“if you have a good company, you will probably be able to raise money. You’re better off working to make you company better than working on fundraising jiu jitsu.” ~ Sam Altman
The days of easy money are not coming back anytime soon, and fundraising has become more difficult compared to the pandemic-fuelled boom.
So we’re back to normal, where investors once again have more power then founders, and raising money is hard - unless you are an AI company!
For early stage companies, running a tight fundraising process will help your chances of successfully fundraising.
This means knowing how to approach investors, how to sequence your conversations, and how to close.
So for today, I want to talk about 5 key tactics to running a tight fundraising process.
Let’s get to it 🚀
Before we start, I want to be clear this is not meant to be a complete guide to seed fundraising, but rather give you some mental models to help you level up.
1. Foster urgency
Generating “deal heat” is extremely important.
What this means is giving a sense of urgency to the process, so that investors are forced to make a decision.
Most of the time, they would rather wait and see.
They would prefer to push a decision back and see how you get on with your fundraise. To see who else is in. If you let this happen enough, you won’t ever manage to close your round.
You need them to commit.
And they way they are more likely to say yes is if there are other investors already committed. Especially if those are “top” investors like a16z.
Yes, this is a chicken and egg problem.
The more demand you have, or appear to have, the easier time you will have raising money.
Speed is critical.
A good round can close in as little as a couple of weeks.
But if your fundraise goes on for many months, it’s going to get harder over time, not easier.
2. Stack your calls
To get deal heat and force investors to decide, you should stack your investor calls as high as possible.
This means if you have two cofounders, one (the CEO) should focus entirely on fundraising during this period.
To be clear - fundraising should be their full time job.
If your cofounder can keep growth going at the same time, that’s ideal, but sometimes you might want your cofounder to also join calls.
You should stack the calls as high as you can. Take 8 or 9 a day if you can.
Try to book your investor calls all in one 3-4 week sprint.
The longer the process takes, the more the heat dissipates, and the more likely you are to get ‘no’s.
Whatever you can do to insist on taking calls in that period - do that.
3. Sequence your investors
You don’t want to email all your potential investors at the same time. You need to be strategic.
All money isn’t created equal. Go for investors who get you and your vision, not just the ones with the deepest pockets.
Make a list with 50-100 relevant investors.
The first stage is to go after angels, then micro-VCs and finally you target your dream investors once you have already filled up a chunk of your round.
Sequencing this way will help to build momentum.
It will also give you a chance to refine your pitch. After getting the first few under your belt, you will start to get better at anticipating the questions you will be asked, and you will have had the chance to develop better answers.
You can also give investors that join earlier in the round a chance to invest at a lower valuation.
So maybe you start your cap at $10m for your angel investors. And over time you can raise it for investors that join later in the round, perhaps to $15m.
If you don’t have a lot of demand, perhaps you won’t be able to raise the cap at all.
If you do raise it, that’s the new floor. You can’t let later investors in at a lower cap than the one you have already established. This is for reasons of fairness, potential legal reasons, as well as it would be a negative signal to future investors.
4. Use the handshake protocol
Not all investors are good eggs. Some will say yes when they mean no, and some will say no but then later claim they meant yes.
This is largely because investors prefer to maintain optionality.
This can make an already difficult process even more so. One way to avoid this is to have a clear ‘handshake protocol’ in place.
The goal of the protocol is to have a clear, written commitment from a potential investor.
This is, pretty simply, just a way to have investors commit in writing to fund a certain amount at a certain valuation.
The ‘in writing’ piece is critical, because over the phone commitments can be ‘misunderstood’ later.
If you don’t have a written commitment, then you can become a ‘call option’ for the investor. If you later become successful, they can claim that their yes meant they were always in and you should honour the terms at which they said they were going to invest.
If you don’t become successful, well, they haven’t wasted their money.
Here’s a simple algorithm for how to do this, from the YC guide:
The investor says "I'm in for [offer]."
The startup says "Ok, you're in for [offer]."
The startup sends the investor an email or text message saying "This is to confirm you're in for [offer]. This offer is valid for 48 hours, please confirm acceptance. You agree to fund your investment no later than 10 business days from the date of your acceptance of this offer."
The investor replies yes.
Follow this process every time to avoid any future misunderstanding or headaches. Until you get to step 4, assume the deal is not done.
5. Put yourself in their shoes
The investor you are talking to will have to write an investment memo detailing why they should invest in your company.
So put yourself in their shoes. Try to imagine the questions or objections that might come up from other people in their firm.
Once you have all the risks and objections you can think of, try to address these in your pitch.
Makes sure you have really succinct and clear answers to key questions such as;
What is your unique insight?
How does this become a $10Bn business? / How big is your market?
What are the unit economics?
Why are you the right team to build this company?
Why now?
What will you do with the money? (Have a better answer than just “marketing”).
And there are going to be questions you don’t have the answer for. This is ok. It’s always better to explain clearly how you are planning to answer the question in future, rather than just trying to make some something up on the spot.
Investors have heard it all, and if you are vague and clearly don’t know what you are talking about, it will be obvious.
Once you start having calls, collect all the questions you are asked and wargame better answers over time.
The fundraising game is a microcosm of startup life.
It’s exciting, it’s terrifying, and above all, it’s an emotional rollercoaster.
If it’s your first time, you are going to make some mistakes, but hopefully these mental models have helped you to level up your fundraising game.
Because you ultimately want to close your round as quickly as possible so you can get back to building your company.
Until next time,
Jamie
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