Key Takeaways
- Always remember: you are worthy. Money is plentiful these days. YOU are the scarce resource. You’re the one actually building the thing!
- Just imagine that you’re an investor. What would you be looking for? You’d want to back a founder who is: Relentless Unique Positive and kind
- The Process: Momentum is Everything
- Step 1: Lay the soil (build a network of champions) A strong introduction is everything in a fundraise: the likelihood of an investor taking you seriously has a lot to do with the way you are introduced. The best “champions,” or intermediaries through which to meet investors, are other founders and mentors who are not investors themselves.
- Step 2. Plant the seeds (start casually meeting investors). Wait until you know without a doubt that you will succeed before you start raising. As soon as you start telling investors you’re raising, you will immediately go into pitching mode and open yourself up to getting “no’s” before you’re well-practiced or ready. After enough no’s, your chances at raising go out the window. Meeting investors while you’re not raising has the following benefits: It signals you care about relationship building. It signals that an upcoming round will be competitive; they also know the game you’re playing! You will get to know investors and determine whether they will be good fits for you. In a rushed process, it’s often impossible to truly get to know a You CAN’T get NO’S! You WILL get YESes. Remember, an investor’s job is to find and back founders. Even if you say you’re not raising, if you make an amazing impression, they will show strong indications that they want to invest. When you have investors consistently forward-leaning after relationship-building meetings, then you’re ready to move into step 3: the actual raise!
- The best way to get to know an investor is through dialogue, not decks. I’ve raised tens of millions of dollars without decks. Why? Decks allow an investor to think they know your business without talking to you. In reality, YOU are the business. Investors should be investing in you as a founder at the earliest stages (and, in my humble opinion, even in later stages). I want them to get a taste for me before they read anything about the business.
- Email immediately following the meeting: Literally the first thing I do after a meeting, usually within a minute of it ending, is send a SUPER short 1-2 sentence email follow-up:
- Hey _Investor_, it was great to chat just now! Looking forward to getting to know you better. [If you haven’t secured a second meeting, you can also add a sentence “How’s next Monday 1p or Tuesday 3:30p for a deep dive?”] This email: (1) prevents you from appearing desperate by emailing them long after the meeting, (2) shows you are thorough and diligent, (3) clearly places them in the action seat for next steps, and (4) increases the likelihood of them following up given that people use their inboxes as to-do lists.
- I’ve never seen an investor get upset that you raised more money than you originally anticipated. They will feel even better that other smart investors are piling into your company! It also derisks their investment because you now have more capital to achieve your goals.
- Many founders think they have to pick one price for the entire round, but that’s not true. Investors know that those who invest early get better terms. Reward those who believed in you earliest, and then raise the cap as you generate momentum. I usually advise founders to raise a small amount at a $6M-$8M cap, then graduate it to $10M or $12M. I’ve seen some get as high as $25M in a seed round! Of course, you can tweak those numbers to fit your circumstances.
- If they ask whether other investors have gotten better terms, and if you have investors at lower caps: “Yes, there were investors who backed us earlier who have a slightly better cap, but they also took a larger risk and invested earlier.” In general, founders largely underestimate the dilution in the early stages. It’s imperative to protect your cap table since your seed round will have the most dilution for the least amount of capital. Founders should use a model like Note Genie to keep track of how much of the company they’ve given away.
- References are key to 1) determining the character of your investor, 2) demonstrating to your investor that you are confident in what you are doing and intentional about who you partner with, and 3) meeting other founders!
- Questions you might want to ask:
- How is it to work with X?
- Have you gone through tough times with them? How were they during those times?
- Did they ever do anything that upset you?
- How have they helped you?
- Do you feel comfortable approaching them with challenges?
- If the reference indicated good character, let them into your round! Send an email congratulating them, letting them know that your cofounder is excited, the references were stellar, and you can make room for them. Then ask for a quick five-minute call. Tell them they’re awesome, their references validated that, and that you’re going to let them in. On the call, confirm the amount: “You mentioned your target amount is X. We can make room for Y.” [Pause for them to confirm.] Then say that you’ll get documents ready and may want to hop on another quick call to discuss how to work together. The next day, get on a call, talk about the cadence of conversations, how they will help, and end by telling them that you’re sending the documents, and reiterating your excitement to work with them. Send DocuSign and wire instructions that are super easy for them to execute.
- You should also make sure that the investor you’re working with has decision-making authority in their firm. This is critically important. If they don’t, when your business faces hard times, other partners in the firm may start stepping in out of nowhere.
- However, for priced rounds, they have much more control, especially if they are getting a Board Seat. I recommend giving Board Observer seats instead of Board Seats. Alternatively, if an investor in a later round wants to be on the board, you can give them a Common Board Seat that you control instead of a Preferred Board Seat that they control. Giving up a Preferred Board Seat is like getting married to that investor:
- NEVER give up a board seat in a seed round. And, to the degree possible, try to do your rounds without a Preferred Board Seat. Observer seats give them a seat at the table without the control. Common seats give them a seat at the table, but while holding them accountable to push the company forward since the common shareholders, with you as a founder holding most of the common vote, can let them go. You can emphasize to this investor that your intention is to have them on the Board forever. If they add value to the business, you’ll naturally want to keep them around for as long as that is the case.
- I typically use an Excel spreadsheet with the following columns:
- Firm
- Target investor
- Last touchpoint
- Next step
- Interest level
- Notes on prior conversations (where did they light up, what concerns did they have, etc.) You could also create columns for specific stages (e.g., intro call, deep dive, references) and check them off as you go. Organization is half the battle here. If you’re careful and deliberate about capturing data, it helps not just to raise your first round, but also subsequent rounds.
- Fundraising should be a full-time job for one founder. Plan for three months minimum. If you get it done earlier, then congrats! But don’t underestimate it.
- “What are the terms?” You should say it’s a SAFE and let them know the cap (that you’ve pre-determined — see the Staggered Valuation Caps section). Don’t waver on this answer. Keep it short, sweet, and simple.
- “What are you using the capital for?” There are tons of answers to this, e.g., “It gives us room for X additional hires, which will help us capture market share faster or launch Y product Z months faster.” I often like to tie in a sense of momentum: “This thing happened sooner than we thought, and we need to scale faster than we originally planned!”
- Make sure you know every term in your documents. Lean on, but don’t fully trust, your attorneys. Tell them you want the most founder-friendly terms possible.
- The most important pitch isn’t a polished one, it’s a casual one. Remember, you’re ideally not going through a deck. You’re setting up casual meet-and-greets with investors.
- Outline for a pitch deck:
- Here’s how the world works today.
- Here’s how the world should work in the future, but here’s what’s broken/missing.
- Here’s why no one has been able to solve this problem so far (potentially reference folks who have tried and failed). This is a massive opportunity. Whoever solves this problem is going to have to do X, Y, and Z, but will be rewarded heavily.
- Here’s the secret to how we’re going to fix this. A secret can be a unique insight, approach, technology, invention, or some shift or change in the world that has opened up an opportunity with you being the first mover.
- Here’s why we’re going to execute the best (best team ever, traction thus far if applicable, your unique experience as a founder, etc.).
- The only way you’ll be able to negotiate is if you have other term sheets in hand. That’s why it’s important to keep your process tight. You can negotiate with a top investor by saying something along the lines of “You’re my top pick, but I have other offers at ____. If you can match/beat that, I’ll go with you.”
What I got out of it
- A pragmatic guide to fundraising – how to successfully navigate the process and close the deal