Category: Fundraising

Most VCs won’t invest in startups super early.  There are some exceptions: my company Hustle Fund tends to invest quite early, and so do a few of our peer funds at the pre-seed level.  However, there are only a handful of us, and 99%+ of startups won’t be able to raise money at this stage.  Alternatively, if you are a successful entrepreneur or have great connections, multi-stage VC funds will also invest super early in these types of founders.

For the vast majority of entrepreneurs, doing a friends and family round of funding during the earliest stages of a company is the primary way to raise money.  I know for many people, raising from friends and family doesn’t come naturally.  Many entrepreneurs may feel like they don’t know enough rich people to raise money from their network.  Many people – would be investors – whom you ask to invest may also feel like investing is only for the really rich.  It can also be confusing and awkward to ask people close to you to invest.  How do you even broach the topic?  Will the person be taken aback?  Will it ruin your relationship?

Here are some tactical tips from my personal experience that might be helpful:

1. Dedicate lots of time to fundraising.

Fundraising, in general, takes a lot of time, and, raising from friends and family is no different.  As I’ve written about previously, one of the biggest challenges in fundraising is that it just takes so much time to balance running a company and raising money.

2. Set up “catch-up” meetings with friends and family.

It’s really hard to know who will be interested in investing in your new venture.  Set up “catch-up” meetings with everyone who is smart, has means, and/or is well-connected.  In each of these meetings, you’ll certainly “pitch” your new venture, but you are not necessarily looking to raise money from each of the people you meet with.  In some cases, you may only be looking to get introduced to more people who may be good to meet.

Pack these meetings into a limited period of time to maximize FOMO as well as maximize the efficiency of your fundraise.

3. Be creative about your meetings.  

Your meetings could be coffee catch-ups, but in other cases, maybe you cook brunch at your home and invite people over. Maybe you invite a lot of people over at the same time.  In other cases yet, you may want to do a group social activity; it could even be bowling!  Whatever works for you and what you think your friends, friends-of-friends, and family may like doing to make your meeting less formal.

Your meetings don’t have to be stiff coffee meetings.

4. You are always “pitching” even if not formally.

You should always have a deck ready to show on your phone or computer, but you don’t always need to use it.  I find that at the earliest stages, people are mostly investing in you.

Make sure that at some point in all your catch-up meetings you mention:

• You are starting a new company
• One line about why it will change the world – think very high level here
• You are raising money for the company
• You are raising only from friends and family
• Casually ask if he/she would like to invest or if he/she knows 1-2 people who might be interested in potentially investing or may know other potential investors

It is important to get each person you talk to very excited about your business.  I find that one of the biggest mistakes entrepreneurs make in pitching their high level ideas is that they say too much about what their product idea does. For example: “I’m starting a new social network that will combine Facebook, Snap, Instagram, WhatsApp, WeChat, and LINE all in one place.”  Or, “I’m starting a new AirBnB for retired people.”  This isn’t very exciting.  The only person excited about your product mechanics is you.  However, you can get people excited about outcomes: “I’m building a new social network that will bring people globally closer together – so that people in India can talk with people from Japan.” Or, “I’m starting a new type of housing platform so that older people don’t need to live in stodgy sad retirement homes and can live a vibrant independent life.”

When pitching to people who do not invest for a living (i.e. non fund managers), it’s important to explicitly mention that you are raising money and that you want their help.  This could mean that they could help introduce you to other people and/or that they could invest.

There are a lot of people on the internet who say you should ask for advice and not money.  IMO, this is really awful advice.  Most people who do not invest for a living – even active angels – don’t realize they are being asked to consider your idea as an investment if you don’t ask for their help in raising money.  If you are talking with your dentist about your new startup, his/her first thought is not, “Oh I wonder if I can invest?” or even, “I would never invest in this.”  His/her first thought will be, “Oh cool, John/Jane Doe has a new career.  I’m going to make a mental note that he/she has left Cisco and is now working for himself/herself.”  They don’t see themselves as investors, and so you need to explicitly make the ask if you want an investment.  You cannot just assume that people will volunteer to invest.

Your conversation might end up going something like this:

“So yeah, lots of new changes.  I left Cisco, and I’m now starting a company.  We are trying to do ABC in the world, and if we’re successful, DEF will happen.  Right now I’m raising some money from friends and family to achieve XYZ goals.  I wanted to see if you might be interested in potentially investing or know 1-2 individuals who might be interested and good to talk with?”

(Please don’t monologue. Those are only the rough talking points that you need to bring up.)

At this point in the conversation, you are making the ask only to see if the person will consider investing (or knows someone who might be good to talk to). You are not asking for a commitment.

It is important to mention that you are raising money from friends and family.  A lot of people have in their heads that entrepreneurs raise money from funds and don’t realize that at the earliest stages, friends and family have the opportunity to invest in your company and also get the best deal.  This is what you need to communicate to would-be investors.

A lot of people also think that investors need to be super rich in order to invest.  This is also not true and also what you need to inform people about.

When you are first starting to raise money, my personal strategy is to set a lower minimum check size and generate momentum.  This makes investing very accessible to many professionals.  I know lots of “angels” who invest $1k-$10k per deal.  I think many people think that angels need to put in at least $25k per deal, but that is simply not true anymore.  Now, you as an entrepreneur may not want a lot of people to put in less than $25k because it will mean you have to do a lot of meetings.  However, when you are first starting out and you don’t have a strong investor network, it may be worthwhile to accept some smaller checks to get the flywheel going and also to say Bob or Mary has invested in your company to generate buzz with subsequent conversations.  Once you start to get checks in the door, you may want to increase the minimum.  As a result, investing in startups is actually accessible to many people in your network.  They just don’t think about it that way, and it’s your job to change that mindset.

