#11 | ?? How to raise money? [3 of 3]

March 7th, 2024 | by: Daniele Dellavalle?

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?? DON’T BE GREEDY, ACCEPT OFFERS GREEDILY?

For those non-technical cofounder, a greedy algorithm focuses on selecting the best option available at the moment without attempting to predict future outcomes; making whatever choice seems best at the moment and then solve the subproblems that arise later. This principle should guide startups in their fundraising efforts from phase 2 onward. Avoid speculating about the future since (a) its unpredictability is a given in this field, often accompanied by intentional misinformation, and (b) the primary goal should always be to finalize fundraising expediently and return to the main business tasks.?

Should you receive a proposal that meets your needs, accept it promptly. In situations where you're faced with several offers that don't align, opt for the most favorable one. There's no benefit in holding out for potentially better future offers when you have a suitable one in hand.?

This advice applies across numerous scenarios. When engaging with multiple investors, proceed by accepting their offers as they come in. You'll notice that as your fundraising progresses, your criteria for what's acceptable will naturally become more stringent.?

Remember, offers tend to span durations rather than represent singular moments. Therefore, if you receive a solid offer that might not align with future ones (for instance, it covers a significant portion of your funding needs), it's sensible to inform other potential investors about this offer, giving them a short window to respond. This strategy might mean missing out on a few investors, but that's acceptable given the initial offer meets your needs.?

Be cautious of investors who issue "exploding" offers, which are designed to force a quick decision within a few days. Top-tier investors, typically don't resort to such tactics, knowing their value doesn't require pressure to be recognized. However, some investors might use short deadlines as a strategy, believing it will corner you into acceptance. A three-day deadline is generally reasonable, assuming discussions with other investors have been happening concurrently. Yet, anything shorter may indicate you're dealing with someone less reputable, and it might be necessary to challenge such conditions.?

While securing offers from the best possible investors is a worthy aim, it seldom conflicts with the principle of accepting offers greedly, especially in phase 2. The real conflict arises when you might need to decline a reasonable offer in anticipation of a potentially better one. However, engaging with investors simultaneously and resisting undue pressure usually prevents such dilemmas. If not, in most situations, swapping a sure opportunity from a satisfactory investor for a chance at one from a superior investor is not advisable, given the high selectivity of top investors.?

The approach changes somewhat in phase 1, where simultaneous applications to multiple incubators / accelerators might be impractical due to scheduling conflicts. Here, prioritize applications based on your preferences.?

As you navigate through fundraising with multiple investors, the possibility of transitioning into a series A round may arise. In such cases, continue to accept smaller investments. Series A investors may prefer not to deal with numerous minor stakeholders, but if their commitment is genuine, they'll proceed with formalizing their investment through a termsheet. Until then, the strategic approach advised by the greedy algorithm—focusing on securing immediate, tangible offers—remains your best course of action.?

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?? DON’T SELL TOO MUCH OF YOUR COMPANY?

Should your venture thrive, a Series A funding round is likely in your future. Therefore, it's crucial to avoid actions in the initial fundraising stages that could jeopardize your ability to secure a Series A. For instance, relinquishing more than 40% of your total company equity early on makes a Series A round more challenging to secure, as venture capitalists may be concerned about insufficient equity remaining to incentivize the founding team adequately.?

As a general guideline, we advise not parting with more than 25% of your company in phase 2, considering what was already distributed in phase 1, which ideally would not exceed 15%. When engaging in fundraising with uncapped notes, you'll need to make an educated estimate regarding the valuation for the forthcoming equity round. It's prudent to make conservative estimates here.?

Of course, should you advance to a Series A round within phase 2, this guidance adjusts, acknowledging that a select few startups may achieve this milestone prematurely.?

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???? IT’S A ONE-FOUNDER JOB?

In teams with multiple founders, it's wise to assign just one person the responsibility of fundraising, allowing the rest to focus on advancing the company. The main challenge with fundraising isn't the time consumed by meetings, but rather the mental space it occupies, potentially diverting focus from other critical areas of the business. The selected founder for this role should endeavor to shield the other founders from the intricacies and stresses of the fundraising process to maintain their focus on the business.?

Should there be underlying trust issues among founders, this approach might introduce tension. However, a lack of trust among founding members indicates deeper problems that extend beyond fundraising organization.?

Typically, the CEO, ideally the most capable among the founders, should take on the fundraising mantle. This holds true even if their expertise lies in areas like programming rather than sales. ?

There are occasions, however, when involving all founders in meetings with significant investors is beneficial, especially when such interactions are decisive for the last meeting before investment decisions. This step should be reserved for critical moments, akin to introducing a significant other to your family, signifying a deep level of commitment and seriousness.?

Despite the focus on fundraising, it's crucial to maintain momentum in business growth. Fundraising is a process over time, not a standalone event, and the company's performance during this period can significantly influence investor decisions. Demonstrable growth can heighten investor interest and commitment, while stagnant or declining metrics may lead to hesitancy.?

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?? YOU’LL NEED AN EXECUTIVE SUMMARY?

