In conjunction with my new book being released – get it here ???? – I wanted to write a post on what I see first time founders typically get wrong when they embark upon their first fundraising journey.
It’s true, there’s unprecedented levels of cash being funnelled toward startups, see the Crunchbase data below. Investors have huge FOMO (fear-of-missing-out) on the next Uber or Airbnb. Not to mention, on a macro-level, global interest rates remain low, and well, startups are a little more exciting than buying into an index tracking ETF.
Surely this is great news for founders everywhere? It should make our mission of putting a dent in the universe a little easier? Unfortunately not. With the explosion of cash being directed toward startups, so too has the level of competition, as well as the benchmark expected. No longer is an idea on the back of a napkin suffice to raise a small seed round.
Over the past decade I’ve helped raise over $50m for startups. I’m also an Advisor to Richard Branson’s Virgin StartUp and prominent London based venture capital firm EC1 Capital. I want to draw upon the experience I’ve had from quite few investment rounds on both sides of the table to make sure you don’t make needless mistakes during the 6-12 month journey of raising a funding round from professional investors.
Underestimating the time and effort commitment needed
Even the most seasoned founders find raising investment physically and mentally exhausting. 90% of the time it will not be a walk in the park. Envisage what would happen to your startup if instead of focusing on partnerships, sales, product and customers you’re focused on finding investors, pitching investors, refining your deck and spending countless hours with lawyers. Your team will feel your absence, so you have to be confident that you have a solid roadmap and a solid team who can perform without you before starting the process.
Blind to the ‘risk reward’ mindset of investors
For an investor, everything comes down to risk vs. reward. Are you a seed stage investor? If so, you’ll expect more reward for the higher risk you’re taking on. Later stage growth investor? You’ll expect some pretty stable earnings, giving you precision to be able to model out endgame scenarios. Founders sometimes fail to understand the wants and needs to the investors they are pitching too. Are you pitching to seed investors with an astronomical pre-money valuation? You’ll price yourself out of the market and seriously impact your chance of raising.
Being too focused on valuation
Related to the risk reward point, I see quite a few founders too focused on valuation. Yes, you have to be smart to ensure that 2-3 years down the line you haven’t diluted yourself to a level where you no longer have skin in the game. But, look at it from the other side, any professional investor will know, understand and respect this. If you’re Seed or Series A level, you should be focused on the brand of the investor. Good investors will add 10x to your startup in terms of network, contact, approach, board. Don’t let a deal fall apart because you are conflicted over valuation. Let the investor have the lower valuation, they’ll then have more of the startup and be more inclined to help should things ever go the wrong direction.
Be you. Don’t act like what you imagine the investors would want to see. Let the investors see you. Let them see the true person they are investing in. Some will like it, some won’t. For the investors that eventually do partner, you will have a stronger, longer lasting relationship.
Know your assumptions, financial model and numbers inside out
Always envisage yourself in the investor’s shoes. Would you invest your hard earned cash in someone who only vaguely knew where their startup would be in two years? As a founder, you have to have a crystal clear understanding of your vision. And with that vision comes revenue streams, strategy and assumptions. Further, with those factors comes the ability to instantly be able to say what year two’s EBITDA is when asked. Yes, startups change and yes, that EBITDA number will most likely change. But as an investor, I’m satisfied that you’ve come prepared – it speaks volumes, I’m also satisfied that you understand the core bases of your business.
Refine your approach after each and every pitch
You’re half way through your funding roadshow and you keep getting the same response from investors. You are wrecking your brain, trying to think of what you are doing wrong. Pause and take a step back, the major thing you’re doing wrong is not learning after each pitch. What did the first investor you pitched too say? Did they not understand what you do? Make sure that for the next pitch, you have front and centre – in clear, easy to understand language. If you aren’t learning and adapting after each pitch, you are just wasting investor meeting ammo. You won’t be able to go back and have a second chance to pitch all those investors again.
Keep the pressure on
Learn the fine line between keeping pressure on and being too pushy. Investors will always want optionality. They’ll want to see stuff being proven. From when you first pitch an investor to when the round actually closes could be 6 – 12 months. There will be forecasts and assumptions that you have pitched, that when given enough time (during the fundraise) an investor will be able to see if they were correct or not. Some of the better investors will give a fast no, with some reasoning behind it. A lot of investors will drag the process out and continue to prod and ask questions — to which you’ll have to invest time in responding. But understand your time is precious and read the signals of whether you think they are well and truly interested.
Secure a lead investor as soon as possible
If you’re raising a $300k seed round, don’t think of the goal as the whole $300k, think of the goal as $150k from a reputable angel investor or VC firm. Once you have the round ‘cornerstoned’ other angels and VCs will want to piggyback on the Lead and the rest will quickly fall into place. On that note, make sure you don’t pitch the VCs or angels who you think you have the best chance with first. Each pitch will get better and better; so practice with a few funds or angels that you don’t mind giving you a no.
Don’t focus on vanity metrics
You will be tempted to throw in big numbers to the pitch. This will part be because you’re insecure about the actual progress of the business, especially as a first time founder – you will be talking about a lot of money, and as a result you’ll think you have to appear larger than you are. Don’t. It will come back to bite you. Not only is it unethical, it may just be that your startup isn’t quite ready for outside funding. So instead of saying you have 100,000 downloads – focus on the daily users, and their growth.
Not using a CRM to manage investors
Personally I usually use Streak for Gmail to create a pipeline and a funding strategy. It allows me to attach all email communications to the pipeline, it means I don’t fall behind on follow-ups and it let’s me see, high level, how the funding round is progressing. Furthermore, due to funding rounds typically take between 6-12 months, it enables me to set up business updates that go out to all investors that I have spoken with, whether or not they remain actively interested in participation.