Category Archives: Angel investor
For a startup, raising a seed round is a daunting endeavor. Techstars Seattle Demo Day is looming and I recently finished mentoring the teams at the Kaplan EdTech Accelerator so advice on fundraising is top of mind. I’ve written about fundraising before here and here, but I recently saw Brad Feld (who is awesome and was an investor in my last company) give a great talk that added a few great words to the lexicon – Leads, Followers and Random investors. So, borrowing from Brad and adding my own ideas, here are a few things to consider when putting together that perfect seed round.
First some definitions;
Leads – Usually professional investors, who write > 5 checks/year at $100-500K/deal to fund startups. They are experienced in the dance, the terms, know lots of other investors…and know how it all works. They negotiate with the entrepreneur and help set the terms for a round.
Followers – These are majority of the investors you will meet. They either don’t have the time, money, expertise or fortitude to lead a round. These people usually have a day job and are investing as a hobby, a way to engage with startups or to support the startup community. If they are “active” they usually do at least 4-5 deals/year. I am a follower and am very clear about it with companies but many other investors are not so clear.
The overall fundraising process should be planned (e.g. I hope to close by the end of the year), with a solid understanding of how much you want to raise (e.g 750K-1M), with what vehicle (e.g. convertible note) and under what terms (e.g. 4M cap, 18-month term and 20% discount). Much more on terms here and in Brad’s book Venture Deals. The clearer you are, the faster the round will likely come together.
With this plan, you have a sense of the amount you need from a Lead investor, usually >25% of the total raise. You also have a starting point for negotiation when you get the lead investor in the room. Now your job is to go find the LEAD!
In a best case, you will also have some idea of the domain expertise (e.g. “marketing tools”) and/or functional experience (e.g. content marketing, channel sales, product development…) of your desired investors and you can ultimately create a “tapestry” of people with complementary skills and backgrounds to add to your company.
When you start talking to investors, spend time asking questions to determine a good fit. Ask them directly;
How much do you normally invest/company?
How many deals/year?
What thematic areas are you most interested in?
When you invest, how do you like to engage with the company?
- When you have invested in the past, were you a lead or a follower?
In addition to the money, how else do you like to help your companies?
An experienced investor (the kind you want) will be totally comfortable with these kinds of questions. They too are about expediency, getting to a YES or NO as quickly as they can and not wasting their or your time. Depending on their answers, you will get a pretty good sense of the kind of investor they are and in the best case, how likely they are to invest in your space and whether you think they can really help the company.
Assuming you think there is a good fit, continue the discussion about the business, opportunity, specifics…to get to a “yes, I think I would like to invest”. If they are a Lead, you can start working a term sheet, if they are a Follow, “collect” them for later and communicate this to them, something to the effect of “Hey T.A., I am really excited to work with you and I think you could add real value to our company. Right now, I am focused on finding our lead investor to get to solid terms, but I would love to pencil you in for (X, depending on their answer to normal check size) for the round, how does that sound?” At this point, consider them “soft-circled” and get back to finding the lead.
Followers are not likely to become leaders, no matter how much you try to convince them. Too many entrepreneurs spend way too much time trying to make this conversion happen. If someone, who has not lead before, wants to step up, probe on experience, skills, desire… and plan to invest more time with them and your lawyers to get to a solid term sheet, but this is not the desired path. You really want an experienced Lead.
After many meetings, you are likely to end up with a collection of Followers and finally, a LEAD! Woot! Get to a term sheet, get the Lead committed and then start closing the Followers. Depending on where in the process you found the Lead, you may have a long or short list of potential Followers. Part of the job of the lead, is to bring more people to the table and in most cases they have many people who they’ve co-invested with before. Ask for introductions and use their leadership to close other people. Assuming the lead has 25-50% of the round, Followers might close out the round or at least get to 75% before you need to go back to the well and look for new investors.
But wait, there’s more. As you you diligently move through your known prospects, getting people to commit, “random” people will show up and express interest. These are likely people who have heard about you from some other investor, another entrepreneur, a press article…but they feel random. As these investors are coming late in the round, you should have momentum with lots of others signed up, closing these Random investors much more quickly. Otherwise, rinse and repeat the process above, but be OK with Random happening.
Finally, fundraising is a sales process so you need to keep momentum going with lots of prospects, closing when you can and continuing the conversation with others being clear, consistent and regular with your communications. Focus on the right things, the right people, the right process and you will close those Leads, Follows and Random investors to fund your own next big thing!
