Category: Fundraising

Whether you believe it or not, raising your first $500,000 is easier than it’s ever been. And raising your next $1,000,000 (or more) is harder than it’s ever been.

When I first started investing in startups around 2010, you could count the number of micro-VCs — funds under $100,000,000 — on one hand. In 2017, there are over 300 other firms registered in the same category (with at least that many more funds trying to raise funds in that same category).

A couple of things you can do to stand out of the crowd:

• Don’t make basic mistakes. You can’t raise money on ideas. You can’t raise money on outsourced teams. You can’t raise money on complicated business models. Keep things simple. I wrote about this in 2014 and it’s still true today.
• Build a business, not a startup. The world is full of people that talk about ideas. You should be focused on your customers. Once you sell one thing to one person you don’t know, you’ve got a business.
• There’s no excuse for a bad pitch anymore. Not when hundreds — if not thousands — of other pitch decks from funded startups are posted all over the web. Find some here.
• Stop chasing investor money. The best time to raise money is when you know how to use it to continue growing the business. Investors want to put money into sales companies, not product companies. You should view investor money as a tool to grow your business.

I can’t promise you the perfect pitch deck or fundraising formula but I can tell you that the bar continues to rise for entrepreneurs everywhere. My hope is that you’ll consider some of these ideas and raise the bar for yourself.

In the worst case, you’ll build a better business for yourself. In the best case, you’ll build a better business for yourself and raise some money to help speed things up along the way.

If you’re interested in picking up a few more tactical tips for your next fundraise, I created a free email course on fundraising for startups.

Imagine you had a full-time job and you screwed up nine out of ten assignments. You wouldn’t keep that job for long.

But being an investor is kind of weird. We’re wrong more than we’re right but, for some reason, people still want our opinions on their ideas.

The truth is that investors (and most everyone else) is notoriously bad at judging ideas. (Remember what most investors said about the iPhone, Uber and AirBnB?)

If you insist on talking to an investor about your ideas, focus the discussion on your growth / distribution tactics. Talk about what else they’re seeing. Ask them why they’ve chosen to invest (or pass) on other opportunities. Talk about everything but the idea.

Stop asking for advice and opinions. Learn to extract information.

Something I learned when I used to sell cars: if you understand how someone makes money, you can better understand how they make decisions.

The business of investing is about deal selection, not deal sourcing. The best investors see 100x more deals than local angels, VCs and anyone else in-between. That’s why it’s easier to get coffee with a professional investor than your local angel group. If you’re a founder, you should skip the local investors first. If you’re an investor, look at deals outside your hometown first.

VCs are easier to understand than angels. VCs are investing other people’s money while angels are investing their own. When angels choose not to invest in your company, it could be for any reason at all (eg, they don’t like your shoes, they hate the weather outside, it’s a Tuesday…”). When a VC chooses not to invest in your company, it’s because they don’t believe that the financial return of your company aligns with the financial returns they promised their investors.

The goal is to make money. When anyone invests in companies, the goal is to return their principal and another three times on top of that. So, for example: if I’m investing $1M in companies this year, my goal is to spread that across X number of companies and hope that one or more of them returns enough money for me to make ~$4M back.

Angels usually earn a paycheck from their day job and keep all the profits when you exit. VCs earn their paycheck from the fund’s management fees and split the profits on your exit with their investors. This is why VCs are incentivized to raise larger and larger funds… and why they’re less and less likely to spend any time outside of Silicon Valley, NYC or other large cities. (More on that tomorrow…)

If you think you’re going to raise money for your company at some point, start by understanding how investors make money before you begin pulling your deck together. Better yet, get to $1,000/month first.

Aside from actually building your business, asking others to invest in your company is the hardest thing a founder will do.

You can find all sorts of tips across the web on how to find investors, how to structure your term sheets and almost every other detail you’ll need to know. It’s what not to do that isn’t shared often.

