Fundraising Field Guide: A Startup Founder's Handbook

Fundraising Field Guide by Carlos Eduardo EspinalCopyright Carlos Eduardo Espinal. 2015.Published by Reedsy Ltd., London, UK.All rights reserved. No part of this publication may be reproduced, stored, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without written permission from the publisher. It is illegal to copy this book, post it to a website, or distribute it by any others means without permission.First Edition.ISBN: 978-1-78613-003-7Donation CausesThis book was written on a donation model. I invite you to review the charities Ive selected, all of which are doing great work, and make a donation that will support their eforts. Im counting on your generosity to jointly become a catalyst for change.You can fnd the list of charities and the links to donate on the books website here:http://www.fundraisingfeldguide.com/7ContentsDonation Causes5Foreword10Introduction11Planning for Fundraising13Preface: The Tao of Fundraising14The Fundraising Mindset15Timing Matters19 Geography Matters20Preparing your Company for Fundraising21 Setting the Right Milestones22Fundraising before a key milestone24Fundraising after a key milestone25Fundraising Challenge: Geography28Keeping Milestone Optionality29 How Much Money Should I Raise?32Your Fundraising Materials43Keeping Materials Lean45Your One-Pager47Your Pitch Deck48 Your Financial Assumptions Model54Your Pitch55 Your Cap Table56The Fundraising Equation578The Option Pool58The Fundraising Process61The Cycle of Fundraising62The Human Element69The Best Way to Reach Investors70Invest in Yourself72The Search for an Ofer75What to Look for in an Investor76 Creating and Managing Your Pipeline79 The Typical Institutional VC Investment Process81 How does an investor review your team?84 How does an investor review your fnancial plan?100Understanding your Deal107Deal Structuring108Deciphering an Equity Term Sheet109Deciphering Convertible Notes111 Deciphering Crowdfunding121 Syndicates127Negotiations128 The Valuation of Your Company129How does an estimated exit value for your company lead to a valuation?134 Valuation Discrepancies Around the World138 A Note on Avoiding Tranched Investments140 Avoiding Toxic Rounds1439 Managing the Legal Process149Where Should I Incorporate?150 The Importance of Good Legal Counsel153 Managing the Flow of Documents155 The Closing & Funds Transfer159Conclusion161Appendix: How This Book Was Made162Donation Causes164Acknowledgements165About the Author16610ForewordAsfounders,weveexperiencedthedifficultiesofthe fundraising process frst-hand.Asinvestors,havingparticipatedinmorethanone hundreddealsviaTheAcceleratorGroup(TAG)andIndex Ventures,wehaveexperiencedclose-upmanyofthe challengesthatearly-stagefoundersgothrough,and observedmanyofthepatternsofwhatittakestosucceed as well.The purpose of this book is to help founders streamline theirlearningprocessofhowfundraisingworks,and whilefundraisingisntrocketscience,itdoesinvolveits ownvocabulary,reliesheavilyonrelationships,careful preparation, courage and lots of patience.ThroughhisexperienceatSeedcampandhisprevious role as a venture capitalist (VC), Carlos has highlighted many of the important points to consider while fundraising.Robin and Saul Klein11IntroductionSince 2007, Ive been fortunate to participate and invest in overonehundredandfftystartupjourneysateverystage of development, from generating an idea to fnding product market ft to raising investor money, and fnally to scaling operationsandexits.Overthissametimeperiod,Ive reviewed hundreds of cap tables, countless fnancial growth plans, hiring plans, and lived through some tough emotional discussions with founders ranging from their very personal health & family issues to intra-founder disputes due to the stress of startup life.Thesecumulativeexperienceshavegivenmeacertain viewpointonstartuplifeaperspectiveonthebravery and courage many founders have when embarking on their entrepreneurial journeys, and the seemingly uncertain and almostrandomwaygrowtheventscanunfoldduringthe lifetime of a company. Many of the chapters in this book are based on real-life stories of founders Ive worked with, and how they overcame key challenges in various steps of their journey. The chapters originally started as posts on my blog, The Drawing Board1, created in an attempt to help new founders avoid the pitfalls I witnessed others struggle through. I approach the efort of observing and reproducing the lessonsIvelearnedovertheyearswiththehumilityofa student. 1 http://www.thedrawingboard.me/12Ibelievethebeginnersmindsetistherightone, becauseIbelieveitsimportanttoemphasizetheever-learningnaturenecessarytotacklestartuplifeduetoits constantlyandrapidlyevolvingnature.Idontthinkitis possible for any one way or framework to contain the myriad of challenges a founder encounters during their journey. As such, I encourage you to approach what Ive written in this bookwiththesamementality:adirection,ifyouwill,but notafxedone.ThereissomuchIhavelearnedfromthe founders Ive worked with; I hope you fnd this book as useful andinterestingasmyworkwiththemhasbeen.Itstheir stories that enabled this book to happen.With that in mind, I also encourage you to review what yougetoutofthisbookwithotherfounders,becauseitis in the spirit of communal discussion that Ive seen the best ideas surface.131 Planning for Fundraising14Fundraising Field GuidePreface: The Tao of FundraisingThere is a Taoist story of an old farmer who had worked his crops for many years. One day his only horse ran away. Upon hearing the news, hisneighborscametosharehissorrow.Suchbadluck, they said. The farmer replied, Good news, bad newsjust the same.Thenextmorningthehorsereturned,bringingwithit threeotherwildhorses.Howwonderful,theneighbors exclaimed. Good news, bad newsjust the same, replied the old man.Thefollowingday,thefarmerssontriedtorideone oftheuntamedhorses,wasthrown,andbrokehisleg. Theneighborsagaincametoofertheirsympathiesathis misfortune. Good news, bad newsjust the same, came the familiar reply.The day after that, military ofcials came to the village to draft young men into the army. Seeing that the farmers sonslegwasbroken,theypassedhimby.Theneighbors congratulated the farmer on how well things had turned out.Goodnews,badnews,saidthefarmer,justthe same. All fundraising eforts and meetings have an element of good news and bad news. How you deal with them and learn from them is what really matters.15Planning for FundraisingThe Fundraising MindsetFundraisingisnoteasy.Infact,itisoneofthemost frustrating and time-draining activities you as a founder will have to do as part of your companys growth strategy. Early on, when you are a small team, fundraising eforts will likely consume far more time than youd like them to, but there is unfortunately no shortcut to the process.Unlessyouarereallyluckyandinvestorscometo you,fundraisingwilllikelyinvolvetakingmanymeetings withinvestorsofallkinds,bothgoodandbad,beforeyou ultimatelysucceedinfndingsomeonewhobelievesin you. You will meet many types of investors along the way, including:Investorswhodoubtyouasafounder/CEO,andyour ability to executeInvestors who are meeting with you because they want to invest in your competitorInvestors who dont have the money to invest but want to appear active in the ecosystemInvestors who will want every inch of detail about what you will be doing for the next fve years, when you both