5. You are selling more than your company

At the earliest stages, people are investing in you.  There are other things you can do to sweeten the deal.  One of the things that we do at Hustle Fund is host a meetup for all of our investors in our fund multiple times a year.  It’s an opportunity for them to meet and get to know each other.  In general, well curated and exclusive networking events are a really good draw for people to participate in things (as I wrote about here as a tip for getting speakers for a conference).  People always want to get to know other rich and well-networked people.  If your initial minimum is, say, $10k, then not only is someone buying a stake in your company, but he/she could also potentially be buying into a network.  And you can facilitate this for free or really cheap.  You can host these in an office space for free.  Plus, pizza, wine, and cheese and crackers are pretty cheap.

People who invest in you – especially friends and family – are buying an experience.  They are not just buying a transaction.  Make that experience a good one.

6. Do a formal pitch & call-to-action if someone is interested

From the catch up meeting, if someone is interested in learning more, you can either dive into details right then and there (preferable if you all have the time) or set up another time to talk.

This is where it’s important to have a pitch deck and materials ready.  At the end of this pitch, try to push for a yes or a no.  In many cases, people will need to think about your deal, but, if the person you’re speaking with is ready to commit, have a SAFE or convertible note ready to sign.

7. Be transparent

If an investor has committed but hasn’t invested in a startup before, it’s important that you clearly outline the risks.  I would say something like this: “I am flattered that you are going to join our round.  And I think this is a great opportunity.  But I really want to emphasize that investing in a startup like this is an incredibly risky endeavor.  I could potentially lose all your money, and there is a high probability of failure.”  People usually appreciate this level of transparency, and I’ve never known anyone to back out.  I think that it’s important to highlight this in case/when things go awry down the road.  Moreover, psychology suggests that in many cases, when things are slightly pulled away from you, you only want them more.

8. Re-assure friends/family that it’s ok not to invest

If you sense that someone feels awkward when you’re asking for his/her help, it’s important to re-assure him/her that it’s OK to not participate.  You might find yourself in a dialogue like this:

“Oh…oh.  Well, I don’t really have any money to invest.”
“A couple of thoughts – 1) First off, I value our friendship/relationship above all else.  So, I don’t want to put you in a tough position.  If this isn’t a good fit, that is totally cool.  I just wanted to give you an opportunity that I think is great.  2) I also want to mention that since this is a friends/family round, we have a low-ish minimum of X.  I don’t know if that changes things, but just wanted to highlight that.”

It’s really important for the sake of your relationship with the person to re-assure him/her that it’s OK to not invest.  You are presenting and opportunity, and that’s it.

9. Don’t run out of leads

The best piece of advice that I received when I was raising money for Hustle Fund was from Charles Hudson, who also runs a pre-seed fund called Precursor.  He said, “Don’t run out of leads.”  This is very good advice. If you have infinite leads (and time), you won’t have to worry about being rejected as you go along, and that is exactly the mentality you should have going into and throughout your fundraise.

When I was a first time entrepreneur years ago, I remember being incredibly afraid of rejection.  I didn’t push people to a yes or a no for most of my raise.  By having the attitude that you have infinite leads, you will force all potential investors you’re talking to into a “yes” or “no” answer.  This is a good thing.  A “no” means you can stop wasting your time with someone who isn’t going to commit.

It also means that you need to keep generating leads to have enough potential investors fill your round.  As you go along, this gets harder because you’ll start with people in your network who are closest to you and then work outwards and chat with people who may be friends of friends of friends who don’t know you at all.  This is why it’s so important to constantly ask everyone you talk with for introductions or 1-2 names of folks they would recommend talking with… because you can’t run out of leads.

Now another typical piece of advice that you often hear is, “Never take an intro from someone who doesn’t invest.”  I would say this is true of VCs.  This is NOT true of non-professional investors: angels, friends, and family.  VCs have funds to invest from, and it’s their job to invest money.  If they pass, then they didn’t like something about your business, and that’s a negative signal.  If I were running a startup, I would not take an intro from a VC who passed.  But angels are different.  They don’t necessarily have pools of money that they need to invest.  If an angel passes, it could be because he/she wants to set aside money to repair the roof on his/her house.  Or save some extra money for his/her kid’s private school.  Or take a fancy vacation.  Or buy a new car.  Angels can do whatever they want with their money, including not invest.  So, if an angel passes, that isn’t a knock on your business per se, and most people understand that.  Also, angels run out of money all the time. They may have been active before, but until that portfolio becomes liquid, an angel may be tapped out of funds even if he/she wants to invest in your business.  So, definitely ask for intros to other potential investors from individuals.

I usually try to ask for 1-2 introductions because it’s a small but anchored request.  If the ask is too broad, such as, “If you can think of anyone who might like to invest…”, then no one will think deeply about it.  Try, “Can you think of 1 person who might be interested in taking a look at this?”  Asking for just 1 or 2 leads is a small task, and almost everyone can think of one specific person he/she knows who may be interested in chatting with you.

Pulling together a friends and family round is a bit of a crapshoot and takes a long time.  Part of the challenge is in identifying which people are interested in investing in you and has some money to do so.  I’ve found that it’s hard to predict who will end up joining your round.  The richest people are not necessarily the most bought into the opportunity nor are they necessarily investing a lot into startups.  In fact, many super rich people are a bit risk-averse because they want to preserve their wealth.  Conversely, many people whom you may discount as not having much money may actually be really bought in. In fact, I’ve found that people who are not super rich tend to also be more risk-taking because they want to become super rich. In the end, you’ll just need to meet with a ton of people.  You’ll need to do a lot of meetings, but raising a friends and family round even if you’re not well-connected can be done.