• $250,000 is the minimum to raise. Anything less will send the wrong signals to professional angels and VCs.
• Never be an investor’s first deal. It’s hard enough to get professional investors to commit to your deal, why make things harder on yourself by dealing with someone that may not be prepared for the risks associated with early stage investing?
• The smaller the check, the bigger the headache. The minimum check size you should take directly into your company is $25K. Anything smaller needs to get routed into an AngelList Syndicate (here’s mine) or rolled up into some other SPV (ask your local angel group about this).
• Raise 18 months of capital or nothing at all. Once you step on the venture treadmill, the expectation is that you’ll raise more money at a higher valuation roughly every 12-18 months. If you raise too little capital, you’re unlikely to hit the milestones needed to get that next round. Don’t set yourself up to fail.
• Investors check references on founders. Founders need to check references on investors. Check AngelList. Ask other founders in their portfolio. Read what others might have said about them anywhere else online. The truth of the matter is that it’s easier to divorce your spouse than to “undo” an investment. Trust me on this.
• Use AngelList to fill your round, not start it. The same is true for any other online fundraising service you choose to use. Getting the first person to commit is a function of handshakes and time — actual meetings.

If you want to do anything big, you need to leave your home town. Even if only for a few short days, weeks or years. That’s because no one’s ever a big deal in their hometown, especially entrepreneurs.

Once you’ve decided that it’s time to raise money, aim for angels, groups and venture firms within a 1,000 mile radius and focus on getting meetings with them first. Let me say that another way: you’re better off not talking to your local investor community first. The problem isn’t the local investors, it’s you.

Before you even think about raising money, you need to know your market inside and out. Look at every deal that’s happening and know every player in the space. (If you don’t know how to do that, click the link at the beginning of this paragraph.) Once you know the players — both entrepreneurs and investors — focus on the ones that are outside Silicon Valley and outside your home town.

Give them value, if you can. Cold email them if you must. But never ask them to spend any time or social capital before building a relationship with them first.

This all probably sounds like a lot of work — and it is. If you want to build a company, you need to raise the bar on yourself and your company. The alternative is that you can stay local, complain about everything and wonder why no one wants to back you.

Once you get someone outside your home town to believe in you, don’t be surprised when the local tech community starts to do the same.

There’s a saying in the investor community: if you’re not chasing a deal, it’s probably not a good one.

if you're not chasing a deal, it's probably not a good one. Click To Tweet

Think about that for a minute.

Investors understand that the best deals are quick to oversubscribe — and they’ve got to fight for an allocation on the cap table.

Having met thousands of entrepreneurs over the past few years, I’ve heard a few phrases that instantly set off alarm bells.

Founder: “We’re raising our seed round and expecting to close it in the next 90 days.”

Um, what? I’ve seen deals close in a week. Sometimes three weeks. Nothing takes 90 days. You sound like you’re not trying hard enough. Or, worse, you’re not good enough to close anything.

Founder: “Happy to meet you any time you’re available.”

Wait, so you have nothing else better to do? Don’t you have customers to keep you busy or are you really doing nothing else at all?

Founder: “We’re looking to raise something between $X and $Y.”

Huh? You don’t know exactly how much money it’ll take to hit your next real business milestone?

Founder: “WE DID ALL OF THIS JUST THROUGH WORD OF MOUTH!”

Shit. Being lucky isn’t the same as building a business. Please, please, please tell me you’ve at least started trying other tactics to grow the business.

Look, here’s the thing: the best founders know how to humblebrag.

You should be leading every conversation with an investor (and perhaps customers too) with factual statements around your business. Preferably namedropping other notable people that are using your product or investing in your company.

If you focus on building a business, don’t be surprised when money starts flowing your way.

***

If you’re looking for more actionable tips on raising money for your company, check out fundraising for startups.

There’s rarely anything more frustrating than meeting a founder that doesn’t know the numbers around their own business.

At the very least, you need to memorize these four things and be ready to talk about them at any time with no notice:

• Revenue (or Monthly Recurring Revenue if you have that)
• Churn
• CAC (cost of customer acquisition)
• LTV (lifetime value)

Even if your business is still early, you should have reasonable assumptions around those numbers.

The more data (read: sales) you have to back those numbers, the more likely you are to actually raise money for your company.

It sounds simple… because it is. Investors want to invest in businesses, not startups.

A thousand years ago, power belonged to those people that owned the dirt. So, if you owned the dirt, you could say, “Hey, you can use this dirt and I have the power.”

