1. Funding Your Company
Obviously this depends on the product, business model, and where you are in the development pipeline.
Idea in need of money
VS
Idea + product + team + business model + existing revenue in need of money
Money holds a higher value in the first so deserves a greater share.
Types of Investment (funding your startup)
How to raise money as an entrepreneur – https://www.youtube.com/watch?v=KB442EchOTY&t=1103s
E919: Scaling Your Startup, “Funding Your Company” – https://thisweekinstartups.com/e919-scaling-your-startup-funding-your-company-what-startups-need-to-know-to-raise-their-rounds-right-other-tips-from-an-early-investor-in-200-startups-7-unicorns-uber-thumbtack-calm-w/
1. Bootstrapping Vs. Fundraising (1:43)
fundraising is a path for very few companies
most businesses are bootstrapped (lifestyle) dont require fundraising
side note-> lifestyle business: a business that will provide a great lifestyle for the owners
Is this a venture scale business?
venture scale metrics and timeline – 100 million dollars in revenue, 30-50% margins
What is your burn? How much do you need? Is this a BILLION dollar business? Create 3 growth scenarios — steady, fast, rocketship
VC Exit
2. Friends & Family (5:30)
they should know the risks, really need to be careful
not as sophisticated
entirely possible (probable) you will lose all your money
Bootstrapping (high-art) – bring product to market then raise
*have a convertible note or a safe agreement – legal investing document so friends and family are protected down the line
SAFE: Simple Agreement for Future Equity
Document that says, “I’m going to give you some money, you don’t have to pay it back, it is not a debt instrument,
however, when you raise a priced round, this money I’m giving you is going to convert into shares – when you start to sell shares (securities) this will convert into securities in your company.
-Reads close to a Term Sheet
-Very basic, easy to understand
CONVERTIBLE NOTE:
Similar to SAFE but it is a debt instrument, interest attached – (larger legal document 15-20 pages)
note for above: set things up right from the beginning, makes things much easier down the line. Keeps involved parties responsibilities clear.
Due Dilligence
The easier the diligence process goes the less reasons there are for an investor to pass
-vesting schedules
-no personal charges (mingling of personal expenses and business)
-Cap Table
1. founding team not having vesting schedules
2. not having investors well documented, who are the investors, when did they invest, was it a convertible or safe, what was the valuation cap, was there interest associated with the note or the safe – very important for downstream investors
-Customer References
-Org chart
-Messy PNL – not showing costs of goods sold
-revenue very spikey (not amortizing costs out properly)
be informed, have accounting software
3. Angels vs VC Firms (16:25)
is VC or Angel right for you?
how much are you trying to raises:
less than a mil -> angels
over a mil -> VCs (institutional capital)
angles invest faster (no team to slow down by making decisions) – more likely to have full time job or running their own company
VCs usually more helpful
Minimum check sizes for angels
ex) 700K angel/seed round
cap table mangement the main factor – as a company progresses there will be times when you need to collect signatures – new investment, safe agreement date changes
in general you want to keep the number of your investors to a minimum
for this reason you ask for a minimum check
starting out 25-50k, can go up as your rounds increase
SEED FUNDS VS VENTURE FUNDS
formal funding
seed funds tend to have 2-3 partners
vc double or triple
seed funds may act a little quicker
otherwise processes and timelines very similar
How to Vet investors:
take a look at their portfolio
follow and get to know on social – learn how they operate
*tip do they have an interest in your space but have not invested in a competitor (litmus test – if they invested in you first and they came to you and asked can we invest in X, how would you feel about it)
interested in general space also good
Syndicates:
amount can be flexible
not looking to set terms like a VC would (lead round)
syndicate up to 250 accredited investors
can benefit companies with a syndicate members knowledge
syndicate members can choose what they invest in
median investment – 80 people (all signatures go through 1 person, the lead)
does not require individual approval (general consensus)
how does founder tap into the network
– deal memo + webinar link (trailer of company)
– members can reach out directly
– investor has to opt-in by reaching out or replying
– generally kept anonymous unless investor wants to be known
– founder say welcome letter to group through list-serv
– passive involvement for investors
4. Startup Incubator vs Accelerator (benefits: fundraising and network) (32:10)
Is it for me? Not for everybody, depends on stage of company
+ positive for fundraising and the network you build
– network with investors and other founders
– negative, you have to give up equity
– What are the best programs?
