What capital raising is actually like (for this founder, anyway)

I recently embarked on a capital raise for my business, Mutiny. Here’s what I learned and how you should learn from my own mistakes and what you can do next.

Understanding the VCs

What Venture Capital looks for

The reality of most Venture Capital groups is today they are mostly run by investment bankers and run complex financial / metric driven models. That means most VCs will be looking for distribution or operational advantages that they can quantify to invest. The Go To Market strategy or how you distribute is as important, if not more, than the problem you are solving.

Most founders will focus on solving a problem more efficiently rather than getting it in the hands of users. In my view, Australian VCs focus as much on the latter as the former, so having a really clear view on how you distribute is key.

I don’t think investors simply look at founders, and it’s a mistake to think they do today. Investors will look at a complex combination of things:

1. Does the founder know the problem?
2. Does the business have unique IP?
3. Is there usage and traction?
4. Is there serious belief in the Go To Market Strategy (GTM)?

My strong belief is scale in usage/acquisition metrics is the number one thing a VC will look at (at least in Australia). Secondary to that is sales growth - which can be an indicator of growth itself.

There’s a few reasons why scale matters more than revenue. Usage basically de-risks - if you have lots of users on small contracts, one loss means relatively little. The other component to that is volume of usage allows for statistical patterns to emerge. We had indications, but we didn’t have a solid customer volume to validate it.

Does revenue matter?

In short - not really. Revenue really validated other elements of the business, but mattered little in and of itself to VCs. If revenue was showing a path to monetising a behaviour that was great. But revenue itself didn’t show or tell that story. We didn’t really see VCs get conviction from our revenue and I’d suggest it’s a hard story to tell.

The on thing they do look at is growth. So if you have metrics, I’d focus on how metrics are growing rather than what your revenue is. E.g user growth trumps sales growth.

The importance of the startup lingo

I’m not sure on this one, but I’m virtually certain our agency and industry background counted against us. There are a few reasons for this I think.

Firstly we didn’t speak the startup lingo naturally. Whilst I don’t think it’s a conscious pattern, it meant we prioritised things like revenue and renewals versus usage patterns and so on. Even small things like Managing Partner versus Co-Founder I just felt added to the difficulty of not feeling like a startup.

Secondly we didn’t naturally know the business models well. We thought scale in revenue mattered and repeat subscriptions and big contracts were a tick. But actually they introduce an element of risk to the whole process. Being able to see that distribution issue is tricky.

Thirdly we didn’t naturally know how to talk to the stages of a raise, position ourselves well in terms of a story and to grow. Again I don’t think this counts as much as “what are the VCs looking for” but I had some amazing advice from a VC who told me to take control of my narrative more assertively. I think if I’d been around some more startup environments that may have come through.

Talking through what we needed and why was important. Framing it in the context of a longer journey was even more so. We didn’t quite nail the seed > Series A > Series B story which in turn didn’t help us.

Preparing a raise

Setting a raise

I find it’s helpful in a raise situation to set your objectives early and do it from a “needs” basis. I went in looking for “what I wanted” and it was one of the worst decisions I’ve ever made in terms of how I structured any potential deal. It made me value things based on what I thought they were worth, rather than trying to set deal parameters I could work with. It also reduced how I engaged with VCs in a collaborative way - I should have let them come to me with deal terms rather than the other way around.

Looking after your own mental health

My mental health significantly deteriorated throughout the capital raise process. This was a function of three key elements:

• I was under huge amounts of pressure and felt compelled to respond in a timely fashion to people investing in my business. This meant I wrote extensively detailed documents throughout, and lost valuable time to sleep and keep myself fit.
• The lack of sleep combined with huge pressures meant that small issues were magnified. It was important (but impossible) to keep perspective, but as most of your conversations are about things of serious magnitude.
• I also lost perspective and judgement at key moments. As I was running the finances and all elements, that contributed to me being brash with some VCs and too assertive rather than collaborative on my process. There were two VCs, one of whom had a beer with me recently, who I’d done that too. It’s worth noting and keeping that in mind.

