I gave a “key note” to a room full of entrepreneurs for the “Idea to IPO” forum the other night. The topic: “Raising funds for your startup.” About seventy folks showed up, and we had a lively 90 minute conversation. I’ve coached entrepreneurs through this for almost 23 years. I’ve also invested in dozens of startups (most recently btw Dolly, Quizlet and Skydio). And, I have also actively raised capital for the few companies in which I was a cofounder/quasi co-founder. So, I have some strong opinions to share. And, after the session a handful of attendees suggested I post these on my blog. So, here goes- Buddy’s guide to raising funding for your startup.
Fundraising can be baffling, frustrating and exhilarating. According to the media, California may be in an extended draught, but money is flowing down the Adobe Creek at flood levels. Just look at all the unicorns – they are no longer mythical creatures, or even endangered species. Ya right! The truth is that it is ALWAYS challenging to raise money. But, if you follow the below guide, you will be successful.
To start, there is a psychology that I encourage all entrepreneurs to adopt as they head into the process. It is hard to make money. So, when you ask an investor to fund your startup, acknowledge this. Investors like knowing their funds are respected.
Next, you have to work hard. The probability of success is dramatically influenced by the effort you invest in the process. To help focus that hard work, follow these four “P’s: Prepare, Plan, Practice, and Predict.
Every fundraising endeavor should start with extensive preparation. Prepare three critical documents:
• An Executive Summary – See the blog I posted on Oct 20, 2014 (https://buddyarnheim.wordpress.com/2014/10/20/writing-an-executive-summary/ https://buddyarnheim.wordpress.com/2014/10/20/writing-an-executive-summary/) — which is a guide toward drafting up this critical document.
• The Deck: This is a set of 12-18 slides that tells your startup’s story. It should be visually pleasing, cover the topics highlighted in your executive summary, and be accompanied by your oration of the investment opportunity. Don’t put too much verbiage in the slides. That is for you to articulate when you present. But, it should be informative and easily understood. Objective facts, particularly around the market you are addressing, is critical. Plan on talking through the slides, without rushing, in about 20 minutes. But, a more engaged audience will likely ask questions and seek more depth. Be prepared for that, and have an alternative dialogue that extends the slide discussion to 30-40 minutes.
• Your Financial Model: You may not have any precision as to your top line projections – revenue and gross margin. But, you should be able to present your business model assumptions. Think of these as hypothesis that you plan to test. This will be a springboard for a discussion around how you see your business evolving, and should reveal the depth of your thoughts. In addition, and arguably more important during the seed fundraising process, convey with specificity how you expect to spend the money being raised. Projected expenses by month; expected milestones to be met and when; how those milestones position your startup for its next fund raise, or unique market advantage. As an investor, an “expense model” is fundamental. Not only does it provide visibility into how the money will be spent but how deeply you are thinking about running the business over the near term. Presumably the funding is simply fuel until the next round of funding. Convey how this money is being spent, and how it ensures the next round at a material valuation increase.
Make sure your first investor pitch is well-rehearsed. Never go into an investor pitch without adequate practice. If you are unprepared, you are wasting both your time and that of the prospective investor. You need to know your story cold. You need to tell it succinctly, and with clarity and confidence. Anticipate the likely questions. Feel comfortable with the subject matter. Present yourself as prepared, approachable, and self-aware. Use friends, family members, co-founders, other entrepreneurs, and advisors to help you practice your presentation. Rinse and repeat. As a rule of thumb, go through your pitch with a live engaged audience at least four times before you pitch to a proposed investor. And, more practice is better.
What? PLAN PLAN PLAN! This means research and really know your prospective investors. Know what relevant experience they have. Know where they have already invested. Make sure they are actively investing. Figure out the best way to approach them. Cold calling is the last resort. Find personal introductions. Cull a list of targets. Confirm they are approachable and active. Make sure you know why your investment will resonate. Prepare a spreadsheet. Each column or sheet should be a category of investors. For a seed round, these may include:
• Friends and family
• Seed funds/super angels
You may consider also developing a list of strategic investors. But, for a seed deal, corporate VCs are not frequent sources of capital, and may not even be appropriate or attractive in light of the early and uncertain nature of your startup.
In each investor category list out your prospects. Once you take a first stab, invite advisors and other knowledgeable folks to help populate the lists. As you are doing this, annotate each prospect with relevant information you have learned: prior investments, colleagues you have in common, unique personal facts, their backgrounds, whatever will help you personalize your approach and dialogue. Figure out who can help you catalyze a meeting. Make sure you have an answer to why this person/fund is a ripe target.
By compiling this list and the related detail, you can avoid superfluous meetings. Don’t pitch a consumer tech business to a med device investor. Don’t pitch a seed deal to a VC that doesn’t invest at your stage or your geography. Pay attention to the pace of the target investor’s historic investments. If they are not active, they are unlikely.
Once your spreadsheet is populated to the best of your ability, you need to orchestrate the introductions and start scheduling the meetings. Maybe you invite the angels to meet together. But, most institutional investors will expect you to give them a personal pitch. Try not to have your “first choice” investors as the first folks you pitch. Your pitch will improve over time. Stage the meetings, but try to get all the first meetings done in 2-4 weeks. You want to keep the overall time compressed. This reduces the distraction from your business but also may help create a sense of scarcity.
To start, a significant number of prospects will not want to hear your story. That is fine. Next, many first meetings will flop. That is also fine. But, if you prepared, planned and practiced, a good number of meetings will go well. This will lead to follow-on meetings and investor diligence. Anticipate that diligence. Know what questions an investor will want to answer. Assemble the documents an investor will want to review Make it easy to find answers.
On the documentation, be sensitive to the document hygiene and access. Prepare a “data room” to make access easy. You can use services like Box or Dropbox. Also, as you populate that data room, be sensitive to the document hygiene. Typos, bad prose, and piecemeal delivery casts a very bad impression. Be organized, and don’t take short cuts. I have a bias toward clean legal documents, clean cap tables, and standard/typical terms with the founders.
Expect investors to seek references. You and your team are arguably the most important assets. Anticipate who can serve as good references, and prepare those folks. It amazes me when an entrepreneur proposes a reference that he/she has not already warned and coached. Keep in mind that some references may be done without your involvement or knowledge. So, be prepared. Think through the common relationships between you and the investor, and make sure you actively manage that prior boss or colleague who may not serve as a positive reference. Maybe warn the investor, or better yet, perhaps enlist the reference.
SUMMARY: Here is a summary of the above for those of you who are unable to plow through my verbose discussion:
• Executive Summary
• The “Deck”
• Financial model (mostly expense waterfall)
• List of prospects
• Warm intros
• Staging your meetings but compressing the overall time
• Don’t get discouraged by “no’s”
• Expect diligence
• Keep readily available tidy documentation
• Plan for authorized and blind references