 

This is my second post (albeit later than I’d hoped!) on the state of Q2 2018 seed-stage fundraising.  The first one focused on crypto is here  (although it’s changed even more since I last wrote; altcoins are starting to moon again, and I’m sure everyone will leave Consensus this week on a high).

Here’s what’s happening in the equity world (from my perspective):

1. Token sales in the crypto-world do affect “equity” raises.

(I put “equity” in quotes because I include convertible notes and convertible securities in this category.)

Part of this is driven by the fact that VCs who can buy into tokens were spending a lot of time looking at token deals for a while, removing some investors from the “equity market.”

2. As blockchain companies are moving back to the equity world to do their pre-seed fundraises, this has shifted investor attention back into the equity world.

A number of companies that would have done a token sale a few months ago are now doing equity rounds instead.  Part of this is driven by how the SEC is thinking about regulations in this space.  Part of this is driven by the traction bar rising amongst blockchain companies – the bar is now higher in order to do a large token sale.  In other words, last year, you didn’t really need anything to do a token sale and this year you do!  (wow, what a concept…)

Now that there are more companies flooding the equity market (via all these blockchain ideas),  there is increased competition for startups seeking investor-dollars in the traditional equity world.  This leads me to point #3.

3. The bar for raising a seed round is increasing and so is the bar for raising a pre-seed round.

I allude to this here,  and Charles Hudson did as well here.  Because the gap between pre-seed and seed levels is increasing, there are a couple of approaches to this.  For some funds, it makes more sense to come in at the same entry point, but they need to be willing to carry their companies longer (i.e. inject more capital into the company) before their companies get to the next stage.  This is both greater risk and reward – pre-seed funds can gain more ownership in companies by putting more money into the businesses at lower valuations.

For other funds, it might mean waiting until there are more investors who are interested in the opportunity.  For others yet, it might mean waiting longer for results or traction.

For us, we are not increasing our check size to carry our companies,. Effectively, when we do bet very early as first check-in, we are now investing at lower valuations.  This is because there is increased risk that these companies will not make it to the next stage, so the price is affected accordingly.  In other cases, if companies are looking for the pre-seed valuations of last year, we’re often investing alongside investors or they’re further along.  In other words, we are not changing our strategy to accommodate changes in the market, but price is reflected in these deals.

Caveat: this is different for blockchain companies.  As these start to enter the equity market, there are a lot of investors who will fund these companies at a very early stage – even seed investors who typically don’t do other pre-seed deals will bet here.  This is great for blockchain entrepreneurs, so we see higher valuations in this space.  That being said, because there is also a LOT of competition amongst blockchain companies now, we are also passing a lot, too.  While we are open to paying up a bit, we won’t pay up as much as other investors.

In general, given how cheap it is to start a company and how few pre-seed investors there are, I think it makes sense to bootstrap to some level of revenue traction before fundraising.  At least, this is what I would do if I were starting a product-company today.

4. Seed rounds are dead

These days, pre-seed, seed, and post-seed stages all kind of blend together, honestly.  While each has different traction “requirements,” investors will often invest in multiple stages of these. Even though many people say the post-seed round is the old A, the interesting thing is that these rounds are not being done by series A investors.  Series A investors are still doing series A rounds even if they are much larger rounds that require more traction now.  Post-seed rounds are being done by seed investors.

This is interesting because it means that “seed” investors will look at a broader stage than they used to.  In fact, Hunter Walk wrote about this greater seed stage here.

In looking at this phenomenon, though, we see that seed rounds are dead (in most cases).

Certainly, if you raise early stage money from a large fund, then you’ve pulled together a round; so, yes, that is a round.  But, the vast majority of startups these days will not be able to raise money from large seed funds who lead  (And that’s ok!).  Most companies these days will be doing party rounds with some permutation of angels, friends & family, and microfunds and at multiple times.

Because most startups will end up raising tranches of money from multiple parties, many startups will use convertible securities (SAFEs / KISSes) or  convertible notes.  And often, these tranches here and there are done at different valuation caps, e.g. $200k on $3m.  Then, you make some progress and raise another $400k on $5m. And this continues.  Effectively, there’s no such thing as a “round” anymore.  These are seed tranches.  

Now, a lot of big funds will tell you not to do tranches.  The truth is that spending a lot of time trying to raise bits of money here and there is not ideal and takes a lot of time. Frankly speaking, sometimes you have no choice and are not able to raise a big chunk all at once.  And that’s life!  The best entrepreneurs will try every avenue for fundraising – big funds, small funds, angels, friends & family – and will roll with their best options and will keep making progress until they either don’t need investors anymore OR they are able to raise a big round once they’ve proven out the business.  Sometimes the most value-add investors are only able to write small checks.  There are a bunch of angels and microfunds I really respect and from whom I would take money any day, even though they are only writing small checks.

Being able to raise in tranches is actually a good option to have because it gives entrepreneurs more flexibility in how they raise.  Gone are the days where you need to sit around for a lead to decide in 2 months if they want to put $500k into your company.  In many cases if you raise $100k here and there, it may even be faster for you to raise $500k from smaller parties on convertible notes and securities than to wait around for a large fund (depending on the fund).  Tranches also create a forcing function for investors; if you only have $200k available at $3m, then that makes an investor move faster than raising a $1m round at $5m when you’re just starting your raise.

