How I raised $10M in venture capital
I learned a lot from my first 100 investor meetings and I learned even more from the next 400. It was in 2012 during the AngelPad incubator program in San Francisco where I first cut my teeth in venture capital fundraising. AngelPad was all aspects of the startup race and has been rated as one of the top incubator programs in the world almost every year they’ve been around. They’ve produced a solid cohort of successful companies, including MoPub (sold to Twitter for $350 million), Postmates (valued at $1.85 billion and IPO-ing in 2019), and Kinnek ($31.5 million in funding), and the program was my entry into the Silicon Valley world.
After burning the midnight oil for 12 weeks during AP5 (AngelPad’s 5th batch) while running my last startup Storefront, we hit demo day and threw ourselves into five different pitch meetings every day from the end of November up until Christmas. We ended up closing our seed round at the end of February in the form of $1.6 million. A year later we raised $7.3 million with Spark Capital as our lead investor and the likes of Nas, Gary V, and Troy Carter (Lady Gaga’s manager) joining in.
The feeling of raising that capital was a rush of responsibility that leads me to sharing this story today. I want to provide some of the dos and don’ts for other startup founders to learn from. We made mistakes and we found strategies that succeeded. I’ll share the inner workings about the way Silicon Valley and San Francisco operate and how they set the standard for the rest of the world.
I’m constantly surprised by how similar venture capitalists (VCs) and angel investor work from one startup ecosystem to another. As I sit here in Riyadh, Saudi Arabia EIR-ing (entrepreneur in residence-ing) a 500 Startups program here, I’m hearing investor tactics and jargon that matches exactly what I see happen in SF (San Francisco). Yes, there are lots of acronyms. Yes, there’s a specific lingo. And, yes, it can be confusing, but once you build the base layer of knowledge, it’s much more straightforward than you’d think.
So, let’s unveil the magic.
Here are the high-level questions you need to go through when preparing to fundraise.
Step 1: Are you ready to fundraise?
Step 2: Is your pitch perfected?
Step 3: What’s your investor strategy?
Now, let’s break each down to understand how you can find the answers.
Step 1: Are you ready to fundraise?
First, ask yourself, “Is my business VC fundable?” Determining upfront if your product vision is a scalable tech business or an agency model is an important and often overlooked step before reaching out to VCs and tech investors. You need to look at things from the investor’s perspective. For a VC, they need 5% of their portfolio to bring 95% of the returns. That means they need unicorns. Only recently have there been new VC models like Indie.vc that have a different model. There are also many other sources of capital other than VCs (I list over 20 ways here).
Second, is your business at the right metrics for the round you want to raise? Gauge this by talking to friendly investors and founder friends who have recently raised and run a similar style business to yours (i.e. marketplaces, SaaS, FinTech). You can also find this information publicly provided by many VCs like this marketplace-focused funding metrics napkin infographic from Version One Ventures.
Finally, what’s your founder vision? Are you comfortable giving up equity in your business? How much equity is too much? 20%, 50%? What about giving up control? When you form a board are you okay giving up a seat to your first lead investor? How about the next one? Are you happy with a lucrative lifestyle business or will you not be happy unless you try to be the next Lyft or unicorn business?
Again, this is an often overlooked point. Many co-founders disagree on the direction of the business, because they haven’t talked about it. They incorrectly assume there is only one way to grow or run a business. They have Silicon Valley groupthink and the issue doesn’t come up until it is too late. Make sure to clearly align your team and co-founders with what the growth vision is for the business. If you want to be a rocketship at all costs then everyone needs to be wearing a spacesuit.
If you’ve put serious thought into why you want to fundraise and who you want to fundraise from by answering these questions, then you need to start preparing your pitch and deck well ahead of your first pitch meeting.
Step 2: Is your pitch perfected?
A common pitch metric I hear in accelerator programs is 100 pitches. If you haven’t pitched your current pitch 100 times then you aren’t practiced enough. Not to mention you need to have your different pitches in order, your financial projections, and still be customizing your pitch to each investor you meet.
Generally, you’ll need three versions of your pitch:
Elevator/Demo Day Pitch
This is a 2-3 minute pitch with 5-10 slides in your deck. You will also probably give this pitch in Lyfts, airplanes, and, inevitably, in elevators. Remember to show and not tell in these decks, when you use them. Get it designed. Make it simple and only show one main point per slide for memory’s sake. For the pitches without decks make sure you keep it conversational and don’t make it sound like a pitch or often times your audience will shut down or get annoyed. Remember, this stage is about building trust in new relationships.
In-Person Meeting Pitch
This is a 30-45 minute pitch with Q&A and 10-15 slides in your deck, plus an appendix. This is the pitch you’ll be giving while across a VC’s table or an angel investor’s cafe stool. You need to be ready to go with or without a deck. Sometimes when meeting in informal places VCs and angels alike will ask you, “How do you want to do this?” And you’ll need your game plan for non-deck situations.
I’ve often heard Marvin Liao, the head of the accelerator at 500 Startups, say, “Let’s just have a conversation.” In that case, you better be ready to pitch your normal flow in a conversational way without a deck. It’s important to personalize your pitch and be ready for any situation that may occur in a meeting. You can do this by just writing down all the potential questions and things that may come up and answering them or noting what you will do in each circumstance.
If you want to see some examples of slides from my own fundraising decks, see my Fundraising 101 presentation on SlideShare.
Bonus: InDinero co-founder and fellow 500 Startups Entrepreneur in Residence Andrea Barrica has some solid advice for mastering your pitch, too.
