Raising capital is part process, part endurance event. Like every event that requires sustained performance, preparation is key and like every process it can be optimised. But before you start thinking about capital raising as a linear experience, remember we’re talking about start-ups where ‘linear’ is fictitious and one-step-forward-five-steps-backward is normal.
This post is the follow-on to 11 Things You Don’t Know About Raising Capital The First Time Around.
Here are the five steps I use to approach raising capital. It’s born from experience and driven by the single most important element in company building and the currency that is always in short supply and constantly running out – time.
1. Design The Path To Yes Or No
The rate at which you can achieve a ‘Yes’ or a ‘No’ from prospective investors is the product of a well-designed process to reveal their interest. In a world where timing is everything, the best early stage investors make investment decisions quickly because they understand the opportunity cost of your time and their own. However when there is a mix of investors, all at different levels of sophistication and all with varying priorities, it’s up to founders to design a path that enables each prospective investor to make an informed decision as quickly as possible.
Think of the path as a series of events. The faster these events play out, the faster investor interest can be gauged which drives the pursuit of funding alternatives and/or (ideally) the closing of a financing round.
I break these events into two groups and track progress in a Google Sheet so that co-founders can understand progress, on-demand.
Pre-Term Sheet Events
These events include introductory and early due diligence conversations with prospective investors up to the point at which term sheets are signed. This is the phase where social currency is established (i.e. where a collective of prospective investors begin to ‘buy-in’ to the business model which propels other investors to also engage) and conversely where the majority of “No” responses are received.
Although the size and stage of investment influences the number of conversations required, this is the guide I use for seed stage investments:
1. Introduction + Pitch — First Meeting
2. Follow-up 1 (within 3 days of first meeting): A phone call to gauge interest, offer to provide additional insight and politely ask when you could expect a response. If interest is high, offer to send term sheet. If interest is low, see below — If the answer is “No”, get there quickly.
3. Follow-up 2: Timing for this meeting is dependent on the outcome of the second meeting. If no response is received from the first follow-up attempt, try making contact six days after the first meeting.
4. Follow-up 3: If no response is received from the second follow-up attempt, try making contact 10 days after the first meeting. There can be a number of reasons why a prospective investor may not respond by this point. If no response is received from the third attempt, try making contact one final time at 20 days after the first meeting.
Obviously, following up can also be done by email but a phone call often yields a more direct response. Remember, timing is everything. Email is easily lost and can be used as a convenient excuse for not responding.
Post-Term Sheet Events
These events are largely process-oriented. Incoming investors have signed a term-sheet and undertake any remaining due diligence. From this point forward, a lawyer well-versed in start-up financing (let me know if you need a referral) helps guide founders through well-established processes to formalise agreement between existing and incoming investors.
The rate at which these events are finalised is based on the preparedness of the lawyer and readiness of investors to review and electronically sign legal documents.
If the answer is “No”, get there quickly.
Remember that most people’s default is avoiding confrontation or awkwardness when it comes to declining an opportunity to invest. This can be one of the biggest (and most frustrating) time sucks as you try to assess who is likely to join the investor team. So remind each prospective investor it’s OK to say ‘No’ and that it avoids wasting their time (and yours) and advances the round by helping to focus on other prospective investors.
The obvious caution here is presenting the ‘No’ option in context. I recommend using something like this during the second or third meeting: “We’d love you to join [venture] as an investor. We really appreciate the consideration you’re giving this opportunity and we’re happy to answer all questions and supply additional materials to assist with your decision.
However if you’re leaning towards not investing it would be great to discuss this as well.”
If ‘No’ is the ultimate answer, positioning the discussion in this way will precipitate the right conversation. And remember, ‘No’ only ever means ‘No’ at that point in time. The world changes too quickly to accept ‘No’ as a terminal response.
2. Be Investment Ready
This means presenting a compelling narrative about the experience you are creating and it’s underlying business model. And to be taken seriously this narrative must include traction. In support of this deck a prospective investor should be able to access a product demo, a term sheet and the existing shareholder agreement (if a company has already been incorporated) – on request.