Then, a hundred years ago, power belonged to the people that had all the money. If you wanted to build a business, you borrowed money someone and they had power over you.

Ten years ago, power belonged to people who knew how to use technology. If you knew how to use email (seriously), you could easily get a job in some IT field and have power over others.

Today, power belongs to people that understand that we live in an attention economy.

When you get a 30-minute meeting with somebody today, you don’t get 30 minutes of attention. You have to earn all of your attention every 30 seconds. And then you have to re-earn it every 30 seconds.

It’s the unfortunate truth of the reality we all live in today.

We’re all busy. Even the investors you’re trying to pitch. Even the employees you want to hire. Even the customers you want to sell. (As a reminder, that’s exactly why investors outside your hometown don’t take your calls.)

Never forget that.

When you decide to pitch anyone, make sure that every word coming out of your mouth is something that grabs their attention.

I’m a big believer that the soft skills of fundraising are far trickier than the hard skills of fundraising.

If you’ve ever worked in a sales job, you now that FOMO and greed are great drivers to get any sale done. It’s the same with fundraising for your company: you want to create FOMO and, especially for investors, understand that greed is important.

Don’t get me wrong: your product, your market, your team and everything else in between matter… but only to the extent that you talk about them and move on.

OK, let’s quickly talk about definitions:

• FOMO: Fear Of Missing Out. It’s exactly what it sounds like.
• Greed. Again, exactly what it sounds like.

When you’re talking to any investor, it’s ultra important to keep the conversation focused on business growth because it’s FOMO and greed that will get your deal done.

In order to do that authentically, you need to do a couple of things:

• Have a business. We’ve talked about this already but you need to have some sort of traction to justify a fundraise these days.
• Fundraise full time. You can’t half-ass this. Building a company is hard. Getting people to invest in that company is harder. If you’re serious about fundraising, you need to keep the company growing and then carve out a month of your own time to setup meetings. If you want to raise $500K, plan on setting up 500 meetings.
• Keep the meetings tight. The goal of the meeting is to focus on business growth, try to avoid spending too much time on pleasantries and other unrelated things. Don’t let the meeting go long — in fact, try to end the meeting early and casually mention that you need to get back to work. Better yet, casually mention that you have another investor meeting scheduled and you want to respect everyone’s time.

If you find yourself talking about anything other than business growth with an investor for more than 50% of the allotted time in your meeting, your deal isn’t going to happen.

If you’re raising money from someone else, your goal is to build the biggest / best company within your vertical. If you agree with that, then you have to agree that business growth is the only thing that matters.

If you find yourself trying to rationalize your investment opportunity in your investor’s mind, it’s just not going to happen.

Investing in early stage startup companies is emotional, not rational.

I’ve spent the last few years on planes, trains and my Airstream. The conversation with entrepreneurs in every city goes a little like this:

Entrepreneur: “My local investors just don’t get what I’m doing.”

Me: “OK, so why don’t you start reaching out to investors in other cities?”

Entrepreneur: “Well, I have been. Every time I get on a call, it seems to end pretty quickly and the conversation dies off after that.”

Me: “SO STOP USING DINNER PARTY ETIQUETTE IN A BUSINESS MEETING.”

Entrepreneur: “…”

Let’s say you’re calling an investor in New York City who wants to invest in companies, right? You know they’re active because you’ve been tracking them on AngelList. There’s no doubt this investor is active.

That New York investor is probably taking 10 pitches on the same day you call. And, while you’re on the phone with them, they’re thinking about 60 other things simultaneously. They’re thinking about their kids. They’re thinking about their next meeting. They’re thinking about the awful coffee they had this morning. They’re thinking about everything but you.

And then you call. And you start saying stuff like this: “Hey, how’s it going? Hey, so, where are you from originally? Hey, so, what do you like to see?”

You’re using dinner-party etiquette in a business meeting, and then you’re surprised when the business people are like, ‘I don’t have time for this.’”

DON’T DO THIS.

Traction is credibility.

If you have any traction at all, lead with it. If you find yourself talking about the product more than the traction, you’re done. The deal’s never going to happen.