– YC, techstars, launch
– watch out for not great programs, can send negative signal
Upside/downside. Time commitment, equity, etc.
5. Growth Metrics investors want (39:20):
Seed and series a
1. revenue (how fast does revenue need to be growing) 20% and above month over month growth (breaks down to 3-4% weekly) not easy to do – investors obsessed with this amount of growth because they only invest in venture scale businesses, early signal of this is fast growth at early stage
2. additional metrics, what is the other metric:
-engagement
enterprise sas – churn (negative), (positive) landing and expanding (negative churn) – existing customer base will spend more with you every month, most common example per seat sales strategy (seats expand each month) greater than the people quitting
marketplace – look at both sides of marketplace and how many participants there are, would drive liquidity in the marketplace (building up the volume on both sides)
consumer apps – daily active users, weekly active users, monthly active users, and cohort analysis – established frameworks now in use – *eric reese (made startups into a science) – retention
vanity metrics and fraud (not important):
– social media followers when its not significant to turn into engaged users (not relevant unless its main sales channel)
– press, forbes write-up, 30 under 30, 40 under 40, etc, logo of prior companies from founding team
metrics for a product build (pre-revenue):
– pure technology play, no revenue traction (how do you clear market in this situation) – when no revenue investors must believe in the founding team (experts in space, experienced)
– big name investors on Cap Table can help validate a person
– largely its the team (how well can you explain the company)
– where is the tipping point for number of users for VC (10 million monthly users is the new baseline) monthly active users – series A starting line
– 1 million of the same user a month for
seed around 1 million a month – 100k a day to clear the seed market
growth rate, velocity also very important – where were you 30 days ago, 60 days ago, 90 days ago – for consumer if you can see a growth acceleration even better
(i.e. 20% MOM, 10k DAUs, 5% WOW if consumer, etc.)
6. What to know before seeking VC (51:42):
– when VC is setting terms there goal is a percentage
– i want 10-20%, this is how much were putting in, this is what your valuation is
– you don’t get to decide your valuate (can turn down a term sheet)
– when you put a VC on your cap-table pressure will incrase and expectations set by VC
– this is a business relationship, the goal is for them to make money
– VC is jet fuel to a startup, they want to see extraordinary growth (escape velocity) it is an unnatural act to have Venture Capital
– 10 year relationship
– unnatural task of having non-organic growth
– VCs are gonna want 20-25%
– Who are you gonna give this percent to and for how much
– What are the terms – want standard terms
Is it ever too soon to start fundrasing?
downsides – can be a distraction, taking away from the core business
understand motivations of VC, are they just planning/researching or actually want to invest
look at buffer app – google buffer metrics – they lay bare their metrics, get like 10 investors a day calling
7. how to seek out invstors to close a round (series-A) (1:02:03)
-investor prospects needed to close round – 100+
-how to tell if they are a good target
-get to 100 qualified targets to put through your funding funnel
-start with top investors in the major geos, closer to you the better
-aim to get the top 10% of investors
-Intros to 75 meetings (either in person or initial phone calls)
-second meetings
-dilligense to about 10 firms
-2-3 end up participating
-raising is a full time job – 6 months job
-should raise enough to cover at least 18 months of runway in each round
-quality of investors matter
-5-10% conversion on 150 emails (this is where the incubator/accelerator intros really helps)
100+ investors -> gets a round filled
Sales Process
Intros — existing investors, fellow founders