As the great philosopher Pitbull once said, "Ask for advice, get money twice." Last week, a company I invested in approached me asking for advice on how they should start their next fundraise. This is the best approach to fundraising, going to all of your investor connections and asking them if they have any advice for you. It's a non-threatening way to get any investor thinking in terms of how your company works and operates. In this blog post, I'm going to go through some tips for fundraising.
First off, fundraising is not the end goal. The end goal is to build a lasting company and to make an impact on the world. Techcrunch and the media release articles about companies raising between $500k and $250m every day, and it clouds people's perception of Silicon Valley and startups. It feels as though if you talk to a couple angels and venture firms, talk to some press, someone will write you a big fat check and all your problems will go away. The media makes it sound easy. I feel very little sympathy for a CEO that says they can't get any traction fundraising after only meeting with 10 investors. Fundraising is extremely difficult, when my Co-founder Thomas Foley and I were at Xpert Financial fundraising, we got rejected by about 150 venture capitalists.
Another thing I should caveat to this post is that there is no right way to raise capital, but these are suggestions for entrepreneurs if you are thinking about raising capital from early stage investors.
"I am the rule not the exception"
A good mentality to go into the fundraising process with is "I am the rule, not the exception". What I mean is that a lot of startups look at Dropbox, and Facebook and other huge successes, and think that their startup is comparative. It is not. Assume that Dropbox and Facebook and other huge successes are the exception to the rule, and that you are the rule. You have to hustle and work hard to scrape together every cent of your round raise over the course of months and hundreds of meetings. At one point, all of those successful companies had to hustle to raise money, and often they still do.
Authenticity in a pitch is nearly impossible to fake. You must believe in your product/vision and be genuinely excited about it. If you don't believe in your product, you will not be able to convince other people to do so. A lot of entrepreneurs also make the mistake of lying in a pitch to make themselves sound better. Investors are pitched to hundreds of times a month, they are able to catch you in a lie, so don't lie. Being authentic will pay off. Even if they don't end up investing, they will have more incentive to help you find the right investor for you.
You should pitch everyone in order to practice. The questions your friends and investors would ask about your business are eerily similar. An investor might understand the industry more, but if you can't articulate your company vision to your good friend you will not be able to articulate it to an investor in a twenty minute meeting.
Be Friends with all Investors
The investor community is very small, you want every investor to have a positive impression of you at the end of an investor pitch. If the investor says they are not interested, that does not mean that they don't like you, most investors have a certain criteria they are looking for in their investments, and you probably don't fill those criteria.
Another mistake startups often make is big timing an associate at a VC firm. An Associate/Analyst at a VC firm represents that VC firm. A lot of startups complain to me saying "Yeah, I had a meeting with X VC firm, but it was with an associate". The Associate of a VC firm is the gateway to that firm. You should show associates as much respect as you show partners. You should really show everyone in the world an equal amount of respect, but thats a whole other can of beans. An Associate cannot make the decision for the firm about whether or not they are going to invest, but they can give their opinion to the partners, and generally those opinions carry weight. I think Associates are underrated in the Venture world. Associates are smart, and will pick up on whether or not you feel "above" pitching them. Be happy that you got the meeting at all, and give it your best shot.
Also, if the investor says no to your pitch, keep in touch with them. They will be able to provide great advice, and they might be interested in the next round of funding after you have hit a few milestones.
Investors do not like it if their only conversations with you is you asking for their money. Keep them updated on your progress, and ask for their advice on certain issues you are having with your product. Investors want to be helpful to companies, so use them as a valuable resource even if they have not committed to your round.
When updating, it is important to use metrics to describe your progress. Update monthly, it's a long enough time to make progress, and for investors its a short enough time to remember who you are and not be annoyed by your emails.
Many people make the fatal mistake of assuming it will be easy to raise money. It will not be, no matter who you are. Many companies put themselves in the situation where they are three months away from D-day, and then they start to fundraise, this is a desperation raise. Do not put yourself in that position. It is difficult to make a relationship with new investors in a three month period of time. It is possible to raise very quickly, but again, assume you are the rule and not the exception.
NDA's (Non-disclosure Agreement)
There is a time and place for NDA's, the time is never, and the place is the bottom of my trash can. I do not sign NDA's and I know many other venture firms and angel investors have the same outlook (will explain reasoning in longer post later). Just know that if you send someone an NDA, it is a waste of time to talk about an NDA. You have an investors attention for 20 minutes, don't waste 10 of those minutes trying to get them to sign an NDA.
Create a Sense of Urgency
This does not mean you should make them panic that your company is going to run out of money so you need it. You have to create a sense of urgency that the investors should invest by a certain time, otherwise the round will already be full and they will have missed their shot. This is a step that I will also go over in a later blog post. This is the ultimate skill of fundraising, many second time entrepreneurs are able to create this facade around themselves to raise money very quickly, and they do it by making the investors feel that they don't need the money, and they already have investors in the pipeline.
If all else fails, figure out how to sustain your business without raising capital. If you can generate enough demand to actually make money, you will be swarmed by Venture Capital/Angel investors. A VC does not make or break a company, YOU DO.
-----------------------------------------------------
A friend of mine just read this post and suggested a few more, that I agree with, which is more fundamental advice.
Don't be afraid to say "I don't know"
Investors ask lots and lots of questions, and the more you pitch your company, the more you'll be able to answer. That said, there's some power in admitting that you don't know the answer to an intelligent question off the top of your head. A good investor will respect an entrepreneur that admits to not being omniscient during a pitch, especially if he or she follows-up with a well thought out answer in the days following a meeting. Better to admit ignorance (every so often) than to try and make something up on the spot and risk being perceived as a liar.
Take five minutes after a meeting to write down what an investor keyed in on during your pitch. Did they dive deep into a specific stream of revenue or a customer acquisition channel? Save these notes, and highlight that data (if it looks good) the next time you chat with that investor.
Most people you pitch will keep your materials, so it's great to have a record of what you showed folks last time around, especially if you're beating your original projections!
* thank you Matt Gunderson for the suggestions.