Key documentation

I would strongly suggest sorting out the following documentation before you raise with your team. Pitch decks aren’t enough. You’re going to be asked for the following and it’s easier if you’ve got it ready - you’ll save yourself time and agony:

• Financials: get your financial model right. Financial model needs to show improving margins as time goes on and clearly define unit economics.
• Use cases: customer use cases are absolutely key. Document these, have them to hand as they will help you shape your Customer calls effectively.
• Usage: have clear engagement, usage and other metrics to hand simply and easily. If your revenue is low usage can supplement these conversations well.

Your team

I focused on being transparent about raising with my team. Why’s that? I told them what we were setting out to do.

Prep them by telling them why you need the money, what help you need and how you expect the process to play. Involving them will help them better support you throughout.

Finally, explain to them how they can help you. I should have prepped my team better throughout on areas they could contribute. This helps because it shows a business bigger than yourself quite quickly.

The process

I basically was able to understand the VC process as functionally 3 stage to term sheet. The three stages looked like this from my perspective:

1. Intro meeting
2. Partner meeting
3. IC meeting / approval
4. Term sheet

Each stage had a particular look and feel to it, and in my mind there were things to watch for. What seemed positive in early stages often wasn’t and to my mind the biggest risk areas were always when people were too friendly.

Intro meeting

The intro meeting was often either a screen by an analyst or a Partner meeting depending on the intro. Warm intros tended to be Partners whereas analysts were the colder approaches (or introductions outside of a startup network). We tended to fall down unless we were speaking to a principal investor or partner first. I’d be hesitant about taking purely analyst calls as a result as a founder (I could be wrong in this perception, it was just how it played out a few times).

The intro meeting typically focused on your story and the business. It was generally quite casual (we went in expecting to pitch and often it was conversational). The most disarming thing here is every VC is super positive with you and on your business. On reflection this is super jarring (two of the VCs were a little more direct with us sooner about issues) and I would have preferred them to set my expectations lower at this meeting. That said, you can see the benefit in keeping super positive - it’s a low risk game theory strategy.

There are a few things I would be asking at this stage to assess for yourself a little better:

• Which partner in your org has the mandate around our industry?
• What is the thesis your fund invests around and does it match our business?
• What is your IC process like?

Partner meeting

Generally speaking from here you’ll meet a partner who will be your “advocate” through the process. A few things I noticed at this stage which was important. The partner meeting they would have almost certainly done their homework on you - at this stage, they’ll know who you are, what you’re about and likely have a (rough) sense of some of the issues. My feeling each time I got to these Partner meetings it was a bit of go/no-go. Certainly the Partners were the hardest meetings as they gave you the least to read and it felt like they were looking for the no versus the intro meeting.

“Getting to conviction” was the common phrase used. Conviction basically means total and utter belief in the product and the vision, alongside the progress. These Partners see hundreds of amazing people a week, so honestly you need to view it as a very noisy space. They don’t have heaps of time for you and that can be a little disconcerting.

Broadly I felt we should have done better diligence on these meetings. In particular I think our focus should have been heavily on what prevents conviction and similar, and worked with our initial contact to solidify that view. That said most VC contacts didn’t give useful feedback in this area and positioned the meetings as nice intro meetings (they definitely aren’t and don’t fall for that!), and I suspect this is to minimise the preparedness of answers.

Some of the things I thought we could have improved in this area, and asked better:

• What type of companies do you like to invest in?
• What’s been your biggest failure as an investment and what did it teach you?
• What are the biggest things that prevent conviction when you meet a company?
• What is your fund’s ownership target in companies?

IC meeting

We went to one IC and boy, it was stressful. We had a really provocative questioner from one side of the room. I think the way it was explained to me is “asking to understand rather than provoke” so importantly, it’s best to keep your cool (I didn’t always do that well here - the business is my baby after all).

The IC will be basically the whole fund. From what I could see, there will be your advocates (the two pushing the deal for you) and then others who are again looking for a reason not to go ahead.

One thing to note here is your advocate at this stage (partner and their team) will be awesome. They will have prepped the room, worked on your behalf and they’ll want the deal to happen by that stage. That’s super important mostly as you can wait for them to chat to you, and to advocate - in essence you’ve got friends in the room. Don’t forget that.