knowyourprojectionswillbespeculativeatbestand hogwash at worstInvestors who dont get what you do at all, but will have anopinionaboutyourproductbecausetheirchildor spouse has a viewInvestorswhoareamazingandgiveyouinsanely 16Fundraising Field Guidepoignantadvice,buttheywouldwanttoseemore traction before they can consider investingInvestorswhoprovideyouwithgreatfeedbackand wouldhelpyougreatlyiftheywereinvolved,butwill only invest if someone else leads the roundAnd then there is the one investor who ultimately believes in you and backs you. Thats all it takes. Just one.Theearlierthestageyourcompanyisin,themore successfulfundraisingisaboutyourabilitytodevelop personalrelationshipsandarticulateyourambitionsasa coherent story. Early on, as much as some investors will want to know your projectednumbers (revenues, traction,etc.), theconversationwillalwayscomebacktoyourinherent abilitiesandvisionasafoundersincethereslittleelseto go on. As such, fundraising meetings in the early phases of companydevelopmenthavetwoprimaryfunctions:They allowtheinvestortoseehowthefoundersthinkthrough their assumptions and if they can work together, and for the founders to assess whether they think the investor will add value to their startup. This quirky dynamic of imperfect information early on leads to the frequent use of an apt analogy that describes the fundraising process: dating. As funny as it may seem, there are more similarities than diferences. In fundraising as in datingYou have to be willing to put yourself out there to meet anyone in the frst place Itsanumbersgame.Youhavetomeetmanypeople, 17Planning for Fundraisingeitherin-personatnetworkingeventsorparties,or online Rejections tend to hurt quite a bit personallyConnections usually happen in the least likely of places and are strongest when they come through a trusted 3rd partyBeing a good storyteller gets people to laugh, open up, and remember youChemistry mattersSometimes its just plain luckbeing at the right place at the right timeThe better you prepare yourself, the better your odds getBeingtooeagertogetbacktosomeoneorwaitingtoo long can end things prematurelyYouhavetogoonseveraldateswithseveralpeople before you ultimately feel someone is the right one for youCase in point: one founder (lets call him Brino), who I have thepleasureofworkingwithtothisday,wasrejected88 times before fnally getting a yes from an investor. Reasons fornosrangedfromtheusualthiswonteverbeabig thingtotheressomeonealreadydoingthis.When Brinohadonemonthsworthofcashleftinhisaccount, he took an expensive fight and car ride to another country tomeetwithaninvestorwho,uponthefoundersarrival, admitted to having entirely forgotten about their meeting. The investor invited Brino to take a ride with him to his next 18Fundraising Field Guidemeeting, and it was during this thirty-minute car ride that Brino fnally got his yes.Developingafundraisingmindsetcentersaroundfour core ideas:1.Fundraisingisaprocessthattakestimeandisrarely quickorpainless.Theearlieryoustartplanningyour process and developing relationships, the better of you will be, and the more likely you are to avoid fundraising in desperation mode.2.You have to embrace rejection as part of the process and nottakeitpersonally.Rejectionwillhappen,forgood reasons,dumbreasons,andmanytimes,forreasons that will remain forever a mystery.3.Everymeetingisaformofpracticethatmakesyou better for the next meeting; the success or failure of one meeting is never the end of your story, just a step along the way.4.Analyzingwhatwassaidduringyourmeetingsand learninghowtoimproveonyourmistakesisthe mostcrucialstepinfndingtherightinvestormore quickly.Justlikeyouanalyzeyourcompanysmetrics, keeptrackofhowpeopleconnectedwithyourpitch; writedownallthequestionsyouwereasked(avery good way of ascertaining which areas of your pitch are stillambiguous),andmakesureyoufollowuponany information requests.Sinceyouwilllikelyneverknowwhere,whenorhowyou willmeetyourfutureinvestor,makesureyouarealways 19Planning for Fundraisingpracticing developing relationships and looking for possible connections for your company. Opportunities will sometimes comefromthemostrandomencounters.Inanotherstory ofunexpectedoutcomes,afounderwasdiscussingsome elementsofhisbusinesswithacolleaguewhiletakinga ride in the London tube. The person next to them identifed himself as an investor and said, Pitch me in one stop, and if its good, Ill give you my contact details. The founder got a follow-up meeting out of the exchange.Timing MattersBecausefundraisingisintrinsicallyaprocessofbuilding therightrelationships,andgood-qualityrelationships taketimetodevelop,dontleavefundraisingforthelast minute.Theprocessfromwhenyoustarttakingmeetings untilclosecantakeuptoeightmonthsforanearly-stage round, and can take an average of six months for subsequent rounds. Naturally, depending on how frothy or exciting themarketyouliveinis,andhowexperiencedyouareat fundraising, these numbers will vary.Keepingyourcompanyfnancedisntsomethingyou should procrastinate on. If you wait until youve nearly run out of cash youll be in desperation mode and it will make the process considerably more stressful and more difcult. Dont defer kicking of your fundraising process on the basis thatyouarejustwaitingtofnalizewhatyoufeelisgoing to be the killer feature. Your idea is of no use to you or your team if you run out of money before making it a reality. As youll read later in the chapter on milestones, there is a way to address the fear of not having your product at the level you want it to be when speaking to investors.20Fundraising Field Guide Geography MattersOnefnalpointtotouchuponbeforemovingontothe fundraisingprocessitselfisthatgeographymatterswhen raising funds.Asmuchaswedalllikefortheretobe100percent mobilityofcapitalglobally,thereisnt.Thereareplenty ofamazingideasaroundtheworld,andperfectlycapable foundersaswell,butthebulkoftheworldsventureand angel capital is still very much aggregated around key hubs such as California, New York, Boston, London, Berlin, Paris, Israel and a select few others in Asia. Thefactremainsthatifyouarebasedinanemerging economy,itllbeharder tofundraise thanifyouarebased in a hub; however, that should not deter you from building somethingmeaningful.Itisthejobofcapitaltoseekout amazing ideasjust make sure yours is one worth fnding, and that youre ready when the opportunity presents itself. 