To me, it’s a good thing for entrepreneurs that seed rounds are dead.

There are also a bunch of investors who will push back on raising in tranches saying, “Yeah, but entrepreneurs end up giving away a lot of their cap table because they don’t know how much they are actually being diluted down with their various SAFES and notes.” I’ve heard this argument many times from friends of mine at big firms.  Frankly speaking, whether you’re raising in tranches or not, you should ALWAYS know what you are signing before you sign (valuation aside, there are many other terms you should be aware of).  You should always know what percentage of your company you’re selling to investors.  Take the time to do the calculations or find someone who can help you with this.  This is not rocket science, and being unable to use a spreadsheet (or find someone to use a spreadsheet) is a poor argument for why someone should not raise in tranches.

I think this increased optionality for entrepreneurs is always a good thing.

RIP seed rounds.

5. Crowdfunding is starting to take off

This is less of a Q2 observation and more of a 2018 observation.

A question I often get is whether crowdfunding is looked down upon by VCs at later stages.  In general, from what I’ve seen, no.  I’ve backed a handful of startups who have done crowdfunding before us, and they’ve gotten funding later from well known VCs.  Building on my overall point in #4, your job as a CEO is to keep the lights on however you can.  If it means that you’re going to raise money from crowdfunding, then that’s great.

Crowdfunding especially works well if you have a consumer product and you have built up an audience who loves you.  When you think about it, this is the best form of funding – taking money from customers both as customers and investors.  I’ve seen some of our companies raise a few hundred thousand dollars from their customers in just 2 days.  Crowdfunding is legit and can move big money and also be valuable in shaping your product.

Just my purview.

I thought it might be useful to do a high level overview of what fundraising in 2018 will look like at the pre-seed and seed stages.  Of course, this is just my prediction; only my $0.02.

It will be hard to raise a pre-seed round through traditional methods

If you are raising money through traditional methods (such as through angels, micro VCs, or VCs) via a convertible note, convertible security, or equity deal, it will be a lot harder to raise pre-seed money in 2018.  I’m seeing a number of investors pull back on investing through traditional means.  This means that traction bar has gone up for both pre-seed and seed stage companies.

In the late summer/early fall of 2017, we were investing in companies that were quite early.  For founding teams we did not already know, they all had a product built and all had early customers.  The companies we were investing in at the pre-seed level were doing as low as $1k revenue per month (non-repeatable) though we also invested in many companies with much higher revenue, too.

Towards the end of 2017, we noticed that downstream investors were slowing their investment pace, and we felt that it would be incredibly difficult to get our companies to the next point if we were investing only $25k at such an early stage.  The market had definitely shifted.  For your “typical” software deal, the stage after us (seed-stage) is probably around $30k-$50k per month in revenue as of writing this post  (this will depend A LOT on the idea and vertical).  So from my perspective, our entry point needs to be close enough to this rough benchmark for our companies to get to the next round of funding.  This has caused us to shift a bit downstream, too.  And in fact, in 2018, we have not yet done a single software deal even though last year we were averaging about one deal per week.

Raising money via an ICO is the exact opposite experience right now

However, if you are raising via an ICO, at least at this moment, you are probably having the opposite experience as a pre-seed company.  In fact, the median raise I’m seeing in the ICO markets is $20-30m or thereabouts, and you need very little developed to raise a lot of money!

For me, I personally think ICOs, at this time, only make sense if you’re building a blockchain company that uses utility tokens as currency for your decentralized product or service.  However, the frenzy is so nuts now, there are so many centralized/non-blockchain related companies that are successfully raising via ICO.

I do think in the long run, ICOs or some variation of today’s ICOs will disrupt traditional VC, and I plan to help this process along (this is what I’ve alluded to here).  I’ll be bringing thought leaders to this blog who can talk more about ICOs in later posts.

Crowdfunding is also more mainstream than you might think

Beyond traditional methods of fundraising (e.g. convertible notes, convertible securities, equity) and ICOs, there are other ways to raise money, too.  Crowdfunding can be incredibly effective if you already have customers and/or have built up an audience.  Companies like The Hustle raised $300k from their customers in just a couple of days.

Pros and cons of different funding methods in 2018

This is going to be an evolving analysis, but as of today, here’s a quick set of pros and cons for various fundraising methods:

“Traditional” fundraising on a convertible note, convertible security, or equity round:

Pros: Tried and true.  Professional investors understand how this works.  There should be no surprises with this type of raise.

Cons: Slow.  Investors can be annoying and obnoxious to deal with.  Power is in the hands of investors.

Crowdfunding and pre-sales:

Pros: Customers are the perfect audience for raising money because they already understand your product or service.  This works well if you’ve amassed a huge user base or audience or have a large mailing list.  If you have a media company or do a lot of content marketing, for example, this could be a great path.  And quick.  And online so you can get investors from anywhere.

Cons: Each investor will likely write only a small check.  So, you might have lots of people to deal with even if you go through a 3rd party platform (e.g. if people have lots of questions).  And, this is most effective if you have something already and/or already have investors – in other words, you’re already in business and have raised some money.

ICOs:

Pros: Once you get all the pieces in place, quick to raise money.  You don’t give up equity or control.  Power is in the hands of the entrepreneur.  Completely online so you can get investors from anywhere. Can raise on just an idea.  And can potentially raise lots and lots of money.

