#9 | ?? How to raise money? [1 of 3]

February 27th, 2024 | by: Daniele Dellavalle?

FUNDRAISING IS HARD?

Fundraising is hard, especially in this market, where global venture funding continues to slide... The challenge of persuading individuals to donate significant amounts of money is inherently tough, a challenge that naturally should exist. However, the perplexity of fundraising often stems from its unfamiliarity to many founders, and the aim of this article is to alleviate this by providing guidance through it.?

To entrepreneurs, the actions of investors can appear unclear—partly because their intentions are not always transparent, and partly because they sometimes intentionally deceive. This deception from investors, when mixed with the hopeful naivety of inexperienced entrepreneurs, leads to frequent conflicts and false hopes that we help founders to address.?

DON’T TRUST YOUR INTUITION?

If you are an unexperienced founder, survival depends on setting strict external guidelines for oneself. Often times, startup word is counterintuitive so you can’t trust your intuition. Here, I present a series of principles that, if followed, can guide you through this ordeal. There will be times you might consider disregarding them. Hence, the foundational rule is: these principles are established for a purpose. Without such guidelines, the natural inclination might lead you astray due to opposing forces.?

The primary forces influencing you are the same ones affecting investors. Investors are caught between the fear of investing in startups that fail and the fear of missing out (i.e. FOMO) on those that succeed spectacularly. The root of these fears is what makes startups so appealing: the most successful ones grow super fast. However, this rapid growth forces investors to make quick decisions. Waiting until a startup's success is evident means missing out on significant returns. To achieve the highest gains, investments must be made when the startup's future performance is still uncertain, which understandably causes anxiety over potential failures.?

Ideally, investors would prefer to wait. A startup only a few months old reveals more about its potential with each passing week. Waiting too long, however, risks losing the opportunity to another investor. And since all investors face these same pressures, what usually happens is a standoff, where everyone waits as long as possible before one acts, prompting the others to follow.?

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DO YOU REALLY NEED THAT MONEY??

Many successful startups get funding, making it seem like raising money is a key part of being a startup. But that's not true. Being a startup is all about growing quickly. Most companies that can grow fast find that getting money from outside helps them speed up even more, and their potential for growth makes it easy to get that money. This happens so often with successful startups that almost all of them end up getting external funding. However, there might be times when a startup doesn't need to speed up growth, or outside funding doesn't really help. If you're in that situation, don't go after the money.?

Also, try to bootstrap for as long as you can and avoid trying to get money when you're not able to. Accepting investors' money often means partially losing control of your venture. If you try to get investors interested before you're ready, you'll end up wasting your time and damaging your reputation with those investors.?

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FUNDRAISING MODE ON / FUNDRAISING MODE OFF?

A big surprise for founders is how much fundraising can distract them. Once you start looking for funds, everything else stops and it takes over both your time and your thoughts. A startup can't handle being ignored like that for long. Startups grow because their founders push them to, and if the founders get distracted, growth quickly slows down.?

That's why you should be clear about when you're actively seeking funds and when you're not. And when you do go for it, give it your all so you can finish fast and return to your main work.?

Even when you're not actively seeking funds, you might still accept money from investors. But you shouldn't spend any effort on it. The two main efforts are convincing investors and negotiating terms. So, if you're not looking for funds, only accept money from investors who don't need convincing and agree to your terms without too much negotiation effort. For instance, if a trusted investor offers to invest with a simple agreement like a convertible note, with terms that are okay with you, go for it without overthinking. The specifics will align with your next funding round. "No convincing" really means you shouldn't spend any time meeting investors or preparing documents for them. If an investor wants to meet but you're not in the mood to raise funds, just say no. Politely explain you're focused on your business and you'll reach out when you're ready to raise funds. Don't let them pull you into fundraising by accident.?

Investors might try to tempt you into fundraising mode even when you're not interested. This works out well for them because they get a chance at investing before anyone else. They might send emails expressing a desire to meet and learn more about your startup. If an associate from a venture capital firm cold-emails you, ignore it, especially if you're not looking for funds. Real deals rarely start that way. If a partner reaches out, try to postpone the meeting until you're ready to raise funds. They might say they just want to chat, but meetings with investors are rarely just casual chats. What if they want to invest? Can you avoid discussing it? Unless you're very experienced with fundraising and can keep the conversation light, it's best to ask to meet later, when you're actually raising funds, and focus on your business for now.?

After successfully raising funds, some companies might add a few investors without actively seeking more. This is okay; if your fundraising was successful, you can do this without spending time convincing them or negotiating terms.?