212Preparing your Company for Fundraising22Fundraising Field GuideNB: Throughout this book, I will use examples that include numbers/fgures that arent designed to be recommendations orrepresentationsofwhatsmarketforinvestorsor founderstoexpect.Aswewillcoverinthesectionon milestones and valuations, so much depends on the type of businessyouarecreating,whereyouarefundraising,and thecurrentmacro-economicclimate.Additionally,this bookdoesnotsetouttocomprehensivelycoverallforms offundraisinginstruments,whichcanincludetraditional debt instrumentsjust to name one. Rather, it focuses on fnancingstypicalofearly-stage,high-growthcompanies, andassuch,coversmainlyequityandconvertiblenote fnancings. Setting the Right MilestonesWhileyourcompanysjourneywillbeaseriesofexpected and unexpected events (hopefully more good than bad) over aperiodoftime,investorswilltypicallywanttohearyour projections as a coherent linear strategy. Better investors know that early-stage startups are fraught with uncertainty and thus will only use your stated strategy as a starting and discussionpoint;investorsthatcomefromotherareasof fnancing, such as debt or real-estate, will likely give more weight to your strategy than it deserves early on.Therefore,thefrststepinbeingabletocommunicate your fundraising needs to an investor is to determine what your cash requirements are over time. The easiest way to do this is by visualizing your companys cash spend as a series of projected milestones.Determiningprojectedmilestonesforyourcompany 23Preparing your Company for Fundraisingwillservebothtodetermineyourfnancingneeds,andto startaconversationbetweenfounders.Youwillfgureout whatshouldhappenwhen,andhowyoushoulduseyour resources.Tobeprecise,Iamdefningamilestoneasa futuremarkerorquantifiableachievementwithin your companys stated growth trajectory, not just a major accomplishment at some vague future time. Essentially, you can think of a milestone as a singular point on the companys projected timeline. Milestones usually mark defning points in a companys history, such as a key hire, a product launch, acertainnumber of users, aretention rate,frst revenues, frst proft, etc.Unlike the typical fnancial goal of any startup (i.e., the creation of a successful, cash-self-sufcient company that provides tangible value to its customers and is foated on the public market), milestones are specifc eventsa subset of that goal. Defningmilestonesisimportantforvariousreasons. By being aware of where milestones exist in your companys futuredevelopment,youcanbebetterpreparedforfuture fundraising. Fundraising of the tail end (or right before) a meaningful milestone will put you on stronger footing when discussing with potential investors.Forexample,letslookatthefollowingmilestones duringafctitiouscompanysfrstyear.Youshouldnot assume these are good time markers. This timeline is purely for illustration purposes.Month 3: Launch Minimum Viable Product (MVP).Month 5: Launch Private Beta.24Fundraising Field GuideMonth 8: Key Hire (marketing person).Month 11: Public Product Launch.Month12:Achievexpercentdailygrowthratein subscribers.If you know how much money is needed, in aggregate, at each point in the timeline, youll also know how much you needtoraisetoachieveeachtarget.Additionally,youcan start determining which milestone will be most productive forfundraisingforwhichinvestor(differentinvestors havediferentviewsonwhatdeterminesprogressina startup). For example, a functional prototype can be a hugely validatingachievementforanearly-stageinvestorevenif there arent any customers yet.Thechallengetoanearly-stageinvestoristobalance investing in your startup before you are too far along in your progress (and thus merit a higher valuation) and coming in too early in your journey (and risk losing it all). All investors strivetominimizeriskwithoutlosingtheopportunityto invest in a hot company. Investors are constantly trying to fnd the least risky point at which to invest. As such, some of the best times for a company to fundraise are either right beforeorrightafterthecompletionofakeymilestone, but before so much time passes that the recently achieved milestone is no longer impressive. Fundraising before a key milestoneFirst, lets look at the psychology of investing right before a key milestone is completed.25Preparing your Company for FundraisingIfaninvestorfeelsconfdentthatthecompanyison tracktohititsmilestone,theyalsoknowthatoncethe company succeeds, it will inherently be more valuable to the outside market because it has been meaningfully de-risked bysomeamount.Assuch,theinvestorwantstogetinon the deal right before launch for example, so that she can get a specifc valuation while the company is still a little bit riskier, but not overly so.Whilethismakesobvioussense,onlycompaniesthat instill a strong confdence and fear of missing out (FOMO) in potential investors regarding the companys growth post-milestone completion can get investors rushing to get this kindofdealdone.Ifyoucanmakethishappenforyour company,youreinagreatposition,becausegenerally,a product-launchmilestoneiseasiertocontrolthansay,a specifc user growth rate after your products launch.Fundraising after a key milestoneNowletslookatthepsychologyofinvestingafterakey milestone is completed.Ifaninvestorfeelslikehewantstostall,toseeifthe milestone is completed or the number of users you acquire hits a specifed fgure, then he is trying to efectively de-risk the investment before committing cash. An investor knows that by playing his cards this way, not only will he have de-riskedtheinvestmentsomewhat,butotherinvestorswill also be more likely to co-fund your company alongside him. In efect, the post-milestone investor wants to get in quickly before the company is too expensive for him to invest in, but is only willing to move when the right level of de-risking 26Fundraising Field Guidehas occurred.The art of selecting the right moment for fundraising is amatterofdeterminingwhichkeymilestonestofocuson and how to communicate them during your meetings with potential investors.Lets look more closely at four key types of milestones. Withinthesefourcategories,thereareafairnumberof potentialadditionalmilestones.Youllhavetodetermine whichmilestonesaremostmeaningfultoyourcompany, and your potential investors.The Four Types of Milestones1. Human ResourcesA frst milestone could be hiring key people that will make a strong impact on your organization (a super-hot marketing person, for example).Examples include: Proof that you can work together as a team (usually historical evidence), or proof that the initial team is able to attract talent. Key hires are C- and VP- level professionalswhowilldriveyourgrowthfurther.Every startup will eventually need a functioning management team consistingofCEO,CTO,COO,VPSales,VPMarketing,and possibly some others, depending on what youre building.2.Product:Productlaunchesvs.incrementalversion releasesExamplesinclude:Proofthatyoucanbuildsomething, i.e.workingprototype;launchofamajorenablerfora 27Preparing your Company for Fundraisingstep-changeincustomeracquisition.Notethatthereisa diference between milestones that you might articulate to aninvestorandthosethatareonyourproductroadmap. Dont confuse the two because they arent the same thing.3. Market: Market validation (frst customers, frst paying customers, etc.)Examplesinclude:Proofthatyoucantalktoaudiences (100,000, 1 million or 10 million users); proof that the product or service is useful to someone (frst users and clients); proof that there is market ($1 million revenue annually); proof that you can scale ($10 million revenue annually); proof that the market is big! ($25 million revenue annually and beyond).4.Funding:Moneybeingcommittedtoaroundthatthe investor in question can lead or participate inExamples include: Proof that you can talk to investors (every fnancing round, even small ones); proof that the ecosystem agrees with your ideas (bringing respected industry advisors or partnerships on board); proof that you can manage your fnances (cash fow positive operation).Just keep in mind that milestones are all about moving fromonestageofrisktothenext.Planyourfundraising strategytoensureyouhaveampletimetocontrolwhich milestonesyourcompanyreachesandwhen.Besureyour fundraisingstrategyusesthesemilestonestoyourbeneft without getting caught between them, stranded for cash.As a general rule, you should try to raise as much money asyoucanandinanycaseatleastenoughmoneyforyou to accomplish your next meaningful