Cons: Logistics can be challenging.  Handling the security of ETH (cryptocurrency) is quite involved.  If you don’t handle this correctly, you can get hacked and lose everything.  If your ICO is not in compliance with SEC regulations, you can get shut down by the SEC.  The value of ETH can fluctuate wildly (unlike the dollar).  Generally makes sense at this point in time only for blockchain related companies that utilize a token that can be used for decentralized services and products.

I’m also seeing variations of the above – various combo deals with equity and tokens…the fundraising landscape has been changing a lot in the last couple of months, so who knows, this entire blog post might be obsolete in another 2 months.  It’s an exciting time…

“So how do you think your meeting went?”

“Oh, it went really well!”

This is a typical conversation I’ll have with a portfolio founder about his/her meeting with another seed venture capitalist (VC).

One thing I’ve noticed in the short time that I’ve been doing this job is that conversations with VCs that feel like they’re going well typically are not.  What happens next is the VC lobs the founder an email saying something like, “We’ve decided this is out of our wheelhouse.  Thanks for meeting.”  And that’s it.  The founder is confused and then frustrated.

What’s going on?  Why is it so hard to discern whether a VC meeting is going well?  A few thoughts…

Originally posted by gamerzlove

1. VCs will ask you hard questions if he/she is really interested in your business

A VC’s job is to turn over every stone in your business.  Because he/she is investing other people’s money, this is really, really important.  This means that, by definition, there will be lots of difficult questions if the VC is doing his/her job.  The flip-side is also true. If I’ve already decided to pass, I won’t even go down the path of asking difficult questions (or even ask a lot of questions) because there are enough red flags to cut the conversation short.

In fact, the easiest conversations with entrepreneurs are with the ones I’ve already decided to pass on.  

I do understand this also leads to frustration. After a VC passes, entrepreneurs are often left thinking that he/she didn’t get a fair shake down with a lot of questions.  “She didn’t even ask me about the team or ask to see the product!” is what I’ll often hear.

I get the frustration.

This is where that comes from. Commonly, VCs will cut a conversation short for a few reasons:

• Your company is too early
• Your market seems too small
• You or your co-founder do not seem sharp or tenacious
• The VC doesn’t like you or your co-founder

Originally posted by failworldblog

Stage

Your stage is probably the biggest reason VCs will pass quickly.  A lot of VCs have a sweet spot, in terms of traction stage, that they are investing in.  It’s part of their thesis or model.  If you don’t fit that right now, it’s not worth wasting time – including your own – to continue the conversation at this time.  However, you should know that a pass now is not a pass forever;  you should definitely go back when you have more progress.

A lot of VCs will try to tell you that they don’t have a sweet spot stage because they don’t want to miss any deals.  They would much rather see you too early than too late.  Truth be told, if you look at anyone’s portfolio, there are always tons of exceptions.  A VC who claims to look for a fair bit of traction will often have pre-launch companies in his/her portfolio.  That being said, a VC can quickly assess per your space and your idea whether it’s worth considering right now, and this is why conversations may end quickly.

Market size

If a VC is passing because your market size is seemingly too small, you can often change his/her mind about the market.

Tenacity

Early stage investors make a lot of decisions based on the founder of a startup.  This works to some people’s benefit and not to other’s.  If a VC sizes you up and has decided that you wouldn’t be a strong CEO, then that’s a pass for now as well.  How VCs determine who are “awesome founders” is a much longer discussion – there are certainly inherent, unconscious biases that we need to work on in this industry – but the bottom line is that you, as a founder, have to roll with the punches even if life is unfair.  The best way to prove you are an awesome founder is by making progress on your business and continuing to knock on those same investors’ doors to show your progress.  That is what truly makes for an awesome founder – someone who can get stuff done.

Bad impressions

Lastly, a VC would cut a meeting short if he/she doesn’t like the founder.  To be honest, if you are meeting an investor for the first time, you would think it would be very difficult to leave a bad impression on just one meeting.  To my surprise, there are actually a lot of entrepreneurs who do not pass this bar.  I will automatically pass if you:

• Lie, cheat, or do something unethical
• Treat my team (or your team!) rudely, meanly, or in an entitled way

Originally posted by sir-maximillian-goof

This may sound obvious, but if we are going to start a relationship, there needs to be strong trust; I need to know that you are a decent human being.  How you treat other people on my team is a proxy for how you’ll treat your own team (read: morale issues and drama), and of course, unethical people cannot be trusted.

Not only will I automatically pass today for these reasons, but I will also pass every single time for your subsequent businesses.

2. Conversations with angels can be easier

All of this said, conversations with angel investors can be very different.  Angel investors invest their own money and can decide to invest for whatever reason.  They can invest simply because they like your logo.  They may not turn over every stone.  So, you’ll see much more variation in your conversations with angel investors depending on the individual angel.

In closing, part of the problem with all of this is that you often won’t know why a VC is passing.  You should definitely ask, and if the issue is around stage of your company or market, investors are usually pretty open about telling you that. If they are not able to give you more specific feedback, by process of elimination, there is likely something negative that he/she thinks about you or your co-founder.

Since I wrote a post on how you’ll need multiple pitch decks, I’ve gotten a number of questions around what should go into them.

Today I want to spell out the ideal email deck – at least, ideal if you’re sending it to me. :)

• Short & sweet
  • ~5 slides is sufficient
• Should be skimmable in 10-30 seconds; E.g.
  • Fonts / colors that are easy to read
  • Not too much text / content
• Include your contact info

The purpose of your email deck is just to get a meeting.  It’s not to try to convince me that I should invest.  That comes later.

What should go into your 5 slides?

