January 27, 2015
Some experts in the startup space say there has never been a better time to raise a round of funding. Whether that’s true or not, there are a few things every startup needs to know and understand before they start approaching investors.
We reached out to 16 prolific investors to ask what advice they have for startups looking for funding. Hopefully the following advice will help you get you in front of the right investors, at the right time.
A special thanks to EquityZen, who allow private investors to access proven startups, for sponsoring this group interview.
1. Communicate your mission. In addition to *what* you’re building, make sure you talk about *why* you’re building it.
2. Sell your team. No matter how much or how little experience you have, find a way to highlight the strengths of your team.
3. Show your product. Somewhere in the first five minutes of your pitch you should be showing / explaining / demoing your killer product / service / app.
1. Be yourself
I meet many founders who obsess over what ‘investors are looking for’. While it’s valuable to understand the psychology of investors, the way to use that knowledge is to remove as much friction as possible in getting the investor to see you for what you are versus dressing yourself or your company up to be something you think will appeal to them.
Be yourself and be concise, if what you are working on isn’t truly interesting to the investor, it’s not a failure in pitching. It’s a success that you figured out the mismatch! Move on to the next investor and find someone who gets it like you do.
2. Pick the right investors
Different investors often have vastly different objectives and expectations on everything from the magnitude and timing of returns to the way company financials are reported to even the way day to day operations are executed.
It’s truly important that you have very frank discussions around expectations before you take someone’s money and find out 6 months later that you are worlds apart on what success means.
3. Think about what’s next
Any time you are raising capital, one of the most important things to think through is how far that money will get you. In the cases where you think you’ll need to raise more money in the future (in other words, most of the time), you should make sure you have enough runway with the new capital to get past the next milestone or inflection point in the business and put yourself in the best position to raise that next round.
There are certainly times when you don’t have that luxury, but I’m surprised by how many companies actually are able to raise as much as they want on great terms, but fail to think through the dynamics of their next capital raise.
1. Never set artificial deadlines such as we are closing in 4 weeks unless you 100% intend to stick to it. Instead, find natural ways to create momentum so that you take away the optionality of investing at the same valuation at a later date.
An example of this would be “we are two weeks in and have 1/3 of our round closed and are talking to the following 5 awesome people who seem interested..” or “we will find out if we get into in two weeks, and if we do, we will likely stop raising and/or raise the cap significantly, if no, we won’t”
2. Sell a vision, but tie it back to a reality that is something you can execute on in the short to medium term.
3. Focus on one (or maybe two) key metrics that really matter… provide proof points as to why they are the ONLY really important things to focus on now and how they eventually map back to your vision, and then build a story as to how you are the team to execute on that plan.
1. Be honest – you don’t have to know all the answers, but have a point of view and be able to articulate why you are doing things the way you are doing them. Don’t stretch the truth in terms of traction or money raised or committed (its a very small world and lying on this stuff is the easiest way to get blackballed)
2. Be solving a real problem
3. Go deep, not broad (at least at first). Don’t try to be everything to everybody right from the start. Do one thing very well and then have the ability to broaden your solution.
Nowadays, a good idea is not enough. There should be some sort of an early success before approaching investors.
I usually focus is on team’s backgrounds, traction & growth so far, growth potential and market/opportunity size.
But it takes more than an innovation to succeed. Unique methods & new solutions make a difference. I think of myself as a person who invests in what matters, not what is predictable & I don’t mind throwing something out in favor of a better idea, because frankly speaking, that’s what start-ups need.
1. Even before you have funding, work on your business as if you have money in the bank. You can get far without money (lining up members of the team, talking with potential partners, etc.). Not only is this good for the business but it makes you more attractive to potential investors.
2. Have a good understanding of how much capital you are raising, how long it will last and what milestones will be hit in that time. This thinking provides discipline for your strategy and also shines light on which investors may be a good fit.
3. Work your network. VC’s like meeting with people they know or with people that come highly recommended by the people they know.
Many strategies for fundraising certainly vary by stage of the company. Advice useful for a seed round won’t always remain true for a Series A, B, C, etc. My advice is more focused for a seed round.
1. You’re fundraising through a balance between Hope & Evidence. Be conscious about your reliance of one or the other, but always have at least a little evidence. This remains true even if raising your first outside capital. Even without a solid product, one can share what you’ve collectively learned by engaging with your target users.
2. Link the intent behind your venture with the investors you seek. Is this a huge opportunity that is going to require lots of capital? Are you willing to give up some control for that resource? Then Big VC is your eventual game. If you think this can grow to be a modest, but highly profitable business then work with angels, syndicates or other investors who are more flexible in successful outcomes.
e.g. Raising a total of $2M to get to profitability and selling the company in a few years for $10M, white retaining 80% ownership can be a huge personal success and make your angel investors very happy. This could be perceived as a failure by a Big VC.