We had two amazing advocates guide us through (they know who they are) and they were truly great reassurances in the room. So at this stage don’t be too nervous and back yourself.

Finally, don’t react to probing questions. I did a little but ultimately I shouldn’t have. Probing questions are good things to happen as it shows engagement, belief and interest.

Term sheet

Okay so this was a big one. We got word we’d get a Term Sheet, and we waited for one to appear. And waited. And waited. The quick view here - waiting is anxiety inducing, but don’t stress! Term Sheets have quite a few hurdles to get by and you should be okay waiting a little bit.

Seeing the Term Sheet I reacted badly because of the Terms inside. I didn’t realise they were all up for negotiation and I should have! That created a more adversarial process, which in turn created debates over everything. Big hint: don’t do that.

When the Term Sheet arrives you should do the following:

• Consider it. The valuation is likely lower than you expect, but don’t fret. The Terms are more important.
• Most Terms themselves are up for negotiation. Expect the VC to go hard to protect themselves and pare it back.
• Have a meeting to discuss Terms and be open about what makes you uncomfortable. That would have been best for us and it’ll be best for you as well speaking calmly and clearly. (We didn’t do this well as some lovely VCs can attest!)

So how did it play out for me?

The process ran much like the above for me, but played out in batches. We had an initial 5 target strategy on VCs we would be happy with. We met in batches like this:

1. Met 1 VC super early who we’d spoken to and liked a lot.
2. Met with 2 VCs we weren’t sure on.
3. Met with 3 VCs we liked and were on our list.
4. We got a term sheet from one of these.
5. Met with 2 more VCs we liked.
6. Met 3 or so VCs who contacted us.

All in all, we met quite a few. We got a Term Sheet!

The Term Sheet I go into detail in my VC review, but I think the broad strokes were the terms really spooked us. On reflection I don’t think there was any malice in those terms, they were just things to negotiate on around the valuation as I think they knew we were quite diverged on everything. Nevertheless it made it feel confrontational and as a founder that put me off kilter a bit in the process (reacting in ways I shouldn’t have).

From there, we changed our approach. We essentially told VCs what we would want and accept and the terms in which we’d look at it. Most VCs were less receptive early on as a result of this (we put a Term Sheet + valuations back to them), and it gave them a quicker reason to say no. I wouldn’t do this again if I had my time capital raising.

What did the VCs actually say?

You can take a look at the VCs anonymised here. Mostly, I’d say the experience was awesome and VCs gave a lot of amazing feedback. I made some big mistakes and learned a lot. You can see my Notion notes on every VC below (I encourage you to read all of them - it will give you a sense of how different VCs behave):

https://like-addition-a1f.notion.site/VC-analysis-1-b09c3c7abbf04679a2c88d1c75130526

P.S - if you’re a VC I’m happy to tell you who you were if you’d like.

How it played out

After 8 rounds of meetings I was basically exhausted and done with the process. It honestly left me feeling deflated. With our cash position improving we set out to raise $2m in a private round, receiving $2.4m in funding in the end. We had a UK fund who I knew well who led the round.

There were a few drivers of our improved cash position, some of which were just winning Customer contracts. That put us in a better and stronger financial position and in some regards was why we were very hesitant to do a deal with heavy dilution on the Term Sheet we got offered. The VC who offered it were great and we have a lot of time for them, but for us, we felt that our business was solid enough and didn’t need lots of runway to get to profitability.

Financials may not matter as much to VC but they did to our decision making

We had something better, profits, which allowed us to make decisions differently. Going into a hell of an uncertain environment I think we’re somewhat relieved to have a tight group of investors who are aligned to a profitable company quickly over rapid, market dominating growth. We personally aren’t sure that model is a sustainable way to build a business in an extremely volatile capital market.

What’s next?

We raised our capital which will enable us to drive self service and automated insights / do a bunch of awesome product work. Importantly, it also allows us to grow without losing heaps of money. For us now the goal is quite simple - we want to build a really profitable company going into economic headwinds. That will give us options and ways to continue to build towards our vision.

We’ll be hiring amazing Product Marketers, Designers, Managers and Full Stack Engineers and I’d always love to hear from amazing people to chat through our vision. If this resonated, please reach out to me at henry at mutiny dot group.