milestone (with some 28Fundraising Field Guideadditional bufer funds to help you spend time fundraising afteryourmilestoneandavoiddesperationmode). Thismeansyoushouldlookatavarietyofpointsacross yourcompanystimelinetoseewhichwillbemeaningful milestones for fundraising purposes.Fundraising Challenge: GeographyAnoldparabletellsofamanwhowastraveling.Hecame upon a farmer working in his feld and asked him what the people in the next village were like. The farmer asked, What werethepeoplelikeinthelastvillageyouvisited?The man responded, They were kind, friendly, generous, great people. Youll fnd the people in the next village are the same, said the farmer.Anothermanwhowastravelingtothesamevillage came up to the same farmer later on and asked him what the people in the next village were like. Again the farmer asked, What were the people like in the last village you visited? Thesecondmanresponded,Theywererude,unfriendly, dishonest people. Youll fnd the people in the next village are the same, said the farmer.As we covered earlier, you will have diferent fundraising challengesdependingonthemixofindividualand institutional investors available in your home country. In a countrywherethefundingcomesmostlyfromindividuals (suchasprofessionalangelinvestorsandhigh-net-worth individuals), you will likely not be able to raise substantially large rounds; in countries where you have access to organized groupsofindividuals,youllhaveaccesstolargerrounds; and in countries where you have access to many institutional 29Preparing your Company for Fundraisinginvestors, you will likely be able to raise the largest rounds. If you go to the statistics section of AngelLists website2, for example, you can compare the average fundraising amounts forcompaniesfromdiferentgeographiesandgetsome insight into this disparity.If you want to go for really really big sums, you should go to the geography where you can get that meaningful amount (otherwise you might underfund your company for what you need to achieve), but keep in mind that changing locales isnt as easy as packing up your bags and moving. In key hubs, the costs of running startups are going to be higher, so you will need to factor that into your plan. Issues that will increase yourcostsincludeimmigrationchallenges(andlawyers), hiring star development talent, and ofce real estate.Identifying milestones for your companys development hasamyriadofbeneftsasidefromthoseassociatedwith fundraising. First, planning milestones allows you to focus on what you will be working on and drive hard to achieve it. Second, the process of identifying and planning milestones forces you to question when and in what order you and your teamshouldtrytoexecutesomething.Lastly,havingyour milestoneslaidoutisusefulfortyingtogetherwhatyou needtoaccomplishwithhowmuchmoneyitwilltaketo get there, and thus fundraise accordingly.Keeping Milestone OptionalityDuring your milestone defnition exercise with your founders, consider doing what I call keeping milestone optionality. 2 http://www.angel.co30Fundraising Field GuideTheprincipleisverysimple:evenasyouplanyour companysfuturegrowthandassociatedcashneeds,you cant lose sight of the fact that youre a nimble startupnot a large corporation that has to report to analysts and public marketshareholders.Yournimblenessisyourstrength. Asmentionedearlier,astartupsgrowthplanisntlinear (even if sometimes you need to communicate it that way); itsmorelikeaseriesofzig-zagstowardsagoal.Assuch, while it is useful to forecast your milestones so that you have aplanandunderstandyourcashneeds,itisalsousefulto look at that plan with one eye, while the other eye looks out for actions that might be more benefcial to your company thanwhatyouhadoriginallyenvisagedoragreedtowith existing shareholders.Inalaterchapter,wewillcoverinmoredetailthe reasons why you should try to avoid tranched investments (investmentsbrokenoutintopartsandreleasedbasedon pre-determined conditions), but lets briefy cover why here. If you consider a tranche as a glorifed milestone, adhering dogmaticallytoitearlyoncouldhaveanegativeimpact. Why?Well,becauseendeavoringtomeetthescheduled conditionsmayconstrainyourcompanysgrowthoptions, evenifmidwaythroughexecutingyourstatedstrategyit turns out that it was a bad idea for the company to have the goal agreed upon for the release of the tranche. For example, imagine if your fnancial plan had in place amonetizationstrategy(andassociatedrevenuestream) kicking of in Month Six of your operations. Month Six comesalong,andwell,uptakeispoorandyourrevenues are not coming in as expected. Additionally, you have some chatswithyourcustomersandfndoutthatactually,the 31Preparing your Company for Fundraisingvaluetheyregettingfromyourproductismostlyaround itsemergingnetworkefect;becausethenetworkisstill small,yourearlymonetizationisstifingthatvaluesince thebarrierfornewuserstosignupisstillhigh,andthus those most likely to pay are reluctant to do so.If you (or your investors) adhere rigidly to your original plan just for the sake of keeping to the plan, youll kill your companys potential long-term value quite quickly; but by stayingnimbleandadaptingyourmilestonestowhatyou thinkshouldbethenewdirection,youmightactuallybe betterofthanyouwouldhavebeenfollowingtheinitial plan. Naturally,thisoptionalitycomesatacost,butthats okay, as long as you know how things are changing. A goal-shiftmeansyouroriginalplanwillchange,thusyourcash burnwillchange,andyourgoalsandthekeyperformance indicators(KPIs)themarkersthatshowyourcompanys success and typically the markers for some tranches will change as well.Goodearly-stageinvestors(particularlythosewho investinpre-product-marketftcompanies)knowthat thiskindofchangemidwaythroughtheirfundingisa possibilityandshouldbebackingyouinyourabilityto make these difcult calls, even if it means a deviation from theoriginalplan.However,youshouldbemindfulthat therearemanyinvestorsouttherewho,forsomereason, still believe frmly in the adherence to a stated plan (likely becauseinotherindustries,CEOsareheldaccountablefar more for these). If you can, avoid taking money from these kinds of investors. At the very early stages in a companys 32Fundraising Field Guidedevelopment,particularlyduringthepre-product-market ftphase,backersshouldinvestinyouforyourabilityto adapt to changing and evolving circumstances, not in your ability to predict the future eighteen months in advance or stick to a plan that clearly isnt working.Of course, this isnt a recommendation to throw out all formsofplanning;itstillhelpstocreateamilestoneplan based around your hypothesis of growth (and relevant KPIs) andcashneeds,becauseofcourseyoucantbechanging strategies every month and you need to keep an eye on cash burn.Atthesametime,youshouldconstantlymonitor whetheranothermilestoneoptionalityplayiscomingup. If you do fnd, however, that you are constantly questioning your original hypothesis for growth, perhaps there is a bigger problemyouarefacing(suchasgoodinternalprocesses). Bykeepinganeyeopenformilestoneoptionalityevents, you might fare better than you would if you exercised uber-disciplinetoarigidplanthatwasbuiltbeforeyoulearned manynewthingsaboutyourcustomersandhowthey interact with your product.Asageneralrule,planforthefutureandidentifykey milestonestogrowtowards,butseektokeepmilestone optionality, particularly at a pre-product-market ft stage. How Much Money Should I Raise?Asmentionedearlier,raisingmoneyforyourstartup