Your email deck should cover the basics.  There isn’t a hard-and-fast rule around what “the basics” means. For most companies, it will cover something like this (not necessarily in this order):

• Problem
• Solution / Your Product
• Traction / Your Unit Metrics
• Team
• Market

Problem

Interestingly, most people glance over this slide.  Of all the slides, this is the one that is probably the most important to address and spend the most time on.

How you articulate the problem accomplishes a few things:

• It gets me excited about your opportunity
• It gives me a sense of how much you’ve thought about the problem and know what you’re talking about
• It gives me a sense of your communication skills – your ability to articulate something complex into just 1-2 simple sentences

For example, one of 500 Startups’ portfolio companies called EnvoyNow does on-demand food delivery to the college market.  Just when you thought you could not possibly invest in yet another on-demand food delivery company, they convincingly articulated the problem.  Simply: College students order a LOT of food, but existing on-demand delivery companies cannot locate and/or access on-campus locations including dormitories and specific buildings.

Their articulation of the problem not only is very specific and easy-to-grasp, but it also addresses the elephant in the room: there are so many existing on-demand food delivery companies – why would you need another one?

Solution

I see too many companies attempt to address all their features with this slide. Just make it simple.  Follow the user experience.  Step 1, step 2, step 3, voila!

Traction

Most companies who send me decks don’t include a traction slide.  I think it’s because people are embarrassed that they are not very far along or they actually haven’t yet tested the waters.

First off, there’s nothing to be embarrassed by.  I’m a seed investor – what would I expect?  Any investor who is investing at the seed stage needs to be comfortable with the fact that there’s really not a whole lot of data at this stage, and if seed investors are not cool with this, they really should not be playing at this level.

Secondly, I think it’s important to understand what investors are looking for in this slide.  I’m not looking for traction for traction-sake.  Every company at this stage – regardless of whether they made $1k last month or $100k last month – is early and far far far away from being a billion dollar business.  So, what I want to understand are your customer learnings.  

If you are super duper early and don’t have meaningful revenue, show me what you’ve learned by testing the market.  This is something that EVERY company should be able to do quickly even without a product.

• What customer acquisition channels did you test?
  • Ads?
  • Cross-promotions?
• What was the cost to
  • Get a signup?
  • Get a free user?
  • Get a paying user?
• What has the retention been so far (if you know)?
• What is the engagement?
  • Are people coming back everyday?
    • For how long?

If you don’t have a lot of information, at a minimum, you can tell me about your unit economics.  What is happening with the few customers or signups you do have?  What do those numbers look like right now?

At a bare bare bare minimum, everyone can create a coming-soon landing page and drive traffic to it and articulate the results for that.  The traction slide needs to give me some idea that this is a product that people want and more importantly how badly.

If you are a post-seed company and you have quite a bit of data, graph your revenue (or users if you’re a pure-consumer company).

Note: please don’t graph cumulative revenue – this is a noob mistake!  I understand that your numbers may not go up every month.  In some cases, the time period of “months” may not make sense and you should slice and dice your data differently.  For example, if you’re an adtech company, perhaps it might make sense to graph your results by quarter since budgets are on a quarterly basis for most ad buyers.

Tl;dr – tout your unit metrics.  If you’re a post-seed company, I also want to see your data over time.

Team

You don’t need to list your whole team.  Just the founders is sufficient.  List only your notable advisors.  If you/your co-founders have domain experience, definitely mention this on this slide.  Also list out key accomplishments.  This slide is fairly straight forward.

Market

For your market slide, you don’t need to do a crazy analysis on this slide.  In fact, I would be ok with a slide with just one big number in the middle in size 108 font.   E.g. “$5B market”.  For me, I also don’t need it to be a $$$ number per se.  It could be something like, “2B people suffer from X”.  I just need to get a sense that this could be worth a lot AND GET CONVICTION.

If you are finding that investors do not have conviction about your market and are not open to meeting, you may need to re-position the problem (hence why that problem slide is so important) or find different investors to approach.

Lastly, in addition to these 5 slides, you’ll also want to make sure your contact information is on the slides.  Decks do get forwarded around.  For example, if let’s say someone sends me a deck for a fintech deal, I’m going to defer to one of my colleagues who specializes in that.  You’ll want to make sure there’s a way for him to get in touch with you.

I was moderating a VC panel a couple of weeks back, and we talked about the best way to get an investor’s attention.  One of the panelists said, “Well, the worst way is to bombard me at an event.”  And the more I thought about it, the more I disagreed.

When I was an entrepreneur, I don’t think I had any sense just how busy most investors are.  I guess I just thought they all sit in cushy chairs all day and sip tea and hang out at the Rosewood on Sand Hill  (ok, maybe some investors do).

But certainly new VCs are not doing this.  They have to hustle for every deal.  They have to hustle to fundraise for their current or next fund.  So how do you get on an investor’s radar?

Here’s a snapshot of my day-in-a-life:

• I average 6-10 meetings per day (typically 20-30 min mtgs), including meetings with both current and future portfolio companies
• I block off 4+ hours a day for emailing with founders
• I do roadshow events or speak at conferences on average 2-5 days per month on the road, 1 day locally
• Right now, my work inbox has
  • 80 import ant unanswered emails
  • 276 back-and-forth email threads with prospective founders
  • 1500+ emails that will just never even get opened because the subject line isn’t interesting
  • My personal inbox isn’t any better, unfortunately

This isn’t to say, “Oh I’m so busy that I’m holier or more important than thou.”  I’m trying to paint a picture of which channels are too competitive to get attention and which channels have opportunities.  I imagine that this is similar for many other investors.