Expect that your deck will evolve the more you pitch but don’t make the mistake of thinking it’s OK to cobble together product demos, a term sheet (or shareholder agreement) as investors begin to express interest. Be organised to respond to investor interest, it will help accelerate the closing of your round. Alternatively be aware that if you’re not investment ready, there’s next to no chance of raising capital.
Should I write an investment memorandum? comes up from time to time. Generally at seed stage the answer is no because it’s considered a nice-to-have or overkill. An IM is typically a 30+ page document that goes into extensive detail about a venture. We wrote one for AirShr because we wanted an added layer of depth to our narrative. Our investors have appreciated it.
3. Identify And Engage Prospective Investors
When the right investors are matched with the right investment opportunity, a deal can be reached and a financing round closed in a matter of days. In most cases however, the process of identifying prospective investors starts with desk research.
So, open a Google Sheet.
Add ‘Name’ in cell A1.
Add ‘Value They Can Bring’ in cell B1. This is the expertise and relationships (beyond capital) that an investor can bring to your venture — be as specific as you can.
Add ‘Early-Stage Investment Experience?’ in cell C1. There is a subtlety to this column that all founders should be aware of. It’s rare to find someone with early stage investment experience who, at one time or another, hasn’t lost money or had a poor experience investing in a new company. I think it’s useful to assume everyone with early stage investment experience has been burned at some point. Approaching prospective investors with this mental model has helped me ask probing questions like “Given your experience as an investor, what factors matter the most to you when deciding to invest?” and “What three pieces of advice could you offer to us, as a new venture, to make the next 18 months as successful as possible?”. The answers to these questions usually leverage their experiences (good and bad) at other ventures. The insight is typically very useful and asking these questions demonstrates an appetite for learning, an essential capability of great founders.
Add ‘Relationship’ in cell D1. This is the name of the person who can make the warm introduction to the prospective investor.
Now, spend a day with your co-founder(s) working through LinkedIn contacts (both 1st and 2nd connections), address books and emails communications. Add people to the Google Sheet who make sense to contact as prospective investors based on the strategic value they could bring (column B) and their investment experience (column C).
Context drives engagement
The wise man who once said “context is everything”, was right. Anchoring a meeting request with a prospective investor to an area of mutual interest or a mutual acquaintance (or better yet an introduction made by the mutual acquaintance) is the most productive way to creating that all important first meeting. This, combined with short and punchy detail about the value proposition, the fact you’re seeking investment of $X and a link to a product page or pitch deck, helps the recipient make a quick determination about how to respond. After all, you need to assume they know nothing about you or your product and only have 30 seconds of concentration (at best) to apply to the email when they read it.
It’s also OK to politely follow-up once each week for three consecutive weeks if you don’t hear back. The best early stage investors usually respond quickly to progress (or decline continuing) the conversation.
4. Hustle To Close
Not withstanding the need to carefully review and execute legal documents after signed term sheets are received, establish a process and timeline to close the round with your lawyer and communicate this to each investor.
The hustle demonstrated when shepherding prospective investors from first meeting to signing a term sheet must continue to closing the round. And like the speed and focus with which the company will grow, it’s up to the founders the drive this.
5. Move To One Team
On closing a financing round it’s likely that incoming investors haven’t met ‘the rest of the family’. Although time zones and schedules might not align, it’s important to formally welcome and introduce new investors to existing investors and leaders at the venture. Ideally this is done in person but it can also be done via conference call or email if a face-to-face event isn’t practical.
This is the first step to unlocking the potent combination that comes with mixing strategic investors with entrepreneurs. And this initial communication
(and regular ongoing engagement via events, monthly or quarterly email updates) sets the tone for how the team, as one force, will help grow the company.
This might seem obvious but in the cut and thrust of everyday, these investments in building a team of supporters who have a vested interest can be overlooked. The events and communications that draw the best feedback from investors aren’t lavish but ones filled with insight, radical candour and, if needed, specific requests of support to investors.
Remember, if you’ve selected the right investors they will be 100% committed to your success and will be open to providing support however they can. That’s why they backed your vision and your team in the first place.