High profile investors often demand a short deck over email before meeting them. This will be shared. It will be shared with investor friends, and, unfortunately, sometimes competitors. You may not want your deck to be used as a tool to feed your competition, so make sure the investor you are emailing doesn’t have competitive portfolio companies.
Remember, this is a long game being played, so even a startup that looks a little like you today will eventually be you and more in the future. Different founders prepare for this in different ways. Some simply refuse to email their deck before a meeting. Others use a watered down version that doesn’t have proprietary numbers or IP in it. We emailed our deck only when we felt there was interest on an investors part and it led to a meeting, or we already had a meeting and they seemed interested. We often didn’t include the appendix and selectively choose what slides were important to send.
Married with this approach, you’ll want to use the rules of Silicon Valley etiquette and aim to get a warm introduction. An intro email is the key to every warm investor introduction.
Intro to [Investor] at [Fund Name]
I would like to get in touch with [Investor Name] from [Fund Name]. They have a very strong portfolio of on-demand mobile services such as Lyft and Kinnek and would be a great strategic fit with Headout.
Below is a quick blurb you can forward.
Headout is a mobile marketplace for spontaneous travelers to discover & book local activities on-demand for the next 24 hours. Think of it as the HotelTonight for tours & experiences.
– $XM sales run-rate in 6 months
– Growing X% month-over-month
– Average transaction size is $X
We are raising our seed round and would love to talk.
Now that your pitch is perfected and you are starting to talk with investors, let’s take a step back and make sure you have a strategy behind every investor interaction.
Step 3: What’s your investor strategy?
Your fundraising timeline and start date are key to running a good investor process. Here’s a general timeline I created you can base yours on. Even a successful fundraise can take 3 months with one founder working full time on it, so you need to go into the process prepared to run it uber efficiently. Think about compressing as many meetings as possible into the shortest timeframe. That way you can change the dynamic from having no leverage with investors to building momentum.
You are meeting with three investors in San Francisco every day for eight weeks. Every Thursday you spend on Sand Hill Road in Menlo Park (Silicon Valley) in order to minimize your drive time. You spend an extra two weeks meeting investors in different ecosystems that are relevant to your business. One week in New York and one in Los Angeles, where you are originally from and have a hometown advantage. In New York, you stop by for a meeting at Female Founders Fund because, you guessed it, you are a female founder (list of female-focused funds). By week three, you’ve met with 45 investors, the perfect sample size to understand if your pitch is resonating. Investors are talking with each other and know you are out raising. It creates some FOMO (fear of missing out) and you start to get hard commitments. You send over your convertible note. You get your first check. Cash in the bank. You pick up the pace and update all of the investors you’ve been talking to that you are now 20% closed with the round. Then 30 percent. Then 50 percent. You’ve hit the tipping point and you are now getting more inbound. Your new investors are making intros for you. Your founder friends are helping to position you by back-channeling to their investors. After another push, you are oversubscribed and closing the round. Back to work.
In an ideal founder-first world, this is what you can construct for your funding round. There are various other tricks in the book and increased pressure around demo days or getting into an accelerator (when we closed our first VC), but overall you’ll notice it’s about speed, confidence, and planning. The founder in the example above knew how to run a process and who her strategy would land well with. She didn’t slow down when she got investor traction, she picked up the pace. That’s how you need to think. Like a shark sensing blood in the water.
As part of your outreach, you should have a target investor list. This could be on a task management app like Trello or Asana (we used Pipedrive), or you can create a Google Sheet with 100 minimum target investors made up of VCs (leads), micro VCs (smaller check sizes), angel investors, friends/family, and other wealthy individuals that you can get introductions to. Add columns for their name, firm, investment size, sector focus, portfolio companies similar to yours, and who’s going to introduce you. We had a list of 300+ investors on our target list with a 7% close rate. Can you guess our biggest mistake when fundraising for both our seed and Series A? Yup, not building a big enough initial target list. Inevitably you won’t get enough warm introductions, or hear back from everyone, and by the time you get to a meeting, you still hear a lot of big N-Os. It’s like a sales funnel. More investors on your target list mean more meetings and more closed deals. That’s good for you.
Running a fundraising process effectively can be about breaking down to the most minutia of details. Think meeting strategy, for example. How will you run your meetings? 30 minutes with a hard stop, because you are busy and have to meet other investors? Will you end meetings early if the investor is not interested? What’s the longest you will let a meeting go? How will you get the investor excited and keep the excitement through the moment you leave the room? These are all questions you need to think through in order to prepare for all situations you may encounter.
Often times an investor will ask at the end of the meeting, “So, how can I help you?” This is where you can shine as an inquisitive and engaged founder who knows how to utilize the people around them based on their skills. Don’t *uck this part up. Investors give high grades to good questions. They love critical thinking and foresight. Often times there is no right or wrong answers, it’s a gray area, and the investor is questioning if you’ve thought through a topic already. You know the business best, not the investor.
Another gray area is adding investors who have a relevant investment or background to your target list. Not that you shouldn’t try, but sometimes this can mean the investor is overly jaded because they’ve seen the hard times of your industry and business. Just because I ran a marketplace business and was able to sell it doesn’t mean I will love your marketplace business.
Be The Founder You Want to Be
At the end of the day, only you can run your investor process. You need to hold yourself accountable, lean into your pitching style, and be yourself. You know your strengths and weaknesses. You know your business best. Go into the investor winds with confidence and build that company!
Tristan Pollock is an entrepreneur who’s raised $10M on one side of the table and invested $30M on the other via 500 Startups. He’s currently advising companies on fundraising and startup growth while trying on his digital nomad shoes. If you’d like to get in touch or need help with fundraising, email him at firstname.lastname@example.org or say hello on Twitter or LinkedIn.