Based off this, if I were pitching myself, here are some takeaways:

1. The best place to pitch an investor is when there is unstructured time

If you are at a conference or an event, investors actually have a LOT of downtime.  They have blocked off time on their calendars to be at an event for x amount of time.  But aside from their speaking slot or panel or whatnot, they are more or less available!

Now, a lot of investors don’t stay for the whole event, but if they are speaking, you can bet they will show up for at least that part.  You have the opportunity to find them before or after their talks.  Have you ever seen an investor on his/her phone emailing or texting people in the corner of a room?  That is your opportunity to jump in and do an elevator pitch.  Be polite and friendly, and you won’t be interrupting.

A strong elevator pitch will cover something unique about you, your story, any KPIs or metrics you may have, and why what you’re doing is important.  Most elevator pitches are really weak.  In part, it’s because they all sound the same and often are too long or rambly.  Also, an elevator pitch does not mean you just talk at someone.  An elevator pitch is a dialogue, but it’s a short one where you need to cover enough interesting points in order to get a meeting.  If the investor is intrigued, you may end up having a much longer conversation at the conference itself.  My longest conversations with entrepreneurs have been at events, and many of the portfolio companies I’ve championed over the last two years have been startups I’ve met at events.

Make sure that there is a strong next step after meeting with an investor.  A weak next step is “Email me.”  You don’t want to end up in someone’s inbox.  A strong next step is a confirmed meeting — it could be at a specific time at the event itself or later on — and it should be locked down or, at least, you should be in touch with an investor’s EA.

2. Cutting through an email inbox is tough

Everyone’s inboxes are busy.  If you must go the email-route, here’s how.

In some ways, this is why people say strong referrals are a great way to meet with investors.  This is true — if the referral is really strong.  Most of the time, referrals are weak or are just OK.  For example, people I’ve met once or twice before do not make good referrals for me.  You’re much better off emailing cold.  Furthermore, there are even some people’s referrals who are negative signaling to me!  On the flip side, there are some fellow investors’ referrals I would hop on immediately.  The issue, as an entrepreneur, is that you don’t know where your mutual connection sits in an investor’s eyes.  Your referrer doesn’t know where he/she stands either.

The best thing you can do is to try to get a warm referral but in parallel, send a cold-email.  It won’t hurt.  Sending someone an email twice isn’t going to be weird.  I probably wouldn’t even notice if someone emailed me 3x.

If you cold-email an investor, whatever you do, that first email must be compelling enough to be moved into a concrete meeting slot.  Asking someone for 15 minutes of his/her time while providing zero context on your business is a good way to get archived immediately.  Why?  Because even though it seems like it’s just 15 minutes of time for a call, that’s what — I kid you not — thousands of other entrepreneurs are asking for at the exact same time.

3. Make the most of whatever structured time you have

Once you have a concrete meeting time, no matter how short, you must have a pitch that is appropriate for that time period.  Most of my first structured meetings with people are 20 minutes.  This is pretty short. A lot of people try to push for longer meetings.  No matter how much time you have, you should have a pitch that can fit that time slot.  You should have pitches for:

• 30 seconds
• 5 minutes
• 20 minutes
• 45 minutes

The goals for each of these blocks are obviously very different.  You’re not going to get investment dollars on a 30-second pitch.  The 30-second pitch is to gauge if it’s worthwhile to move you to a longer pitch.

Similarly, I favor 20-minute conversations as a starting point because it’s enough time for a concise, direct entrepreneur to outline the following information:

• Team backgrounds and mission (why they are doing this)
• The problem they are solving
• Brief solution + differentiation
• Notable KPIs
• High level unit metrics

The best entrepreneurs I’ve met can cover all of this and more in 20 minutes and still have time to spare.  They have thought deeply about what points are important and made sure to cover all of those points while avoiding long, meaningless tangents.

This means that you’ll need to pace the conversation accordingly.  If 10 minutes have gone by in a 20 minute meeting and we’ve only talked about your team, that is not good.  You must drive the conversation to cover everything you want us to cover — i.e., whatever is needed to push me to the next step — in whatever allotted time.  We won’t be able to schedule another time  to cover anything we missed unless that first meeting is compelling enough.  As an entrepreneur, it’s your job to cover everything that is compelling to get to that next step.

By the time the call is over, you should know concretely what the next steps are.  If you don’t, make sure to ask and push.

Your round isn’t anywhere near closed unless you have enough investors who are very serious about investing.  However, it can often be difficult to figure out if an investor is actually serious about investing or just being positive about your business.  So how can you tell who is actually serious and who isn’t?

Signals to look for:

• For VCs, you’ve had at least a couple of meetings with the firm, including the decision maker / makers

• For everyone, you’ve discussed details of the round — e.g. how much you’re raising, what the money will be used for, and even potential valuation / terms of the round; If you are talking to angels about your company, they may not even realize you are trying to raise money from them unless you explicitly mention your round!

You will need enough serious investors to even start to close your round.  How many are enough?  The pipeline value of this serious investor group overall should be at least 2x the dollar amount you’re looking to raise.  In other words, say you’re looking to close $500k, you will need enough serious investors such that should they all invest, they would invest approximately $1m in aggregate.