In the traditional phase 2 fundraising approach, startups present their case to investors using a slide deck. However, there's a growing sentiment that they may be becoming less crucial. Many of the most successful startups manage to progress through phase 2 without creating decks, opting instead to engage directly with investors through conversation to outline their plans and ambitions. This direct approach often proves effective, particularly for startups that quickly gain traction.?

Additionally, a concise executive summary is indispensable. This document, ideally limited to one page, should clearly articulate:?

• your objectives?
• the rationale behind your idea?
• the achievements you've secured to date

Its purpose is to serve as a concise reminder to investors of your discussion, which is especially useful given the volume of proposals they encounter.?

Be aware that any materials you share, including your deck or executive summary, might be circulated beyond your intended audience. However, providing these documents to potential investors is a risk worth taking and should be viewed as a necessary aspect of conducting business. While the thought of your confidential information being leaked may be frustrating, it's rare for such leaks to significantly impact a startup's success.?

If an investor requests your deck or executive summary before agreeing to a meeting, be aware that this request can sometimes indicate a lack of genuine interest in your proposition.?

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?? STOP IF IT DOESN’T WORK?

When do you stop fundraising? The optimal point to stop is once you've secured sufficient funds, but the reality can be less straightforward.?

Advising on this matter is complex due to the variability of startups' experiences. Some have persisted in their fundraising endeavors against all odds and have eventually found success. However, my typical advice to founders is to consider winding down their fundraising activities when the process becomes unproductive, akin to the experience of drawing air through a straw when a drink is nearly finished. This analogy reflects the diminishing returns of continued efforts in fundraising; when the tangible opportunities dry up, persisting in the attempt is unlikely to yield positive outcomes.?

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?? STOP AS SOON AS IT IS ENOUGH?

For many founders, fundraising is a daunting necessity. However, a few find it more exhilarating than the day-to-day grind of building their startup. Early-stage startup work often involves tedious and stressful tasks that aren’t cool. In contrast, successful fundraising can feel rewarding, offering a break from mundane tasks to the excitement of securing substantial investments during upscale meetings.?

Yet, there lies a significant risk for those who excel in fundraising. Excelling in an activity can naturally make it more enjoyable, leading to a potential overemphasis on fundraising efforts. It's critical to remember that the core of your startup's success will come from addressing customer feedback and improving your product, not from the ability to attract investment. The real danger in a fundraising addiction isn't just the risk of allocating too much time or giving up too much of your company; it's the false sense of achievement it may foster. This misconception can distract from the essential, often less appealing work required to build a genuinely successful company.?

Observing startups that have quickly become fundraising sensations, I tend to be skeptical about their long-term viability. While they may capture the media's attention and be touted as the next Facebook, the overemphasis on fundraising success often signals potential pitfalls ahead.?

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?? TOO MUCH MONEY WILL HURT YOU?

While it might seem counterintuitive, securing an excessive amount of funding can lead to unforeseen complications. These risks, though not immediately apparent, can profoundly impact a startup. Obtaining a large investment typically comes with a lofty valuation, setting a precedent that might be challenging to surpass in subsequent funding rounds.?

For a startup, escalating valuation with each funding round is crucial; a failure to do so can signal trouble, making the company less appealing to future investors. For instance, if your phase 2 fundraising values the company at $10 million post-money, aiming for a pre-money valuation of at least $30 million in the next round becomes necessary. Achieving this level of success requires outstanding performance.?

Moreover, the influx of funds can be more problematic than the valuation itself. Excessive spending complicates the path to profitability and inflexibility, particularly as hiring more personnel makes it difficult to pivot or adjust strategy. The advice, while challenging to heed due to the allure of available capital, is crucial: if you find yourself with a substantial amount of money, exercise restraint in spending. This discipline is essential, albeit difficult, as the temptation to utilize these resources can be intense.?

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?? PREPARE FOR HIGHER EXPECTATIONS?

Consider the capital acquired in phase 2 as potentially the last funding your startup might secure. It's imperative to strive for profitability with these resources.?

Initially, a startup only needs to demonstrate potential to attract funding. However, by the next round, tangible success is expected, often in the form of profitability, setting the stage for a path to public offering. Phase 3 fundraising typically demands concrete evidence of a successful business model.?

There are common pitfalls that startups fall into between phases 2 and 3. One is a delay in achieving profitability, often due to a lack of urgency when there appears to be sufficient funding for the immediate future. This complacency can make transitioning to a profit-oriented mindset more difficult over time.?

Another issue is excessive spending, particularly on hiring. Rapid expansion of the team immediately following a fundraising round can lead to unsustainable growth in expenses. Startups are advised to scale their teams and expenses cautiously, aligning growth with genuine business needs and revenue potential rather than investor encouragement.?

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?? BE POSITIVE!?

“Learning to embrace and savor rejection is one of the best things that entrepreneurs can do. Launching a startup is the time to find your ever-optimistic inner child again.”?

―?Alejandro Cremades,?The Art of Startup Fundraising?