Troy Henikoff is the managing director of TechStars Chicago. I recently saw him do a great talk outlining the tools and strategies around building your financial models. Lucky for you, the Techstars team in NYC, where Troy spoke, videotaped the whole thing, but I thought I would pull out a few key points and add a bit of my perspective too.
As entrepreneurs, we all make PPT slides to tell our stories, which is basically required. These slides get the broad story across and should be used to get prospective investors engaged in the business. But, the smart investors will quickly want to understand how you plan to run the business, what choices you need to make when and what impact these choices will have on the core metrics of the business. These choices are best examined and communicated in a set of financial models and they are critical if you are to impress good investors and run a successful business. Time to study up!
Troy does a masterful job of showing you, through a presentation and example spreadsheets, how to build the models, what assumptions to make, how to challenge these assumptions inside your team and then with investors.
A few key tips;
Use Excel vs. Google Spreadsheets. Excel is more powerful, will allow you to take real snapshots and is “the language of a professional financial world.”
Use simple, clear “labels” on your spreadsheets. This makes is easier for everyone to understand what you are talking about as you move around different sheets.
Build the models yourself – you need to understand your business, how the model works, what are key assumptions, when you need more cash…you can get help in structure so it meets standards, but know your own model.
The most important number on the model — revenue. To create long-term sustainability, you must be growing revenue, preferably quickly.
Know how to take an investor through your model in a way that is concise, clear and methodical. This will instill confidence and build a solid foundation for working together.
The one thing you know about your model is that it’s wrong, you’re just not sure where, yet. Your job is to make it and then find the things that are incorrect as you keep running the business by comparing the model to actual, usually on a monthly basis.
Troy does such a good job on the slides and the presentation, I won’t try and cover all the points, but I highly encourage you to download the docs and watch the full video. It will be worth it.
Full video is here – https://techstars.wistia.com/medias/qqh2rt9v7w (multiple segments, so keep watching)
Copy of presentation and sample docs are here – https://www.dropbox.com/sh/wyvknlpf0i2myzw/AABH4wDZD1qeq2rtPzxaSKina?dl=0Read More
I do a significant amount of startup mentoring and I’m often asked about fundraising. Like many things, I’ve tried to develop a process and decision-making criteria. There will always be exceptions to every rule and the odd startup that can raise a round without much preparation, but the vast majority will require focus and discipline to get it done. Here’s what I recommend.
1. Pick the right time – In my opinion, there are only 2 good times of the year to raise money, spring (February-June) and fall (September-November). For the other times of the year, most people who have money (angels and VCs) are off vacationing in fancy places, and getting them to make decisions or coming to consensus is really hard. So, decide when you will be ready to raise money. Your story and pitch should be ready in early February or September depending on which window you’re targeting. Redpoint’s Tomasz Tunguz has some data to support this and suggest the fall is the best window. Work your plan backwards from this timeframe.
2. Pick the right amount – early stage funding tends to come in 3 flavors: angel, seed or Series A. Angel rounds tend to be $250-500k, seed 500k-1M and Series A 2-5M. There is some variance depending on the stage of the company and the specific investor, but for plannings sake, decide on an amount. How much you should raise depends on a few key things: what you need to take the business to the next level (usually 12-18 months runway) and your overall progress compared to all the other things the investors can fund. You can also check out Tomasz’s post (can you see I am a fan of his) which describes the right amount to prepare you for a Series A. Most good angel or seed stage companies have some working product, a small, but growing amount of users, maybe some revenue, a solid founding team… and if you don’t have these, it will be hard to raise a round.
3. Find the right investors (before you need to raise money) – once you’ve picked a timeframe and a general amount, you can start building a list of prospective investors. Focus on; a) Geography – Depending on where you’re based, there are likely investors in your geography who are active (at least 4 investments/year). Look at other companies in your area that have recently been funded (at the same stage) and who invested in them. b) Domain – every company has a “category” they’re working in and it can often be expanded to fit into two or three categories. For example, Rival IQ, which provides competitive analysis for companies (my current company) is a b2b company focused on “marketing tools”, “analytics”, “social media” ,“business intelligence” and “competitive intelligence”. With the categories, start listing all the companies who’ve been funded and by whom (investors). Crunchbase and AngelList (which share data) are great for this work. You should end up with a list of companies, their current investors, locations of the investor, amounts invested, and timing of the investments. Combine the lists (geography, category, comparables), and you will end up with a solid list of investors who are likely to invest in your space, in your area and at your stage. Rank them by who you like best, who has best success and/or where you have connections or history with the particular firm or partner. Separate into “A” (guys you really want) and “B”(people would be fine, but not the best). The B list will be your pitch practice guinea pigs. I tend to have groups of 10-15 investors in A and B.