Next, you need to create strong urgency with this group of people.  Founders will often create urgency the wrong way by saying nebulous things like, “We have all this interest.”  Or “We’re closing our round really soon.” But these types of statements are not only not credible, but they also signal you have no idea what you’re doing…

There are several ways to create strong urgency – here are a few:

1) Have a firm deadline you can and will commit to  

This is often easiest if there is a particular event coming up — such as a Demo Day or a pitch event / press event.  “We are closing a tranche of funding on X date, which is our Demo Day.  After that, the price will go up.  So if you are serious about investing now, then let’s talk in the next 48 hours.”  Then, tell all investors you’ve been talking with about this deadline — both the serious and non-serious — and see who talks w/ you in the next 48 hours and ultimately comes into your round.

2) Tell all potential investors how much money is in your investor pipeline 

If all of your serious investors were to invest, how much would this pipeline be worth?  (As mentioned above, it should be at least 2x…but ideally more).  Then tell all investors you’ve been talking with — both the serious and non-serious — that you are closing off your round soon, because at this point you have about $X in your investor pipeline but are only raising $Y.  And so if people are serious about coming into your round now, you’ll need to talk in the next 48 hours.

3) Tell all potential VCs about where your conversations stand with other VCs

If you are going into second round / later stage meetings with VCs, make sure all the VCs you’re talking to know this.  “I have 4 second round meetings this week with other VCs on Sand Hill. Things are moving a bit faster than I’d originally thought, so if you think it makes sense, let’s get a meeting scheduled this week.”  Keep putting pressure to shuttle your VC fundraising process along with all the firms you are talking with.  Once you get terms — either verbal or bulleted in email — then tell all VCs that you are now talking specific terms with another VC and that you’re trying to figure out who is potentially in this round and who is out.  Once you get a term sheet, tell everyone that you have a term sheet and that you are trying to figure out which firm(s) make(s) the most sense to move forward with.  Every step of progress you make with a VC should be something you tell all the other VCs about so you keep moving all processes forward.

DO NOT TELL PEOPLE WHICH VCs you are talking with!  You don’t want VCs talking to each other behind your back and then either colluding on price or talking themselves out of your deal altogether.  You want them to think independently.

Also, if you get a term sheet with a valuation that is much lower than you’d hoped / anticipated, this is not the end of the world.  Just getting any term sheet at all is a GREAT starting point.  Valuations are the result of supply and demand — not based on your progress / revenue.  Once you get a term sheet, you should focus on getting other term sheets so that the terms can get bid up and so you can have other VC options.  On the flip side, a lot of entrepreneurs overly focus on valuation — you don’t don’t want to set your valuation too high (because it can bite you in the next round), and ultimately, you want to work with investors who are right for you, so make sure the relationship(s) is/are right with the VC(s) you ultimately go with.

Now, for all of these tactics, a big risk is that no one commits to your round at all and it completely falls apart!  But you have to take that risk.  This is why it’s so important to have enough serious investors in pipeline in order to keep moving your fundraising process forward — investors WILL drop out either because they weren’t serious in the first place or they can’t move fast enough or they don’t like the details of the round.  And you need to be ok with that.  If you don’t have enough serious investors in your pipeline, you either need to have more first meetings with new prospective investors or re-evaluate whether you should be raising money right now.  Often it’s a better use of time to stop fundraising and then go back out and raise money later when you have a better story to tell.

The old adage of “Always be selling” definitely applies to fundraising.  One of the things I didn’t realize as an entrepreneur was that at the seed stage, anyone could potentially be an investor.  A lot of entrepreneurs just think to pitch to VCs, well-known angel investors, or people who have signaled they are angels on Angelist.  The reality is that angel investors can be anybody, especially these days, now that non-accredited investors can invest much more freely.  Angel investors can be people without a tech background: doctors, lawyers, bankers, engineers, etc.  They can even be your users and customers; for example, The Hustle raised $300k from its readers in 50 hours.

You no longer need to be super rich or write big checks to be an angel investor. In fact, many angel investors in Silicon Valley are not!  I have friends who save $10k a year just to angel invest $1,000 in 10 companies per year via syndicates on websites such as AngelList.  For them, they see this activity as an investment.  They invest in startups much like they invest in index funds on the public markets by putting a little bit of money into many different companies.  Many “regular” people invest in large diverse portfolios as part of their retirement savings strategy.

Furthermore, angel investors also see this as an investment in themselves.  Often, being an angel investor – no matter how much money you are investing – is a great way to network.  You have the opportunity to meet and get to know other investors in your portfolio companies.  Investing in big index funds, while a good retirement strategy, doesn’t allow you to meet other investors in those funds.  But investing $1k into a startup can often get you an invite to free VIP events that that startup throws for its investors.

Saving $10k+ per year to invest in startups, while not possible for everyone, is within reach for a lot of middle class and upper-middle class people who are interested in investing in their retirement.  As a startup, there’s a huge audience to pitch to — just about anyone who is doing just fine in life can be your angel investor.

But most people who save $10k+ for their retirement per year don’t advertise that they are angel investors.  They don’t have a website talking about a fund or their investments.  They don’t signal they angel invest.  So, it’s hard to tell who might be interested in potentially angel investing in your deal.  This is why it’s really important to hone your elevator pitch and constantly get other people excited about what you’re doing in case people you meet are angel investors or know investors who might be excited to invest in you and your company.

Always be pitching.

Last week, I had a great time at SaaStr, a conference dedicated to all things SaaS. Thanks to Jason Lemkin for inviting me to speak on fundraising there.  With 10k+ attendees ranging from startups to large enterprise SaaS companies, SaaStr had impressive content for everyone and great networking opportunities.  (As an aside, the other SaaS conference you should attend is called SaaStock in Ireland.)

My talk was focused on walking entrepreneurs through how investors think about their portfolios and how founders can use this information to his/her advantage to raise money.

See slides below: