Fundraising
But as it often is, learning things the hard way turned out to be a great gift. I was forced to develop a first-principles understanding of what worked, what didn’t, and why.
Timing. My advice mostly applies to early-stage (pre-seed and seed) fundraising. As you get further along, different techniques are required. While the spirit and strategy are similar, the tactics shift significantly.
However, fundraising correctly and building meaningful relationships with investors saves you a lot of time in the long run.
Making it your own. The most important facet of fundraising is unflinching authenticity. Don’t ever blindly follow advice (including mine!). There are TONS of ways to fundraise. Make sure any advice you receive resonates with you before you put it into action. Take tidbits and make it your own.
Skill, not luck. Some founders get lucky with fundraising. They meet the right person at the right time. Getting advice from “lucky” founders can be misleading.
Money is plentiful these days. YOU are the scarce resource
I quickly learned that self-confidence is key to fundraising. As my confidence grew, the checks started to pile up. You may feel like you’re “overshooting” or becoming arrogant during the process. That’s okay, up to a point. A good investor should know that most great young founders have egos. You have to in order to do this crazy thing! A good investor will put their own ego aside to back you and bet on you maturing over time.
Avoid these high-ego investors at all costs;
I like to keep these qualities in mind, and strive to embody them: Visionary
Fundraising is purely a matter of momentum
Lay the soil (build a network of champions) Plant the seeds (start casually meeting investors) SEND IT (you’re fundraising!)
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.
Everyone you meet in this process is a potential champion. They will also be the source of other champions and introductions.
Step 2. Plant the seeds (start casually meeting investors)
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!
Avoid being introduced to an investor by another investor who isn’t already invested in your company. The reason is obvious: the fact that they have not invested sends a negative signal.
Hey Node, hope all is well!
The First Meeting (the Intro) The first impression you make on an investor is everything. You better impress the heck out of them. This is best accomplished by being your uncompromising, confident, authentic self.
So, remember: dialogue, not decks! Note: If an investor asks for a deck before the meeting, don’t outright dismiss them. Instead, I like to send bullets. For example: Hey Investor, I don’t have materials I’m sharing right now, but here are some [aim for 3-6] bullets to get you started: X product that is tackling the $XB _____ industry head on
What do you like to invest in? What do you look for in companies? What do you look for in founders?
What’s your fund size? Fund focus? When did you close your current fund? What size is your average investment?
How are you thinking about deploying capital? Where are you in your fund cycle?
Where do you find yourself providing the most value to your portfolio? How do you best like to help founders?
If they ask you a question about your business and you don’t have the answer today, don’t be afraid to say that you will decide down the road.
“Where are you in your fundraising process?” ■ What they’re really asking: How fast do I need to move here as an investor? And how much interest is there around this deal? At this stage, remember, you’re not fundraising. You’re just getting to know them. But you can hint that you’re thinking about fundraising in the not-too-distant future.
Duration: Keep the meeting to 30 minutes, no more. You’re on a tight schedule, too. You’re a busy founder.
End goal: The goal of the first meeting is to establish a longer second meeting.
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.
The Second Meeting (the Deep Dive) This is a 30-60 minute meeting in which you come prepared with more questions about the investor, and vice versa.
For example, ask about specific investments they’ve made and why they made them. Investors love talking about companies they’ve backed.
There are a couple potential outcomes at the end of this meeting: 1. They say it was great chatting but don’t make any motions to invest. In this case, you put them on your “reach back out when raising” list. 2. By the end of the meeting, they explicitly say they want to invest.
SEND IT! (you’re actually fundraising) By this point, you’ve had dozens of informal conversations with investors. You’re getting really good at pitching. Your swagger is on the rise.
Our product is exceptionally hard to build, but we believe we’ll have a production-ready version in X months ● We’re currently doing massive experimentation around how to onboard users to get to a CAC (cost of customer acquisition) of less than Y dollars. ● We’re onboarding users to a waitlist and consider 1,000 waitlisted users to be our critical point. ● “We haven’t yet achieved these milestones and are heads down working on them. We’ll consider fundraising when they’ve been hit!”
Many founders succeed by publicly starting with a smaller goal than their eventual target.
Once you have 1M and half is already committed. When you get to 1.5M and have $1M committed! This creates the perception that your round is always nearly full.
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
In general, I advise Bay Area founders to start at an 6M cap, but you can adjust upward or downward for your specific circumstances and confidence levels.
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! After many reference calls, I’ll grab coffee or hop on a Zoom with the founders to get to know each other better. It’s a great way to compound your network. Sometimes it also leads to them wanting to invest, too!
Hi Reference, Great to meet via email. We’re in discussions with Investor about an investment opportunity at MyCo, and she said you would be a good person to talk to as a reference. Do you have time for a quick (~10 min) call any time over the next few days? Please let me know when’s most convenient for you. Alternatively, here’s my cell phone number if you want to call whenever you have some free time: phone. Thanks!
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?
Great investors will give you a clear “no” and honest reasons why they’re not investing. Unfortunately, few investors operate with this level of integrity and respect for founders’ time.
Investor says the business is amazing and they think you’re a great founder: 10% chance of investing ● Investor says they would like to invest in this round: 50% chance of investing ● Investor says they would like to write a check in this round, asks for terms, says the terms are fair, and says they can wire soon: 80% chance of investing
Here are some signs of bad investors: ● Large ego ● Treating you with anything other than the utmost respect ● Unsophisticated questions (they really just aren’t getting it, or perhaps they’re even excited but for the wrong reasons) ● Extra investment steps (for example, holding you up by saying, “I want you to meet with my friend who knows about this”) ● Missed deadlines (or general slowness) ● Unclear investment criteria ● Bad energy (judging investors based off your energetic connection with them is incredibly important)
You should also make sure that the investor you’re working with has decision-making authority in their firm.
When you’re raising on SAFEs and Convertible Notes (discussed later), investors have less control over your company, so you can be a bit more lax on thoroughly vetting them.
I recommend giving Board Observer seats instead of Board Seats.
Giving up a Preferred Board Seat is like getting married to that investor: and even worse, you cannot get a divorce! You’re stuck with them until you go public.
NEVER give up a board seat in a seed round.
With fundraising, one cofounder should take a leading role.