4. Understand the marketplace – this involves knowing the competition and market comparables. I tend to use a combination of Rival IQ (quick and easy competitive analysis on positioning, seo, social stats…), a MindMap and a spreadsheet for this work. I basically want to compare a) who’s in the space that directly competes with me, b) who might as we grow and c) who might if we get really big (or who would buy us or the competitors along the way). This will give you another list of companies and investors and start to arm you with; “we are similar to X (recently acquired company where investor did well), but unique in these ways…” Investors are great at pattern matching and you need to illuminate the relevant pattern that you fit in. This list will also inform you of the level of acquisition and metrics you might need to move from level to level. Below is a snapshot of a MindMap I did for my recent Rival IQ fundraising.
5. Draft your “story” – considering the timing, the amount, the investors, the marketspace and your own plan of what and how you want to attack the market, you can determine what kind of story you might want to tell. There are various levels and different kinds of progress that can support an investment, and different investors will care about different things in these early days depending on the kind of business you have. For example, when I was raising money for Gist (my last company), we had some investors who were deeply interested in the product (Brad Feld/Foundry), and some others who were more interested in our monetization, and still others more interested in our viral growth of users. All of these are reasonable, just different, and would have required a different story (and proof) of our progress. For Rival IQ, we wanted to tell a story about “validated customer demand” so we targeted >30 paying customers by Sept 15. We also wanted to keep showing customer growth and breadth in demand (verticals, geography…) and, while our story included a strong team, a big market, a cool product, we led with “validated customers” with reasonable $ and $/customer and targeted people who liked that story. Pick your own story and start building supporting data, metrics, comparables… to support it.
6. Connect and test, refine, test – start making connections with funded founders (who know investors) and with the targeted investors (from your list), and testing your story/hypothesis. Unfortunately, this is the hard work of finding ways to get introduced by people who know the investors and will vouch for you. This is a major value of accelerators like Techstars. I would start with the “B” group and test the story. Get short meetings with something like “I am doing X, plan to raise money in the (fall) and wanted to start building a relationship with you now. Given that you have so much experience in this space having invested in A, B and C, I wanted to get your take on Z (very succinct problem you are wrestling with).” Be very tight, very narrow on your questions and listen. What did you think of the response? Was it helpful, specific, logical…and did it help you make a hard decision? If you like the feedback, say thanks and ask if they want to receive updates on your progress. If not (and you will get lots of weak and non-specific answers or advice), say “thanks, that’s valuable input and I will consider that as we move forward” (whether you will or not). In any case, try to limit the first meetings to 30 minutes and let them ask you to stay longer, otherwise you both can get back to your email. If there is strong interest, ask what specific kinds of progress (metrics, growth, product, team…) they have seen from their last 2-3 similar investments at your stage. Try to quantify what you should look like in the future and then you know what to work towards and how likely it is to achieve.
Side note: good investors will not likely invest in you if they are already invested in one of the other players in the space. If you contact them, be very upfront if you think there might be a conflict.
7. Send regular updates – I suggest sending a monthly investor (or prospective) investor update. Bcc people on the list. This is likely to be about one page long (email) and include key items like major wins, product updates, key metrics growth, team additions… It should also provide simple ways for these investors to help, like “looking for an intro to X guy at Twitter” or “looking for great blog posts on SaaS metrics or growth hacking…” Good investors want to help, but you need to make it really easy for them at this stage. Listen and respond quickly if/when they engage. Keep doing these even when you think nobody is listening as it shows commitment, communication skills, ability to build a tribe… You can send these to advisors you meet along the way too as they will often be your conduit to investors. I get about 15 of these every month from companies I’m helping.