takestime,distractsyoufromdevelopingyourproduct,is fraughtwithemotionalupsanddowns,andunfortunately doesnt have a guaranteed outcome to compensate for these negatives.Frankly,manyfounderswouldrathergojump 33Preparing your Company for Fundraisingintoanicylakethantakeanotherfundraisingmeeting where they arent sure what they should say to convince an already-hesitant investor to open their purse strings. Partofthatanxietycomesfromnotknowingexactly what investors have in mind when evaluating the company, particularly when it comes to cash needs.So naturally, the question becomes: How much money should I raise?The short version of the answer is: as much as you can. But just to say weve covered all our bases, lets look at the extremes. When is raising as much as you can potentially harmful? Whileraisingasmuchmoneyaspossibleallatonce sounds great, you cant operate under the assumption that moremoneymeansfewerproblemstoworryaboutearly on.Withalargeamountofmoneyearlyoncomesseveral potential problems:1.More investment terms and more due diligence. It is probablyafairstatementtosaythatthemoremoney involved,themorecontrolprovisionsaninvestorwill want, as well as more diligence to make sure their money isnt going to be misused.2.A high implied post-money valuation3 or alternatively, higher dilution up front. In order to accommodate a large round, investors need to adjust your valuation accordingly if they dont want to wash you and your founders out. For example, if your business is objectively worth $1 million, 3 http://en.wikipedia.org/wiki/Post-money_valuation34Fundraising Field Guidebut you are raising $2 million, unless the investor plans on owning 66 percent of the company after investment, theyneedtoadjustthevaluationupward.Havingan artifciallyhighervaluationprematurelycanputalot ofstrainonyourstartup:ifthingsdontgowelland another round of fundraising is needed later on, it is very likelythatthesubsequentroundwillbeadown-round (when you take a negative hit to your valuation), or other new investors passing on the deal in the future because it is too expensive.3.A propensity to misuse easy money. You could argue this point from a psychological perspective if you wanted to, but sufce to say, I know many VCs who believe over-funding a company leads to fnancial laxity, lack of focus, and overspending by the management team. Perhaps it is lingering fear over the hey-days of the late 90s, when parties were rampant and everyone got an Aeron chair. But the general fear with overfunding a company is that its founders will be tempted to expand faster than they canabsorbemployeesintotheculture,integratenew systems, or meet real-estate needs without substantially disrupting efcient operations.4.A last one is the medias reaction (positive or negative) tohowmuchmoneyyouveraisedrelativetowhat youhaveachieved.Thisoneishardtoreallyquantify and happens only to very few startups. In 2012, a serial entrepreneurraised$41millionoutofthestarting blocksforacompanycalledColor.Unfortunately, theappwentnowhereanddidntsatisfythepromise expected of it for that kind of money, making it, at the time, the source of many jokes about the perils of raising 35Preparing your Company for Fundraisingtoomuchmoneyearlyon(Coloreventuallyshutdown a year after its re-launch). Although clearly a very rare case,itdemonstrateswhatthetoomuchefectcan cause.In2015,thecaseofthestartupcalledSecret shuttingdownafterhavingraised$35millionandthe foundershavingcashedoutaportionofthat,alsoleft investors with a bad taste.Now lets review the opposite extreme: under-funding your company. One of the risks you run when being willing to take an amount of cash you know is insufcient for you to achieve any one of your meaningful milestones is that you will likely not be able to demonstrate any substantial progress before you need to go out fundraising again, then fundraising in desperation mode. While there are exceptions (youre frststartingoutandjusttryingtovalidatehypothesis,or youre bridging your companys fundraising by raising a little cash to get you to the next major milestone), you should avoid raising too little money: you will very likely put yourself in a weak fundraising position.Okay, I get ittoo much or too little money can be bad. So how much money is the right amount of money?Letslookatthisquestionfromadiferentpointof view.Aswewillcoverlateronduringthesectiononhow aninvestorevaluatesyourfnancialplan,aninvestormay notnecessarilyknowtheexactfguresyourbusinesswill need to grow to its next major milestone. Instead, to some extent, an investor will rely on your ability to communicate yourfnancialplanandreviewyourcashneedsrelativeto your stated goals. Thus,itshouldstarttobecomeapparentwhyitisso 36Fundraising Field Guideimportant for you to have a solid understanding of your cash needs. Your hypotheses will become the foundations for your discussions with investors.Alongside the timeline of milestones you and your co-founders will establish, youll develop a parallel schedule of cashmilestones.Thecashmilestonetimelinerepresents howmuchmoney,inaggregate,youwillhavespentto achieveeachmilestoneyousetouttoaccomplishinyour strategic plan. Referringbacktomyexamplesofmilestonesina companysfrstyear,wemightfndacashtimelinethat lookssomethinglikethis(Ivepurposelyputinfctitious numbers;donotassumethesearerecommendationsor actual numbers):Month 6 $60,000Month 8 $80,000Month 10 $100,000Month 11 $110,000Month 12 $120,000Month 18 $240,000Ive used a $10,000 cash burn on this example up to the endofYear1,thenstartinginYear2,Iveuseda$20,000 monthly cash burn. Thinking this part through is critical; if you raise less money than necessary for a major milestone, youll likely fall short in cash at a time when your company doesnt have anything outstanding to show for an investor to be impressed.37Preparing your Company for FundraisingMonthly Cash Burn, or the amount of money you burn through each month in aggregate, is a key fgure to know before meeting any investor. If you dont know what your monthlycashburnis,youreintrouble,asyouwilllikely struggletohaveagooddialogueaboutcashneedsand representative accomplishments.Letsassumeyouvecalculatedyouridealcashneeds andtheamountseemsabithigherthanwhatyourlocal investorsarewillingtoofer.Yourelikelyaskingyourself the following questions: IfIaskfortheamountItrulyneed,butthatisabovewhat investors are willing to give, doesnt it automatically set me up for a no?If I ask for a smaller amount, wont investors know that I need more money than what Im asking for?If I ask for too little, will I sound like I dont know what Im doing?Whatsthebestwaytokickoftheconversationwithan investor in a non-hub market about my desire to raise more capital if available, but my willingness to take less cash and make the best of it? HowdoIavoidgettingpigeon-holedintonotbeingabig enough thinker nor pricing myself out of the local market?Thisiswhereunderstandingyourmilestonesandcash timeline comes in handy. In markets where you are not going to be able to raise the ideal amount you need upfront, one way of hedging the beginning of the fundraising conversation is by articulating your requested amount this way: This is 38Fundraising Field Guidewhat I need: [ideal number based on what you think will be keymilestones],butthisiswhatIcanaccomplish[oneor two other meaningful milestones behind the big one] with this [smaller number] capital.Byphrasingthecashrequestconversationthisway, youveavoidedsoundinglikeyoureaskingfortoomuch too early, and have demonstrated you understand that you need to achieve things before you can likely go fundraising again. In efect, youre trying to articulate confdence to an investor based on your knowledge of what it will take for you to be successful.Investors: whos who and how much can each provide?Investorscomeindiferentsizesandstyles.Themost obvious ones are friends and family, but shortly after them come angels, or people of high net worth who are willing to invest in your startup in exchange for equity. There are many variantsofbusinessangels(angels).Somearejustsimple individualsinvestingoutoftheirownpockets,othersare aggregations of business angels angel clubs- or syndicates like those possible online via crowdfunding platforms such as AngelList, Seedrs, Crowdcube, etc (which we will cover in a later chapter).An angel investor (someone who usually invests his own money) typically invests in the tens or hundreds of thousands, butlesssointhemillions(particularlyifyourenotliving in a major hub of angel investing; in the US, however, these sums go up). An angel, as opposed to your friends and family, 39Preparing your Company for Fundraisingwill also typically want to see more progress in your company before committing to an investment. It is likely that angels will want to come in early enough to give you cash to achieve something plus a little extra to help you fundraise after (so theycangetmoreequityfortheircapitalthantheywould from coming in later), but these angels may also hold back some additional cash for a follow-on round when they can seehowyouachieveyourmilestonesbeforecommitting further.Whilethisisnotunusual,itisdiferentfroma tranched investment, when typically a larger amount of cash is committed upfront with specifc conditions and at greater dilution to you.Followingfromthepreviousexampleearlierinthis book, an angel may opt to fund you through Month 10 with yourrequirementof$100,000,plusalittleextraformore fundraising (perhaps an additional $50,000). This would get youthroughyourproductlaunchandgiveyouacoupleof monthstoseehowitgoesintermsofmarkettraction(all the while, you will be speaking to new potential investors), soyoucanhavesomethingstrongertotalkaboutfor fundraising purposes.Moving on from angels, institutional investors are ones who invest other peoples money as well as their own. For example, a seed-stage venture capital (VC) fund -a type of institutional investor- may see that your company has some real potential and that you have a plan that requires $100,000 to launch before you start trying to monetize. But with their experience of seeing your kind of business having to do a few pivots before getting the launch product 100 percent right, the seed funds partners might think that perhaps the best quantity to give you based on your calculations is $500,000 40Fundraising Field Guidefor about a year to a year and a half. This larger amount would also give you some breathing room to work on achieving your various milestones rather than having to focus on having to be constantly in fundraising mode.Considering the two examples above, how is it that two typesofinvestorscanhavediferentperceptionsofhow much money you need? Efectively, how can you determine how much money an investor actually thinks you need vis-a-vis what you ask for?Recallthefollowingsentencewetalkedaboutearlier: This is what I need: [ideal number based on what you think willbekeymilestones],butthisiswhatIcanaccomplish [one or two other meaningful milestones behind the big one] with this [smaller number] capital.Arequestlikethisleavesthepossibilityforvarious thingstobefuid,andfranklyascrazyasitsoundsfor thistobesonon-exact,thatsaninherentpartofearly-stagestartups.Ambiguityisbothyourfriendandasource offrustrationaswell.Yourexactcalculationsmayhave said that you needed $500,000 to launch your product, but anexperiencedinvestormightknowthatforcompanies suchasyours,thereareusuallyissuesalongthewaythat consumecashwithouttherequisitequantifableprogress towardtheagreedmilestones.Becauseofthis,investors may sometimes include cash bufers in the number they ofer you in a deal, even if they dont articulate it that way. This bufer could come from the various sensitivity analyses the investor evaluates. (For example: what if the company is delayed in launching their product by two months; or what if the company cant fnd that key employee; or what if the 41Preparing your Company for Fundraisingcompany cant start charging for their product for an extra few months; or what if the product needs a pivot; or what if people arent willing to pay what the company expected?) All of these things will afect the cash fow of the company, and if the investor assumes some or all will occur, the company mayneedmoremoneythanthefounderplannedfor. Efectively, your $500,000 in a perfect milestone execution timeline may actually end up being more like 1M after some delays and mistakes, and with the extra cash the investor in my example above gave you, you now may have enough cash to go fundraise without having to panic about getting cash inyesterday.Onceagain,youreavoidingdesperation modeoneofyourmajorgoalsduringthefundraising process. Keepinmindthatthislargeramountaninvestormay bewillingtogiveyouwillafectyourvaluationrange.Too much money up front will infate the valuation range your company sits in (unless the investor takes more equity), so an investor wont want to give you an excessive cash bufer that would force the company to be overpriced for them and for the companys fundraising future. Inversely, you can also see where an investor may deem a company underfunded if it doesnt have enough money to get to where it can achieve meaningful milestones and attract future investors.Diferent investors will come up with diferent numbers for your companys ideal fundraising strategy based on their experienceandwhattheycanofer.Withthisknowledge, be open to the wisdom gained from multiple perspectives. If you meet an investor who wants to invest a lot quickly, great; if you meet with various investors who are more risk-42Fundraising Field Guideaverse, at least you wont get caught out not understanding your own execution plan. As a general rule of thumb, many early-stage VCs will consider your cash needs over a twelve-to-eighteen-month period when trying to determine what you should raise before you need to go fundraising again.In conclusion, the most important thing is to be keenly awareofyourcashneedsonamonth-to-monthbasis,so thatifthequestioncomesupduringadiscussionwithan investor,youknowhowmuchyouplantospendandby when.Intheend,embracingtheambiguityandfuidityof thisprocessisthebestwaytoavoidfrustrationwiththe contrasting conversations you will likely have with investors. As long as you know your monthly cash burn across various milestonesand/orwhenyourunoutofmoney,youllbe armedwiththeknowledgeyouneedtohavemeaningful conversations with investors.433Your Fundraising Materials44Fundraising Field GuideIfyoutellme,itsanessay.Ifyoushowme, its a story.Barbara GreeneIwantedaperfectending.NowIvelearned, the hard way, that some poems dont rhyme, and some stories dont have a clear beginning, middle,andend.Lifeisaboutnotknowing, havingtochange,takingthemomentand making the best of it, without knowing whats going to happen next. Delicious Ambiguity.Gilda RadnerWhywasSolomonrecognizedasthewisest manintheworld?Becauseheknewmore