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GET INTRODUCTIONS?

Most of the time to talk to investors, you need to be introduced to them first. If you're showcasing your startup at a Demo Day, you'll meet a bunch of investors at once. However, you should still seek additional introductions on your own.?

Is an introduction necessary? Yes, especially in the early stages. While some investors might accept a direct email with your business plan, many indicate a preference for not being approached directly by startups.?

The effectiveness of introductions can vary widely. The most impactful introduction is from a well-known investor who has recently invested in your startup. Once you secure an investment, ask that investor to introduce you to others they hold in high regard. Another valuable source of introductions is founders of companies the investor has previously funded. You can also seek introductions from others in the startup ecosystem, such as startups accelerators, lawyers and journalists.?

Platforms like AngelList and WeFunderCircle can also connect you with investors. These should be considered supplementary options. Focus first on securing investments through your own efforts, as these tend to lead to better-quality investors. Additionally, having already secured investment from reputable investors can make raising money on these platforms easier.?

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IT’S A?‘NO’ UNLESS YOU HEAR YES? ?

Treat investors as saying no until they unequivocally say yes, in the form of a signed definite offer with no contingencies.? ? I mentioned earlier that investors prefer to wait if they can. What's particularly dangerous for founders is the way they wait. Essentially, they lead you on. They seem like they're about to invest right up till the moment they say no. If they even say no. Some of the worse ones never actually do say no; they just stop replying to your emails. They hope that way to get a free option on investing. If they decide later that they want to invest — usually because they've heard you're a hot deal — they can pretend they just got distracted and then restart the conversation as if they'd been about to.? ? That's not the worst thing investors will do. Some will use language that makes it sound as if they're committing, but which doesn't actually commit them. And wishful thinking founders are happy to meet them halfway.? ? Fortunately, the next rule is a tactic for neutralizing this behavior. But to work it depends on you not being tricked by the no that sounds like yes. It's so common for founders to be misled/mistaken about this that we designed a?protocol?to fix the problem. If you believe an investor has committed, get them to confirm it. If you and they have different views of reality, whether the source of the discrepancy is their sketchiness or your wishful thinking, the prospect of confirming a commitment in writing will flush it out. And till they confirm, regard them as saying no.?

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THE EXPECTED VALUE?

When reaching out to investors, you should use a strategy similar to performing a breadth-first search, and prioritize based on the potential value of each investor. This means you should be talking to multiple investors in parallel; talking to investors one after the other takes too much time, and it doesn't create a sense of urgency for them to make a decision. However, not all investors should receive the same level of attention from you, as some are more likely to invest and would be more beneficial for your startup than others. The best approach is to engage with all potential investors simultaneously but focus more on the ones who seem most promising.?

To determine which investors are more promising, you calculate their expected value.?

Expected value= how likely an investor is to invest in your startup * how impactful their investment would be. ?

For example, a well-known investor who might invest a significant amount but is hard to persuade could have the same expected value as a lesser-known angel investor who is more likely to invest, but will contribute a smaller amount. On the other hand, an investor who is not very likely to invest a lot and also demands multiple meetings before deciding has a much lower expected value and should be approached last, if at all.?

Using this method ensures you avoid wasting time on investors who tend to be indecisive or who might lead you on without making a commitment. It's like a safeguard mechanism that helps you focus more on serious prospects and less on those who aren't moving towards an investment. However, it's important to be objective and realistic when estimating how likely an investor is to be interested in your startup, without letting your own preferences cloud your judgment.?

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UNDERSTANDING THE ACTUAL PROGRESS?

Understanding your progress with an investor can be tricky, especially since they often come across as more positive than they actually are. The key is to focus on what they do, not just what they say. Every investor follows a specific path from initial discussion to actually funding your project, and it's vital to be clear on this process, recognize your position within it, and gauge the pace at which they are moving.?

Always make it a point to ask about the next steps after any meeting with an investor. Find out what else they need to make a decision. Is another meeting necessary? What topics need to be covered, and how quickly should it be scheduled? Do they need additional artifacts? Are there internal discussions they need to have, perhaps with partners, or any particular concerns they need to address? Inquiring about the expected timeframe for these actions is also important. While you shouldn't come off as aggressive, staying informed about your standing is crucial. If investors dodge these questions or give vague responses, it's usually not a good sign. However, those genuinely interested in investing will often be transparent about the process ahead, including what needs to be done before the investment is finalized, as they're likely already considering these steps in their mind.?

...to be continued...