8. Assemble the investor puzzle – when you are finally ready to raise the round, you should have a good idea of the potential investors. This may include the skills or domain expertise you really need to help the business get to the next level, and/or the people who have added lots of value along the way. Focus first on getting a lead investor, who will likely take 25-50% of the round. You can gather the followers later, but focus more on the lead as they will dictate terms, structure, timing…and you don’t want to need to go back to the followers over and over as things change. Secure the lead, collect a few followers and target 75% of the full round you want to raise. With this in hand, outline the specific areas where you are still lacking. For example, at Rival IQ we had our VC lead (Vulcan), our solid seed/CEO people (who can help us better run a SaaS company) (David Cohen, Startup Studio) and some people representing our customers (social marketers like Jay Baer and TerraLever) – that got us to about 85% of the round. We wanted more social platform players so we got someone from Facebook and then added the founder of Hootsuite, who has a trifecta of deep Twitter understanding, deep social and SaaS experience and agency background. Boom!! We have 2-3 small spots left and we are being very targeted about who we want and why. The latter investors often come quickly once the leads are in place and fill out the overall puzzle for a great round.
Generally speaking, the round will take you 3-4 months if all goes well and will take the CEO 50-75% of his time. If done well you will end up with a collection of people who complement the business and the founding team. From there, your job is inform and activate them to help grow the business. Good luck. And, once you get a live one, here are few things you might need to be prepared – http://www.tamccann.com/raising-startup-funding-7-things-you-need-to-be-prepared/
I also love this post, which is very specific and tactical
On Saturday, I was given an opportunity to speak to a room full of entrepreneurs at the Startup Day, put on by Marcelo Calbucci and the crew at Seattle 2.0. My topic was “raising money from angels and VCs”. I think my presentation was flat and mis-targeted, so here are some of the things I should have said.
Update: Here is a link to the video from the event.
Relationships matter and take lots of time to develop;
- introduce yourself early (now) to as many funding sources as possible, before you have a great idea
- develop relationships with successful entrepreneurs (sold companies in the space) as they could be advisors, investors or connectors – use sites like Linkedin to leverage and grow your network and connections, you will need it later and can never really be big enough
- offer your connections or services to potential funders – if you work at a big company (e.g. Microsoft or Amazon), offer to make introductions for their existing investments to key people, groups, programs, events, brown-bags. If you know key bloggers (which you should), offer to help, it is a really good way to build credibility all the way around
- if you are a social media person, promote what they are doing. You need to begin a dialog and offering to help is a good first step. If you are not yet a social media person, you need to become one anyway to promote your ideas and picking relevant investments and promoting them, commenting on them is good early content and will begin to establish yourself in a space as a thought leader
- understand what they are investing in now and why (what stage, what space, what vision…)
- read and comment on their blog posts
- retweet their posts on twitter, when relevant
- suggest other relevant investments that they should/could make in the space you care about
- share relevant articles/links/event – “Brad, I know you care about X and I thought you would think this is relevant…”
- promote their ideas into relevant circles. if you care about the same stuff, which will increase your likelihood of a good match 10x, you should be discussing and debating the solutions of the future
- understand their personal backgrounds – you will be making a 3-5 year commitment with these people, so you may as well understand how much you are going to like to hang out and if you share a similar “world view”
- go to the same conferences, like www.defrag.com to meet other companies, funders…in your space
- use products like www.gist.com (shameless plug) to do all this more efficiently
- read blogs from Brad Feld (Foundry), Fred Wilson (Union Square)
At this point, you have asked them for nothing, done alot to help their companies, established that you are a smart, well-connected person who knows other people who care about future solutions in a particular space. All, before you ever talk directly about any one idea. I guarantee that you will learn alot as well about trends, companies and their strategies.
In choosing between raising money from angels and VCs, here are some things to consider;
- if your idea is good, well articulated and with a high likelihood of success, the time to raise angel and VC money should be the same and it may actually be faster to raise VC money
- Raising money will take 6-9 months from the time you start to the time you have $ in the bank. Starting way before you need money, but start very softly with steps from above.
- if you choose angel – work hard to get 1 large lead (~25% of the total round) before you engage all the others. Until you have a good line on at least 3 of these people, don’t even start the process
- angel groups can be good (e.g. Keiretsu Forum) but look for a sponsor who is in the group, who should be a lead angel investor and develop that relationship first.
