How to raise $5M-$15M from Silicon Valley? Learnings from a conversation with a VC from Sequoia Capital

Date: 16 Dec 2023

'Hi. I would like to raise funds for my business. Something like $5-$15M from Silicon Valley. Is this possible?

I don't have any idea how this works and would like to ask you some questions.'

This is what I said to a prominent venture capitalist from Sequoia Capital- one of the most successful funds in the world.

We were at his house sitting on the table, where I gathered the most crucial information for my fundraising strategy. I knew it was unlikely for this person to fund Team-GPT. So I went on to ask him a bunch of questions.

I was taking notes the whole meeting.

This article goes into all the questions I asked and the answers this VC gave me.

I've heavily based the fundraising process of Team-GPT (raised $4.5M) on this information.

Here are the questions + key findings.

What key metrics or milestones should I focus on?

• Show constant growth
• Paint a big picture and tell a compelling story
• Focus on how this becomes $500M ARR in 10 years
• The more metrics you have, the better

How to target investors?

• Talk to founders and get warm introductions to VCs
• Start having informal meetings with investors way before you fundraise
• Develop relationships now, as most investors are in for the next 10 years
• Be prepared for "We are not investing yet but..." conversations

What are realistic amounts of capital to raise in a first round?

• For first-time venture-backed entrepreneurs, $15M is likely too much
• Start with Seed and target $0-$3M.
• It's supply and demand. If more people want your deal, you will likely get a better price

What kind of due diligence should I expect from investors?

• You should know all the common ones by heart (ARR, #users, MAU, etc.)
• Do cohort analysis
• 30d, 60d, 90d retention of different cohorts

Who leads the round - does it matter and why?

• It matters significantly
• Every lead investor in Seed optimizes around ownership
• Whatever you raise will likely cost 20% of the company
• Everybody hates co-leading (10% for one investor, 10% for another doesn't make sense for anyone)

How to choose lead investor?

• Main decision: "Do we like you, do we like the idea"
• For Seed round, look for: Outlier founder (most important) with Unique and compelling insight in an Area where you can build a large business
• Ask yourself: What investors do you want to have on the cap table?

Timeline for raising?

• Be conservative, 1-6 months, brace for 3 months
• Most time-consuming part is getting to the first term sheet. You just need one.

Thoughts on Business model?

• Don't set your price low
• Aim for around $50/user/month
• The moment you set your price, you set your target market

What are the key considerations for the Board of Directors?

• It's Seed round - YOU (the CEO) are the board.
• OpenAI's recent issue is just one of many examples of board-related problems but these will come later

Where should the company be incorporated?

• Incorporate in Delaware. Full stop.

What are some examples of Sequoia's recent investments?

• Sequoia just invested $15M in a company that doesn't have revenue
• Why? The founder had several successful exists that made money to their investors

Examples of people who can raise $15M on an idea:

• Ofir Ehrlich (LinkedIn profile: https://www.dhirubhai.net/in/ofirehrlich/)
• Assaf Rappaport (LinkedIn profile: https://www.dhirubhai.net/in/assafrappaport/)

Additional note:

• Wiz (company founded by Assaf Rappaport) raised significant funding from the get go

• Sequoia is willing to invest large amounts ($15M) in pre-revenue companies
• Founder track record is highly valued (multiple successful exits)
• Successful founders can raise substantial amounts even without current revenue

How does Sequoia approach investments?

• Sequoia makes about 20 investments, totaling $700M
• 10% of these investments drive the returns
• They invest with very high conviction (translation: they need to be super-duper sure you are a winner!)

How should I frame my pitch? The VC advice on Team-GPT:

• Don't lead with "ChatGPT is difficult to adopt" as it won't resonate with investors. ChatGPT is perceived as a good product
• Focus on the transition from single player to multiplayer
• Emphasize the shift from personal to company-wide story

What narrative should I build? The VC suggestion:

• Enterprise communications have only been people-to-people
• Going forward, it will be people-to-people and people-to-machine
• There needs to be a new enterprise chat system that mixes both

What should I emphasize about myself?

• Focus on why I am the person who will build this company -> you are the CEO and have to show you are 'calling the shots'
• Sequoia would invest in companies based on "Act 1" (the founder's background and vision)

Key analogies for Team-GPT:

• Slack is great for human-to-human communication
• There needs to be a new enterprise chat system that incorporates both people-to-people and people-to-machine interactions

How should we structure the initial equity distribution?

• In the beginning, founders are getting everything

What about early investors?

• It's better for me to have preferred stock than common stock -> later it turned out that founders always get common stock

How much should we allocate for the stock option pool?

• Stock option pool should be 10-15-20% of the company

At the end I had written Next Steps

To do:?

1. Every week work on the deck a bit more?
2. Focus on the storytelling, not the numbers?
3. Metrics -> engagement and retention?
4. Cohort analysis - 30d, 60d, 90d retention of different cohorts?
5. Talk to founders that have raised before?

Talking to other founders

Indeed talking to founders was crucial.

I set a goal to meet 25 founders.

I met about 15.

These founders told me everything I needed to know about the fundraising process.

The Sequoia VC told me that books will be a waste of time.

I disagree then and now.

Read these 3 books before starting to fundraise:

• Venture Deals
• Fundraising by Ryan Breslow (short and sweet)
• Angel by Jason Calacanis (very fun to read)

They'll help you think like a VC!

Thanks for reading and good luck fundraising!