Summary: There is an incredible amount of content on the internet about fundraising. Below are VENTUREAPP’s top picks and summaries of what you need to know.
1) How to raise money – Paul Graham
VENTUREAPP Brief: Paul Graham is one of the most authoritative figures in the world when it comes to early stage company building. PG has written a very, very comprehensive set of rules for companies seeking their first institutional funding, summarized below.
- Rule #1: Do not raise money if you do not want to grow faster or if the money will not help you. Do not raise money when you won’t be able to because you will waste time and burn your reputation with investors.
- Rule #2: Either be in “fundraising mode” or not. Fundraising is very distracting and startups can’t afford to be distracted for very long, so when you decide to focus on fundraising, do it completely and get it done ASAP. If you are not in fundraising mode and an investor wants to invest, you can take their money only if you do not have to spend time convincing them with materials/meetings and you do not have to negotiate, otherwise you are then spending your time fundraising.
- Rule #3: In order to raise a real seed round, you should get introduced to investors rather than approaching them directly. The best introduction is from an investor that has already invested in your company. The next best is from a founder the investor has invested in.
- Rule #4: Hear no until you hear yes. Investors are not investors until they unequivocally say yes, and even then they can still back out. Investors like to wait to invest, and in order to do so, they will lead you on. Follow this protocol in order to determine whether an investor is committed.
- Rule #5: Approach investors with a breadth-first search and prioritize those that seem most promising. Expected value of an investor = how likely they are to invest multiplied by how great it would be if they did invest.
- Rule #6: Know where you stand with investors by looking at their actions rather than their words. Never leave a meeting without understanding what is required next to move forward. If investors are vague, expect the worst. Investors that give you clear steps are more serious candidates.
- Rule #7: Get the first commitment and quality matters. Other investors’ opinions is what drives many people to invest. Even a small check from a reputable investor can be the hardest piece of getting a round together.
- Rule #8: There is no deal until the money is in the bank. Lot’s of thing can go wrong at any time and a day delay can bring news that spooks a committed investor.
- Rule #9: Avoid investors that don’t lead. They are worthless until you have committed investors.
- Rule #10: Have multiple plans. When investors ask you how much you plan on raising, you should have multiple plans depending on the profile of the investor. If it is a bigger institution, you should focus a plan that would fit within their typical investment range, if an angel, go with your plan for a smaller raise.
- Rule #11: Underestimate how much you want. By telling investors you plan to raise less than the target in your head, you can create scarcity in a round as you receive commitments.
- Rule #12: Be profitable if you can. There are two distinct modes of fundraising: founders who need money and knock on doors, and founders who don’t need money but can take it to grow faster. Profitabilty lets you control your own destiny.
- Rule #13: Don’t optimize for valuation. Valuation doesn’t matter, building a successful companies and growing revenue matters.
- Rule #14: Get yes/no before valuation. When talking with your first commitment, avoid being pulled into a conversation about price. Tell them price is not the most important issue to you and that getting a deal done is. Give first investors a low enough valuation to commit but..
- Rule #15: Beware “valuation sensitive” investors. Investors who describe themselves as such are compulsive negotiators that will slow you down. If you approach them, try to approach them last among prospective investors.
- Rule #16: Accept offers greedily. Don’t look in to the future because the future is unpredictable. Acceptable offers now should be accepted because the goal is fundraising is to get it done as quickly as possible.
- Rule #17: Don’t sell more than 25% in phase 2. This will make raising an A round difficult because investors will worry founders will not have enough motivation.
- Rule #18: Have one person handle fundraising. Fundraising takes mindshare away from the business and one founder should try to insulate the others from the details of the process so they can focus on the business.
- Rule #19: Make an executive summary and a deck. Follow Sequoia’s outline for a deck. Assume investors will share your deck, it is the cost of doing business. Typically, do not send a deck to an investor who asks before a meeting as it means they aren’t serious about meeting.
- Rule #20: Stop fundraising when it stops working. While every situation is unique, it is often better to stop fundraising to improve your business and avoid becoming a house that has been on the market too long that no one is buying.
- Rule #21: Don’t get addicted to fundraising. When fundraising is going well, it can be more fun than aspects of running your startup. You can begin to convince yourself you are already successful when you aren’t.
- Rule #22: Don’t raise too much. Raising too much can set expectations you may never reach and it can cause a startup to spend too much before they are ready.
- Rule #23: Be nice. Behaving arrogantly can bite you in the ass. While playing hardball is good, soften being tough with kind words. And be nice to both investors that say yes and say no. Investors that say no can be a yes in the future.
- Rule #24: The bar will be higher next time. Plan for this money to be the last you ever raise. Get to profitability.
- Rule #25: Don’t make things complicated. Avoid investors until you decide to raise money, and then when you do, talk to them all in parallel, prioritized by expected value, and accept offers greedily.
2) How to develop your fundraising strategy – Mark Suster
VENTUREAPP Brief: Mark Suster is one of the most prolific bloggers in the VC world and produces some of the best advice about how to truly run a startup as he has successfully built two companies. This is his guide on creating a fundraising strategy, summarized below.
- Identify the right target investors: Just like any sales process, qualify prospective investors and focus the majority of your limited time on those most likely to buy.
- Research your buyers: Pitching investors without knowing the themes and stages they invest in shows a lack of awareness and wastes time. Know what partners within firms are a fit for your business.
- Call high: Partners make investments, not lower level staff. Develop good relationships with the founders of their portfolio companies as this is the best way to get a valid introduction.
- Develop relationships early: People buy things from people they know and trust. Trust comes from getting to know someone over time.
- Create scarcity: Creating scarcity creates a shot-clock for the investors to buy.
3) What the seed funding boom means for Series A – Josh Kopelman
VENTUREAPP Brief: Josh Kopelman is one of the top partners at First Round Capital, one of the world’s premier seed funds. While this article specifically touches on the gap between raising a seed and Series A round, the dynamic shift applies to the general investment stack.
- Because it is cheaper than ever before to start a company and because there are a significant amount of new funding sources, more companies than ever before are raising seed financing.
- Due to the high volume of seed financed companies, Series A investors have a greater supply of companies to choose from, and in turn this has driven more competition for A round funding.
- Often times early stage founders take positive conversations with VCs as signals they want to invest in their Series A and end up trying to raise before they have the metrics.
- Early stage founders often now try to raise too much money. It is always easier to increase the size of your round than decrease it.
- You should raise enough money during your seed to reach 18-24 months of runway. This will give you the greatest chance to achieve the metrics needed to get to a Series A.
- Do your research to determine what investors really roll up their sleeves to do work for their seed investments.
- Have a very clear plan and budget for your seed round. Understand the milestones you need to hit for an A round and make sure you have more than enough runway to get there.
- A really good fundraising process takes 4-8 weeks, not including preparation and closing time. Make sure you have enough runway to close.
- You should plan 4 weeks of preparation to nail your pitch before raising your A round.
- Knowing what specific investors look for and tailoring your pitch to them is critical.
- Adversity can be a good thing, as it can strengthen you.