Before you decide to raise
Build infectious conviction
If you're waiting for funding before you quit, if you're waiting to find a cofounder before you talk to customers or build a prototype, if you're waiting for something to do anything - you should understand what’s stopping you from moving. The reasons why you feel shaky are also the reasons why someone else won't invest. You need to strongly believe before you can convince others to believe. There are two caveats to make.
Don't get stuck “waiting for the right idea” you believe in. Ideas don’t just automatically latch on to you, and conviction doesn’t build incidentally. You need to put in time and effort to build on rough thoughts, explicitly ask the hard questions, and in this process, convince yourself of an opportunity.
Don't mistake this to mean that you need to answer all questions or convince everyone that this will work. In fact, there are many people I respect who just don't get eesel, and we have lots of unknowns ourselves. You'll need some resilience in the face of skepticism. Just check out the comments Coinbase or Dropbox got when getting started.
Get a plan B
You're most in control of the whole raising process when there's an alternative to raising you're comfortable with. Things felt starkly different for us when we had a plan B - world views shift from one of desperation to one of agency, and that shift bleeds into everything about this process.
Of course, sometimes, there really is no option and you absolutely need upfront capital. I'd just urge you to reflect on this. If your idea is really so exciting and you’re bursting to get started, it should take a lot to stop you completely. Maybe a plan B is to start monetising earlier than expected? Or work part time as a freelancer and continue working on your idea on the side?
Before you start reaching out
Get in the right mental state to face lots of rejection
Some chats go really well. You feel a real connection, you feel like you're very aligned, you feel like they could bring value, and yet, you still end up being rejected. These are the rejections that hurt the most. Heed whatever learnings you can and keep moving - it's not the end to that relationship (there are many tales of folks saying no to say yes for a later round) and it certainly doesn't mean the end of your company. Even the best investors and the best companies can just not click e.g. some great investors passed on Airbnb. Keep your's and the team's spirits high, as no one else will do that for you.
Index on market trends for valuation and round size
It's natural to approach questions on valuation and round size by looking at the:
- intrinsic value of the business today
- amount needed to reach a milestone, plus fudge factor
However, when there’s no revenue to show for and little growth, knowing your intrinsic worth or how much money you need to get to product market fit is full of unknowns.
There are other less obvious factors that are easier to figure out:
- valuations going in the market for similar companies
- dilution you are okay with
- ownership investors expect
In other words, look at how much you need, but index on how much the market will give. This implies you raise as much as you can for a dilution you're okay with. Of course, contrarian takes exist, and there's a point to be made that raising lesser brings constraints, which brings focus.
Time the narrative
In theory, you can raise at any stage - before revenue, before product market fit, before the product is released, before you start building anything. However, wherever you are in the growth of your company, you need to convey a convincing vision about where you want to go next, and explain that money is pretty much the main bottleneck. For example, it’s probably not a good idea to raise right after a big launch, while you’re yet to clearly know what's next. So figure out the next milestone with truthful detail, and frame the funds as the main bottleneck.
Break down a large round into smaller chunks
It’s totally fine to increase your round size because you’ve had too much interest, rather than vice versa. You’re better off starting with a round size that’s a bit more modest and increasing that over time. e.g. if you're looking to raise $2M, start by first closing $500k and so on.
When you reach out
Bring tight structure
The steps needed to find product market fit are nebulous, and you need to be innovative about your path. In contrast, at least the first steps to raising have almost no ambiguity, and you don't need to get too creative. Make sure you transition away from a product mindset (where paths are unknown) and treat raising like sales.
- Have a timeline: Know when you’ll iterate on the pitch, when you'll start reaching out, and so on.
- Set up a pipeline: Use a simple Kanban board, visible.vc or even a CRM to keep track of all the potential investors you want to contact and where they are in your process (To Contact > Contacted > Call Scheduled and so on). We used Notion and it worked fine.
- Create territory: You can source target investors from OpenVC, Shai Goldman's list, AngelList, Nfx Signal, VClist or even Crunchbase by looking at investors of companies you admire or investors of companies that are kind of similar. For each of these, evaluate how you can get warm intros.
Note: In theory, you don't need an explicit round with a specific deadline, and can actually raise on a rolling basis where you progressively add investors. I can't speak to how well that works in practice but even if you proceed this way, having some structure will probably help.
Reach out mostly in parallel
If you approach investors one by one, fundraising will just drag on for way too long, and worse, you'll miss out on building buzz with the round. You ideally want to have calls back to back, packed in a few weeks, and progress folks through the stages together.
Amidst the back to back, you'll want to leave some space to iterate on your pitch. You'll also want to stagger some folks. In particular, it's a good idea to become "a lean mean pitching machine" and already have momentum with the round before reaching out to your most coveted investors. Likewise, some angels aren't comfortable being the first money in, and are best approached when you already have most of the round closed (we made this mistake ourselves).
Share a Loom walk through of your pitch
I came across this tweet from Harry Stebbings and it made total sense.
In theory, this could be a great way for everyone to skip past the first chat. So after the initial back and forth, when a call would be suggested, we'd link to a recorded run through. Perhaps 10mins is too long, or folks just aren't used to this yet, but most didn't watch the video. When folks did watch it however, the interactions felt tangibly better. This practice does seem to be increasingly encouraged so I think it's worth a go.