stories(proverbs)thananyoneelse.Scratch the surface in a typical boardroom and were all just cavemen with briefcases, hungry for a wise person to tell us stories.AlanKay,Vice-PresidentTheWaltDisney Company.45Your Fundraising MaterialsKeeping Materials LeanInordertogofundraising,youwillneedcommunication materials:materialsotherswillusetointroduceyouto potentialinvestors,materialsforyoutosendinvestors that show more details about your strategy fnancially and execution-wise, and lastly, materials that show the current equity structure between founders. As you will likely have so many things to do as an early-stage founder, the best way to think of these materials is not as a burden, but as the leanest form of communication on your companys behalf.Aspartofhisbook,Thinking,FastandSlow4,author Daniel Kahneman mentions some research that highlights theimportancenotjustofhowyounameyourcompany, buthowmuchdetailedthinkingyouneedtogivemany trivial aspects of your presentation. In his words: A study conducted in Switzerland found that investors believe that stocks with fuent names like Emmi, Swissfrst, and Comet will earn higher returns than those with clunky labels like GeberitandYpsomed.Themoralofthestoryisthatyou must sweat the details, and it all begins with your startups name and investor materials, as they are the foundation of thecrucialfrstimpressionyoullmakeonprospective investors.Luckily for you, though, the days of long business plans are long-gone (or should be anyway). Investors rarely have thetimetoreadthemanymore.Optimizeyourmaterials tobeconciseandaddresskeyissuestocommunicateyour story, and no more.Whiletherearemanydiferentopinionsastowhat 4http://www.amazon.co.uk/dp/014103357646Fundraising Field Guideconstitutestheidealsetofmaterialsforfundraising,Im proposingthelistbelowastheabsoluteminimum(youll see why shortly):1.Aone-pager,inamobile-devicefriendlyformat(most investors will likely see your plan for the frst time on a phone), that contains the absolutely critical facts about your company. 2.Thepitchdeckyouwillusewhenpresentingverbally. Naturally,youllhavetodeveloptheverbalpitchthat accompanies this deck.3.Thepitchdeckthatwillhavemoredetailandisbased on #2 above, but that will still make sense to an investor even without your verbal presentation.4.Yourfnancialassumptionsmodel,toshowcasehowyou are thinking through cash use.5.Your cap table, to show the equity distribution between your team members.6.Your online profle on AngelList, Twitter, F6S, and other meaningfulplatformsthataretypicallyusedtolearn more about your company.Letsnowexploreeachofthesecommunicationmaterials individually.47Your Fundraising MaterialsYour One-PagerWhenyougotothemoviesandseeanepictrailer,youre naturally drawn to want to see the movie when it launches. Similarly,thepurposeofyourone-pageristoenticethe recipient to want to learn more about what youre doing with theleastamountofefortandinformationpossible,asan investors attention is at a premium early on with the many deal options available to them.The one-pagershould be a work of art that represents you, your brand, your tone, and your personality. It will be your fundraising calling card. It is the attachment that will likelyfollowtheintroductoryemailthatgotyouintothe investors inbox.The one-pager should be:High quality. Ugly will not cut it to really stand out.Readable from a phone email client, as most people will be on the go.Both informative and reductionist at the same time.Onewayofthinkingabouttheone-pagerformatisto startofwithallthekeyinformationaboutyourbusiness, afewimagesandyourcontactinformation.Remember, thisdocumentwilllikelybeyourcallingcardwhenothers introduce you. Assume the one-pager will go far and wide, including into the hands of your competitors; while you want ittobeinformative,makeitatrailerinsteadofafeature presentation.48Fundraising Field GuideYour Pitch DeckAs mentioned earlier, most investors that are good and in-demanddonthavetimetoreadanythingmorethanthe executive summary of anything sent to them. So should you evenbothercreatingapitchdeck?Whatshouldonelook like? And what may it say about you?First lets start by defning what a modern day biz plan pitch deck could look like. Id say that if you can take your pitchdeckandaddtoitthenecessarytextsothatanyone reading it can fgure out what your business is about without youhavingtospeaktoit,thenyouvegottenitright.For the deck youll present verbally, youll likely use a subset of this more detailed one, but with the text removed for you to speak to the key points.A modern deck doesnt need to be as complicated as you think, as early-stage plans are clearly simpler (versus later stageones,wherethecompanyhasscaledoperationsand profts).Thepurposeofanyplan/deckistohelpyoucraft how you communicate your business as well as provide those investors who do take an interest with the extra information theyneedtoevaluateyourcompanyaftermeetingyou. However, the days of the lengthy formal business plan have longsincepassed.Noonehasthetimetoreadthemany more,andforthoseinvestorswhodemandthemwell, perhaps ask them which areas theyd like more information on and you can deal with them on a case-by-case basis.If you need inspiration, there are plenty of examples out there, from Guy Kawasakis5 Art of the Start6to Business 5http://www.guykawasaki.com/6http://amzn.com/159184056249Your Fundraising MaterialsPlansforDummies7.Additionally,TechCrunchrecently published an article8 that captures amazing stats about what works and what doesnt in terms of decks.Any plan/deck should, at the bare minimum, include:1.Anoverviewofwhoyouareandwhatyouvedone (basically, why you and your team can make this happen).2.Asuccinctexplanationofwhatyourproduct/service does.Usescreenshotsifpossible;runitpastanon-techie friend and see if they can explain it back to you.3.Amarketoverviewsection.Themarketsizeofyour opportunity,keyplayers,competitors,partnerships, target market9, etc.4.A snapshot of your fnancials. Efectively, how you will useyourcash,whichinanearly-stagestartupwillbe your expectations of cash usage. This section will likely requireyoutoalsohighlighthowyouthinkyouwill likelymakemoney.Ifyourbusinessisaboutgrowth frst,clearlyshowyourpotentialinvestorshowmuch moneyyouwillneedtogrowthecompanytowhereit hits the tipping point.5.Competitivediferentiation.Howyoubringvalueto yourcustomers(thepainpoints)aswellashowyou diferentiate from competitors in your market.Allplanstypicallycoversomebaselineinformation,such as identifying your market and competitors. No matter how 7http://amzn.com/07645765268http://tcrn.ch/1BaFZfI9http://en.wikipedia.org/wiki/Target_market50Fundraising Field Guideshort it is (10 slides), a business plan is useful for investors evaluatinganopportunity,anditalsoofersvaluetothe founderspreparingitbecauseithelpsthemarticulatethe core concepts of product, market, opportunity, the team, and the investment proposal. Remember, a plan is about organizing your thoughts and conveying them clearly to someone else, not about meeting somemagicalquotaofpageswithgraphsandcharts, although depending on the complexity of your proposition, this may be necessary.Generally speaking, I have found a companys plan has allowed me to determine:1.Thecompanyscommunicationstyleandabilityto articulate what they (their product or service) do, clearly andsuccinctly.Doesthecompanyrelytoomuchon buzzwords and/or comparisons to get the point across, or are