3. As CEO, don’t go it alone during the fundraising process. Rely upon yours peers to help with asymmetrical information and experience. e.g. A VC is likely to have participated in dozens of deals, with a broad network of peers. You can try to gain a similar advantage in negotiation and network power by being open and talking to your fellow CEOs. Learn from each other’s triumphs and mistakes.
Accelerators like YC or Techstars provide huge value not because of practical skills learned, but because of the quality network that gets activated on your behalf.
Strong technical co-founder from the outset.
A compelling prototype and ideally customer validation / traction.
Put a lot of energy in to targeting your outreach:
– Consult AngelList to find out who’s interested in the your area.
– Approach investors through a trusted intermediary rather than directly (find that person through LinkedIn’s mutual connections).
For funding, best to start with your own time and energy alone. Early equity is expensive so avoid giving it away as long as possible.
There are 3 parts to a successful funding raising pitch which operators who have become VC look for:
1. What’s the Big Deal : What is the big wave or change in the market which you uniquely believe is creating an opportunity. For example, users searching on their mobile phones in a new way; Under utilized cars which could be rented out; etc.
2. Show Your Work : What is your approach to the opportunity, e.g. where is your surf board on the wave such that you will be successful because of your approach to the opportunity. Here is where you show your work in product, early traction, etc.
3. Win by Working Harder : What are you going to do next, like tomorrow and accomplish in 6 months. There is the execution plan for the next step and helps make the business real.
Understand your market, including your customers and competitors: who will buy, why, when, why from you?
Work out your business model before you build your solution: how will you make money, how will you market, how will you grow?
Have your one-page executive summary and pitch deck organized and ready.
1. Assemble a strong balanced team – make sure you complete each other. It is not all about technology although this is the core. Add business, product (UX) and marketing skills to your team, and remember “it is all about people”.
2. It is a mutual partnership. Do your own due-diligence on the fund/angel investor. Ask people for references on the fund and the specific partner that will join your board. It is a long term partnership.
3. Fundraising is a learning process and NO is also an answer. But you should ask for honest feedback and try to perfect your company and story after every NO you get. We in Carmel try to give a detailed explanation when we reject a company and help as much as we can even if we don’t invest.
You should remember that VCs see hundreds of companies a year and invest only in a handful companies a year.
1. Don’t reach out to professional investors until: (a) your product is built and tested; (b) solid team in place; (c) customer acquisition tested with profitable unit economics for scaling; and (d) proof of concept solidly behind the business (e.g., lots of users, high growth rate, big pipeline).
2. Use creative bootstrap financing techniques to bridge you until then, with several examples you can learn about at this post I wrote on the subject.
3. Raise enough money to: (1) carry you at least 12-18 months or whenever your next proof point can be achieved; (2) be double what you think you will need, to cover unexpected expenses or delays; and (3) cover both the cost of your product development AND your consumer acquisition marketing plans (most entrepreneurs focus on the former, and forget the latter).
Keep your pitch simple and easy to understand. The last thing you want is to confuse a potential investor and have them leave a meeting not understanding your business or the opportunity. Practice by giving your elevator pitch to your grandma.
Know who you’re meeting with beforehand, especially when meeting with VCs or angel groups. Even 5-10 minutes of research goes a long way.
Your investor deck will be an important document for all of your discussions with potential investors. Put in the necessary time before going out to pitch and make sure it addresses:
– The problem
– Your solution
– Company traction
– Team overview
– Competitive landscape and differentiators
– Financial projections
– Sources and uses
– Potential exits
1. Creating an aligned and motivated team with domain experience.
2. Do not give away too much of the company too early to advisors or angels.
3. Should raise when you have an early product or service built and you can show either proof that customers will pay for such a service or that you have a high rate of adoption and retention that could lead to customers paying for a product or service.
Ask yourself how big your company could be and that will decide whether you raise from F&F, angels, crowd funding or VC’s.
1. Identifying a real problem, i.e is it a nice-to-have or a got-to-have? This implies expressing a very clear value proposition (we do THIS for THIS TYPE OF CUSTOMERS by DOING THAT, with THIS SPECIAL MAGIC SAUCE)
2. Aim for a global addressable market, i.e have ambition for a real business and real revenue. This will help with the multiple of revenue for their sale price, i.e for the potential revenue an investor might make with them.
3. Surround themselves with proper team / advisors, etc. Complementary skills. Identify the missing skills and have a proper plan to address them.
At the risk of sounding cliche (but cliche’s exist for a reason), find a problem you want to solve. One that keeps you up at night and you’re willing to give up the next 4 to 6 years of your life for it. And know that odds are that 90 plus percent of startups fail. If you still want to solve that problem against the odds, then you’re one to bet on. Go for it.
Regarding raising money, first build something of value and then get traction in the market, and only then go raise some money. Otherwise you get lost in the noise of raising money rather than building something of value and getting it to users. Ultimately, the latter is all that matters.
If you build something of value (no matter how minimal) and people start using it, then you have a good shot of raising money.