We recently just completed raising venture capital, (a Series A financing), in which we raised $1.1M. The round was led by MentorTech ventures, with participation from Amicus Capital and prominent Bay Area and Seattle angels. We started fundraising in earnest in August of 2009, so from start to finish it took us 8 months. Raising venture capital was a lot harder and took a lot longer than we expected, but obviously with determination and a bit of luck it can be done.
This post covers the top lessons we learned along the way:
- Raising money can be incredibly hard. Yes, I'll repeat it again it case you missed it the first time. I'm sure there are plenty of startups out there that skate through the fundraising process-we were not one of them. Despite having many of the elements of an attractive investment (experienced team, huge market, proven business model) our hit rate with investors was very low. We had to push through hundreds of "No's" before we got to the few "Yes's". Set your expectations properly so that you don't get discouraged five months in when you are still eating Top Ramen and your bank account is near empty.
- Start with great pitch materials. This topic is worthy of a whole series of posts, but I'll summarize what we did. We found good advice and tried to follow Guy Kawasaki's 10/20/30 rule for building your pitch for our powerpoint deck. I also would recommend reviewing Mint.com's pitch deck--very well done. Look at the best advice out there and tailor the outline to fit your story. I'd recommend starting the process by writing a full business plan and creating a detailed 3 year financial model for the business. While nobody will ever ask for these things, they force a level of rigor that will ensure you think things through carefully. After this create a one-page overview, a seven page executive summary, and a 10-15 slide ppt deck. We also created a one page deal summary that summarized the key terms. We used all of these docs extensively. We attached the one-pager when first approaching someone. The 7-page summary we sent out if people wanted more info. The powerpoint is of course for meetings. And finally, the 1-page deal summary we sent to people that showed an interest in investing. For your pitch, I'd recommend planning about 3 weeks time for reviews and dry-runs. We practiced our pitch with about 5-6 friends and advisors and the quality improved dramatically.
- Cast a very broad net. We created a target investor list of over 350 individuals and institutions that were either a good target for investing or were a good source of introductions. We reached out to over 200 of these people. We started by listing our closest connections and then became experts searching Linkedin. Much of our list we found by searching on the term "angel" on Linkedin. We then prioritized the list based on investor interests, how active an investor appeared to be and how many degrees of separation there was in Linkedin. We reviewed the list as a team to determine (in Linkedin) which of us had the closest connection to people we didn't know and then started reaching out. Ultimately we found our lead investor, MentorTech, through an introduction from a business school teacher of mine from 10 years ago. One of our key angel investors we found via Linkedin and sent a "cold" email as the first contact--so even the "trawling" that we did worked.
- Keep interested investors warm. As we started getting interest from people, we kept a "hot list" of folks that showed some level of interest. We made sure to send updates to these folks at least once every month or two so that when we found our lead investor, they'd be warm.
- Be dogged, but not desperate. Investors live busy lives, are often are slow to respond, are flooded with other opportunities, and (some) take many vacations. Don't take a non-response as a lack of interest. I generally would send a first email and then would send at least 2 more emails, starting with "Just checking in again in case you missed my earlier email... ". These 2nd or 3rd follow up emails worked in at least 4 cases leading to meetings. One of our seed investors finally came through after several long time gaps when he was totally non-responsive and we weren't sure if he had lost interest--had we not persisted, we would have lost him.
- Find a credible lead investor. You'll read this advice everywhere--it's critical. Finding a lead should be your primary goal. I have heard of a few startups that raised money from a herd of small angels, but I think this happened more often before 2008 during the time when angel investing was a hobby for many--these hobby investors are scarce now. We spoke to many investors that said, "I'm interested. Come back to me when you have a lead." The lead investor will negotiate and set the terms with you. Others then will follow. It is hard to get those first investors and there is a good reason why: one of the primary risks in investing is "financing risk". If you are a $25 - $50k investor talking to a startup, why would you ever invest first? Putting your $25k in might give the company 1-2 months of runway. If you sit on the sidelines and wait until a lead puts in $500k or $2M, you do risk getting squeezed out, but if you are able to get in, the financing risk is greatly diminished. Finding a lead investor is the hardest part of the whole process. If you are targeting VCs, look for those that have led in the past and are interested in your space. If you are targeting angels, determine through networking which angels tend to lead and bring others in--build and nurture a relationship with these folks.