Focus on warm intros much more than cold outreach
75% of our warm intros led to a call, while only 18% of cold outreach led to a call. The general addage is that if you craft cold with care, it'll work.
There's still truth to this, but it really needs to be highlighted that cold, even if personalised, is no where as good as warm. Here's what our cold outreach looked like:
We'd personalise the copy further and add a personalised GIF.
No matter the personalisation, and the fact that this is one profession where cold emails are encouraged, cold outreach doesn't work that well. You're often just ignored, and even if you end up talking, the dynamic is not as good as conversations starting warm.
In retrospect, I'd focus most of my energy on getting warm intros one way or another. Do cold only for contacts you really really want to chat with but genuinely have no way to a warm intro. Ideally, they'll also be folks who actively seek cold intros e.g. see this list.
All this depends on your network of course but, for what it's worth, I was very surprised by how many amazing people I was just 1 degree away from. Go to LinkedIn and see mutual connections. You may be surprised too.
When you're actively talking to investors
Why + Why now = Action
To prompt action, you need to answer not just "Why invest", but also "Why invest now". Unless there're explicit constraints that create a need to act, delaying the decision to invest is actually the most rational course of action for any investor.
Why wouldn’t I just say "maybe", wait and see what you get up to over the next weeks, and keep delaying the decision? If you start getting traction, then great - I can jump in as a believer. If you don’t, then great - I haven’t missed anything.
Likewise, as a founder, you’ll also want to delay decisions of your own e.g. you’ll want to keep refining your pitch before reaching out to a high profile investor ("you only get one chance to make a first impression" you'll tell yourself).
This is why you need to create constraints to keep both investors and yourself moving. For investors, it could be the sense that the round will close at a certain date, or that someone else could fill the round, or that you could have a big launch which could significantly change valuation, and so on. For yourself, it could be the sense that competition is moving fast, there’s meaningful product work that’s being delayed and so on.
Don't let the 'cold' distract you
Don’t spend your energy on trying to convince ‘cold’ and ‘lukewarm’ that drags on - don't send that 2nd follow up email to someone who never replied, don't burn time having lots of meetings with the same folks. Acknowledge that it's just unlikely that someone moving slow and showing less interest at first will have a total swing in another direction.
Of course, there's some nuance to keep in mind - the best folks by definition have a lot prying for their time, and putting in effort when no one else does, stands out. Treat your time and energy as finite, and use your judgement.
When you're in the final stretch
Embrace the unknowns of the final crunch
While you can start fundraising in a structured way, when things are in flight, the best you can do is keep an open mind and embrace the rush. You could end up with a cap table you couldn't have expected. e.g. we closed with K Fund who we got an intro to from an acquaintance, totally out of the blue, only in the last minutes.
Don't overthink dilution
You've been told this already, but I'll reiterate it because it's hard to truly digest. You naturally want to feel like "you got the better deal" when playing the valuation game against investors or other startups.
In this great talk, Peter Thiel mentions that competition makes you better at whatever it is that you're competing at. It's critical to remember that you're not competing to get the best valuation. You're competing to survive, and surviving when most startups fail is what winning will be. I still struggle with this personally, but how PG put it has especially stuck - Airbnb raised their seed at a $2.6m valuation, so if valuation is what matters, you're already better than Airbnb.
There's of course a balance, and you don't want to be the next Airbnb but own nothing when it comes to liquidation. However, 1 or 2 more percents of dilution in your first rounds could be worth it to ensure survival (read this for more nuance).
Stay standard with the legal stuff
Staying standard makes everything smooth.
- We used Stripe Atlas to incorporate eesel. Clerky is great too, though in our case (as foreign founders) there is one form (called the EIN) they wouldn't file.
- We used Safe (Simple Agreement for Future Equity) which is essentially a very simple and standard template for all the paperwork needed to sign terms with investors.
- We use Mercury for our bank and it's been amazing. They don't charge a monthly fee and the user experience is pretty slick.
Free up your time to focus on the important stuff, and don't add friction for an investor already jumping hurdles to build conviction.
Carve your own path
There is no one way to do this, and there is no way you will be able to account for all the variables. We've seen counter examples for a few common sayings:
- People suggest you don't get an intro from someone who rejected you because it's an “anti-recommendation”. However, Qwilr got rejected by AirTree and got an intro to P9 who then ended up investing.
- People suggest you don't raise with multi stage funds for seed as they aren't incentivised to price up the next round and there is “signalling risk” if they don’t join. However, Loom had a multi stage firm in their seed round.
- People suggest you only talk to partners as associates don’t have authority. However, Mona closed their seed round with an associate championing them.
You could go mental trying to ensure every step is optimal. Seek to learn from everyone and everything - and at the end of the day - trust your judgement and carve your own path. You got this!
Here're some reads I'm grateful for.
- YC's guide to seed, Safe primer doc and video on priced rounds
- PG's guide to fundraising
- Mark Suster on pro rata and just about everything
- Christoph Janz on benchmarks and just about everything
- Fred Wilson on Safes (notable counter points) and just about everything
- Holloway's guide to raising
- NFX's guide to raising