- big ideas play into spaces with big competitors, so you may need VC to be able to react and/or create enough momentum to compete
- simple rule of thumb – if you need <1m>
- make your company plans “stage appropriate” – most Series A VC rounds are between $3-5M, so craft your plans to match this amount. $3 gets you A, B, C and $5M gets you A, B, C, D and E or the same timeframe (~18 months). Be firm on your stated “what you need”, but flexible in these ranges
- try and set you plans to achieve strong results in 18 months, at which point you will either need more capital or will be cash flow positive
- the easiest way to raise money is to have a good business so focus on customers and better yet, paying customers. If you can’t actually get paying customers, line up as many real people (potential customers) who say they would pay for your solution if it actually worked like you say it will in PPT
- Focus on real customer vs. the overall market size. Know them by name and try and quantify what they will pay. Better yet, get a PO or some other commitment in hand that indicates a real willingness to pay
Once you have chosen to raise money;
- focus on the sales process, this is a numbers game with relationship strength and your skills being the key things to increase the odds
- it takes a ton of time (50-90% of the CEOs time) for 6-9 months.
- work in groups of 20 with a focused horizon (~3 months) to separate the likely from unlikely.
- if you have done your homework and understood the landscape (while you were building your plans), you should know the 20 likely firms/people, based on stage, size, history…now is your time for engagement. Hit them hard with a big push of info and momentum.
- Once you have made the first pass (email intro), first meetings and seen the traction, then you can move on to the next 20 with an updated pitch
- focus on warm introductions only. If you do not have a direct connection, you have not done your homework and built your network. Ask other CEOs, service providers…to help you find the right connections
- set the timescale – send bi-weekly updates to everyone of your prospects who has not said “NO” yet. Show progress, achievements both internal and external, talk about what you need to succeed (team, marketing, sales, product dev…) all the things that their investment will enable
- “we would like to see more traction” is a likely NO, likely move on
- “we would like to see more traction”- ask for the specifics on what this means. “does this mean you need to see XX customers, or YY product improvement or ZZ partnership signed…” and then determine if you can achieve in your time window
- keep showing progress to date on all different aspects. Investors love to see a team that can set a plan and execute on time and on budget
- collect your responses and “gang up” your answers in the next update, investors can wait a few days
- send your updates on Sunday afternoon to time your them for partner meetings (which usually happen on Monday)
- the better the VC, the better the feedback. Take it and use it to your advantage
- focus on the hard problems with your plan (we all have them) and how you want to solve them and where you need help (we all need it)
- with regard to market size – focus on the successful companies and exits vs. bullshit from some analyst firm. Include small, medium and large company comps (focus on medium, publicly traded as you can gain tons of market data from there). For example, Salesforce.com has 1.3M paying subscribers, will make $1B in revenue this year and has a $5B market cap, that is the kind of business we are trying to create (assuming you were going to sell something to salespeople like we are doing at Gist)
Don’t worry about;
- NDAs – good investors will not sign these anyway and they have no real interest in “stealing your ideas”. In fact, the best possible investors have tons of knowledge about other players in the space, will have likely looked at investing in all your competitors, know what the big players are doing, know the hard problems…and they got all this information because they didn’t sign the other guys NDA either. You want these investors!
- Patents – while it is a good idea to get some things on file early and use time to your advantage, don’t spend too much time talking about this during a VC pitch. If they care, they will ask. We used http://www.olympicpatentworks.com/ and got great value.
- Terms – if you are lucky enough to get a term sheet, it will outline all these items. You cannot control it, so don’t worry about it. Your job is to create value! Value on your side of the table will drive the terms in your favor. Brad Feld and other VCs have written extensively about their philosophy on terms and term sheets.
- VCs wanting to replace founders – if you are doing the right things, they will love you and make sure you have lots of equity to keep pushing the business ahead. If you suck or the business sucks, you should all be looking for someone to make the equity more valuable. Most VCs want the founder to lead the thing all the way, it is a better story.
- The exit – if you create a great business, the exit will take care of itself. That said, if you have done a good job understanding your market and large competitors, you should be able to explain a likely exit with historical acquisitions. This is more of a commentary on the space, trajectory and pace of innovation than the exit itself.
Certainly more than I could fit into 15 minutes. Game changing ideas will likely need capital, expertise and people and great angels and VCs (Foundry and Vulcan) can provide that. Let me know if you need an intro. I have included the deck I presented and I am happy to try and answer any additional questions or make other introductions to people in my network. Good luck.Read More