At Epicenter we did a fundraising week where we brought together all aspects of raising money — from angels and seed investors to ICO’s, crowdfunding and the likes. I have fundraised before, when we brought in investors for Magine TV for instance or most recently with FitnessCollection. With Magine, we ended up raising 13,5M$ from family offices but before we did close with them, we met VC’s in Europe and the likes of Sequoia from the Valley. I learnt some key lessons raising money to grow (might not be fully applicable to seed or early stage) when fundraising that I thought I’ll share some of my learnings.
1. Why should you raise money? Understanding the difference between an entrepreneur and investor
That is probably the most obvious question, but not many entrepreneurs that I meet answer that question convincingly. Yes, money fuels product development, more hiring, may be going into new markets etc, but for most investors this needs to make sense. Yes, throwing buzzwords like AI or Machine Learning might help, but it doesn’t really in the long term if you do not have a thought through way to show money back.
Learning 1: “Entrepreneurs need to understand that you as an entrepreneur is in love with the product or customer problem or what your vision is. Most investors are in love with making money back or better making 10x the money. They probably like you or your work, might brag about your product at dinner parties but they love it when they show returns”
Hence if you do not have a good case of showing when you plan to make money (whether that is an exit strategy or route to profitability), your chances of raising money are quite slim.
The good thing about having VC’s or investors with you is you get more disciplined reporting your progress, you can get specific expertise or access to network from other portfolio companies but needless to say you get cash to fuel growth.
2. It is a full time job when you are actively raising:
Most companies that are inching close to product-market fit, but need just that extra 1M EUR to cross the bridge find themselves close to the valley of death. If you are in that position where your metrics are not yet there, your team has been at it for a couple of years or more, the best bet is to go after sources you already know. Raising from a VC you don’t know might be time consuming, and would take away focus from building your business.
Learning 2: “Fundraising is a full time job when you are actively raising money. It takes away focus from building your company, and you have no way to hack it. It helps to get intros and use people you know, but the process is not linear and takes a lot of time.”
3. Build a fundraising funnel:
Just like you have a marketing funnel to track leads and convert them, you should have a fundraising funnel that matches investors and their partners (important!) sector and geographic interest. You need to prioritise your potential investors into categories, and then find the best possible way to get to them. Just like trust building is key in marketing, it is equally if not more important in fund raising. You need intros and you need to have a strong reason to meet.
Learning 3: Have a funnel of investors classified by geography, focus and interest. Do not write cold emails, and take any meeting because he/she is an investor. Focus your efforts and make tailor made email intros
4. Your document bundle needed to get started:
You need a bunch of things to get your investor meetings going. You need a kick ass email that summarises what you do, your traction, key metrics , what you are looking to raise and finally a call to action — all neatly summarised into 1 email. You need a 1 pager that you can attach to this email or a light investor deck that has 8–10 pages about the opportunity. You need to have an understanding of what dilution you are ready to take to get the investor onboard. And probably most importantly you have a kick ass story on what you plan to do with the money and why you are investment worthy.
Some keywords: Fear Of Missing out, Why Now / Sense of urgency
Learnings 4 grouped in 1
Here is my favourite growth / Series A deck from Mixpanel that raised at 865M$ valuation.
Here is how a good storytelling looks like, despite being an early stage pitch.
Big Willie G knocking it out of the park in 3 minutes
5. Some classic pitfalls:
Most of the above is self-explanatory but I will focus on 2 things:
- Taking your friend as a lawyer and not making sure your contracts are in order. StartupDocs is a great starting point but you probably still need a lawyer if you are taking a few million euros.
- Not disclosing thorny issues is a classic mistake — most professional investors know that running a small company is fraught with challenges, and yours is probably no different. Be humble, honest and upfront about it. The worst case scenario would be the new investors are in for a nasty surprise when they find something out either during DD or later, which is of course worse than getting a no during the courting stage. Remember that most investors talk to each other, and you do not want to be known as the founder who did something stupid by not being honest.
What do VC’s and growth investors look for
They are looking for:
- Market Size (big)
- Differentiation (IP / Technology / Distribution)
- Traction (metrics so far)
If you have good traction, and on to a decently big addressable market with good ambitions, you have a pretty good shot at raising money. But remember the first point on this post above, logic of you being attractive is not enough, but the path to making 10x the money and the probability of that event is the key. For VC’s, out of 10 investments they make, 1 needs to probably make 10x the money — and the whole fund lives on finding that investment. Combine with the fact that 90% of the funds do not raise follow on funding, investors are in a tough business too. Hence, find ways to stick out on why you are awesome but find ways to make their decision safe that you are most likely going to be the 10x investment in their current portfolio.