also make contact with the associates and analysts inside a VC firm to begin the relationship building process.

Each round of successful investment helps set you up for the next round. A good entrepreneur is always networking and having an eye on future rounds of funding will help keep you focused on growth.