- Push hard for real business results. Four months into our fundraising process we started to see real results in our business. Traffic, leads and revenue were spiking. It was when our graphs started to climb up and to the right that we started to get interest from investors. I believe that we likely never would have gotten funded without the impressive results that we had in the Fall of 2009. So figure out a way to keep pushing hard in your business while you are fundraising--the progress you make during this time might be the catalyst for an investor.
- Remove the investment risk. There are three types of risk to a startup investment (this explained to me by Geoff Entress): financing risk (will the company be able to raise enough capital to avoid bankruptcy?), business model risk (does the business model throw off enough profit to make this interesting?), and execution risk (can the team pull it off?). Do your best to remove as much of the risk as possible. By the time we had a commitment from our lead, we could argue pretty well that we had removed the business model risk (by proving that our model worked at a local level) and most of the execution risk (by demonstrating the strong progress and results that we had.) And of course, the lead investor then takes away the financing risk for the others you bring in.
- Be wary of angel networks. We presented to two angel networks in Seattle. Both were a waste of time and in fact caused us more anxiety than anything. At one presentation, the "CFO for hire" of one of our competitors was sitting in the front row as we went through our detailed plans and exposed our secret sauce--he was madly taking notes. At the other presentation, the lead attorney for our biggest competitor was in the room. In my humble opinion, this is complete bullshit--angel networks should do a much better job of ensuring that the sensitive details that they force startups to share don't get in the hands of direct competitors. Know that when you apply to these networks, not only will you stand a chance of presenting to your competition, the docs you submit to the angel network or upload to AngelSoft can be accessed by hundreds of people that you can't screen.
- Hire an experienced startup attorney. A great startup attorney is an invaluable asset to have in the negotiations after you have interest from a lead investor. VCs and experienced angels negotiate terms for a living--you don't. Hire an attorney that sees and negotiates a lot of financings, as he/she will have a good understanding of what terms are "market" and hopefully will turn out to be a shrewd negotiator. We used Beacon Law Advisors--Chris Hurley and Brian Richmond were fantastic. Be prepared for steep bills as a good attorney isn't cheap--but it's well worth it. Not only did Chris play a critical role in preparing us to negotiate the major term sheet terms (we led these discussions--he didn't attend), he led the negotiations when we were going back and forth to finalize the "definitive docs". During this final stage, the legaleze gets very thick and quite frankly there were times when both Jay and I were barely keeping up with the discussion.
- Don't take your foot off the gas until the money is in the bank. The process goes like this... The first sign of real commitment is when you get a term sheet from your lead (if you are doing an angel round, you should provide the term sheet.) You will then negotiate the major terms and settle on a final term sheet and then you will create and negotiate the "definitive docs". From the time we received our term sheet to the day it was dually signed was 11 days. From signed term sheet to "funding" took us 18 days. A few tips for negotiating the term sheet: 1) be as prepared as possible for each negotiation (work through all the options and alternatives, model the alternatives and role play the negotiations with your attorney) 2) push hard for the terms you want--the investor likely wants to do the deal nearly as bad as you do so don't be wimpy, and 3) push hard on the timing (have Saturday meetings if you have to, get your investor to commit to responding by a certain time, and work hard to turn things around quickly when the ball is in your court.) After you get the term sheet, someone will draft the first version of the "definitive docs" which in our case totaled over 100 pages, and then you'll negotiate all the finer details of these docs. Simultaneously while you work to finalize and then sign the docs you will need to herd all of the other investors you are bringing in to sign and fund on the same day. I'd suggest to clear your calendar the week you are closing as you'll want to be available at any time to jump in and push things along. The 29 days from receiving a term sheet to funding felt like a tight-wire act--we knew the deal could fall apart at any time. The key is to push as hard as you can until the deal is closed to avoid having something unforeseen blow up the deal.