objectives and vision clearly discernible? Is the plan wellwrittenandfreeofgrammaticalerrors?DoIwalk away from reading it able to describe the opportunity in simple terms to others? How do they use visuals? What kind of style does the company have?2.Thecompanysabilitytoresearchtheirmarketsize, competitors,keyindustryplayers,distribution channels,etc.Ifacompanyhasnotadequately researchedthesizeoftheirmarket,thiscanbeareal deal-killer.Iremembermeetingwithfoundersfor anewcompany;whileIwasoriginallyreallyexcited about the potential for their product, pointed questions duringourmeetingrevealedthatthemarketsize wasonlyafewmilliondollarsworldwide.Asyoucan 51Your Fundraising Materialsimagine,realizingthesizeofyourmarketduring aninvestormeetingisprobablynotthebestwayto makeanimpression.Makesureyoutrulyunderstand yourtargetmarket,andthekeyplayerswithinit. Theidentifcationofkeycompetitorsisanimportant detail to include and can actually play in your favor if you can clearly articulate how you diferentiate yourself. In the case of some companies, where distribution channels andkeypartnershipsareimportant,identifyingthese anddiscussingthemisimportanttoprovidepotential investorswithconfdencethatyourteamunderstands the challenges inherent to its industry.3.The companys ability to analyze their cash needs and expectationsforgrowth.Nothingisscarierthana company whose ambitions are huge, but whose idea of cashmanagementisnotinline.Aswecoveredduring the milestones section, you dont need a CFO, but you do need to have thought out what key costs grow with your ambitious growth and when the crucial cash-points are foryourcompany. Generally speaking,investorsdont have fnancial discussions on the very frst meeting, but if you have an understanding of your cash uses, this will make you seem far more competent.4.Thecompletenessandexperienceofthecompanys team.Sufceittosaythatifyouhaveagreatteam, highlight their accomplishments. If you know you need to hire someone to round out the team, its okay to put thatdownasafuturehireatleasttheinvestorwill know that you know there is a weak point in the team, and that you plan on solving it as soon as the investment comes in.52Fundraising Field GuideOnthesubjectofyourteam,dontunder-estimatethe importance of your teams slide.Whenaninvestorconsidersyourcompanyatthe earliest stages, who you are (efectively your team) is just asimportantasyouridea,ifnotmoreso.Yourteamisa crucial part of your companys success, yet many teams omit their team slide or bludgeon it because they dont feel they have anything interesting to add other than team photos and job descriptions.Whatsworseiswhenfoundersjustpointtotheteam slideduringapitch,andsaysomethinglikeHereisour team, we have lots of rockstarsor something generic like that.Letslookatwhatthemajorsellingpointsofateam slide should be:1.To show a teams capability to deliver. Basically, does your team know anything about what you are doing? If you are a healthcare company, do you have a healthcare background?Ifyouaremakingsomethingforthe fnancialindustry,haveanyofyourteammembers worked there? What companies have your team members workedinthatcanvalidateyou?Ifyouveworkedat Googlebefore,forexample,itwouldbeworthwhileto putthatcompanylogouponyourteamslidebecause theimageofthebrandwouldspeakfastertoyour audience than any number of words you could say in the same time frame.2.To show a teams capacity to deliver. Are you efectively complete or incomplete as a team? Is your team mostly businesspeoplebutlackingthetechnicalcapabilities todeliver,orisyourteamwellroundedandableto 53Your Fundraising Materialsexecute? If your company industry requires an amazing specialist,doyouhavethatspecialist?Bytheway,do not assume that it is a bad thing to admit you are looking tohireforspecifcfunctionsyoudontcurrentlyhave internally;doingsoshowsmaturityandyourteams self-awareness,althoughyoudonthavetostateitas part of your pitch.3.To show a teams culture & communication style. What is your company like? Is it a fun place to work or is the tone more serious? What titles do people have? How manyofyourteamareoutwardfacingandhowmany inward facing?In terms of where your team slide should be, there is not a hard and fast rule, but Ive found that if you are building something born out of a personal experience at your prior job, it makes for a decent early slide to explain the background toyourstory/pitch.Ifyouarebuildingsomethingthat isntpartofyourbackgroundstory,thenwheretheslide sitsismoreaboutfow.Focusontellingagoodstorythat iscomplementedbyyourteamslideratherthantheother way around.Articulatingthefourpointscoveredaboveallows founderstojustifythecomponentsofabusinessmodel tothemselvesbeforereallyinvestingfurtherinanidea. During the writing of your plan/deck, you may identify risks that compel you to change the business model or even the industry focus. 54Fundraising Field GuideNow, a couple of tips before moving on to the next section: Avoid putting a valuation on your deck/plan (unless you are fnalizing a round). Investors may ask for this fgure in person, but you are likely to prevent a future dialogue if you put the valuation on paper and it is either too big or too small for the investor. By omitting it, the investor focuses on what matters: what you are trying to build. Thesecondtipisthatacaptable,whichwewillcover shortly, is a handy thing to include in your plan/deck (but perhapsyouwonthavespacetoincludeitinaverbal presentation).Thisisusefulmostlyforsubsequent discussions,butcangreatlyhelptheinvestorto understand everyones motivations.Remember,oneofthebestthingsyouandyourteam members can do very early on is co-draft a pitch deck/plan, nomatterhowsimple,thatyoufeelcanrepresentyour companywithoutrequiringyourphysicalpresencetoget the value of your opportunity across. Your Financial Assumptions ModelIn addition to the above materials, you will likely be asked for a quantifcation of your cash milestone assumptions to see howyouthinkthroughyourcostsandrevenuegenerating activities.ThereasonwhyIchosetocallitthefinancial assumptions model is because calling it the fnancial plan this early in your companys development is misleading. As weve covered in the milestones section, very rarely do your projectionsforDay63orDay105trulyhappen.Standing 55Your Fundraising Materialsat Day 1 (or before), you cant know what the future holds. Think of the fnancial assumptions model as a representation ofhowyourcashneedsareafectedthroughyourgrowth assumptions.Lateroninthisbook,wewillcoverhowaninvestor reviews your fnancial plan, but for now, start thinking about howtorepresentyourcompanysexpensesandrevenue expectations,andhowtheyafectyourcashburn,inan easily readable spreadsheet.Forsometemplatestojogyourthinkingabouthow tovisuallyrepresentthefinancialmodels,searchfor Christoph Janz SAAS Dashboard for a starting point, and check out IA Ventures Resources10 page as well; it has some greatmaterials,includingdecktemplates.Foradditional resourcesandthoselistedhere,checkoutthisbooks accompanying website11.Your PitchAsmentionedbefore,storytellingisakeypartofthe fundraisingprocess.Thehumanmindwasdesignedto process stories as a way of recalling important information regarding meaningful and important things from the past. Refningyourverbalstorytellingartistryisaworthwhile investment,asyoullbeabletochannelyourpitchmore efectively.Whenthinkingaboutyourcompany,thinkaboutthe underlying story behind it. Why are you doing this? Why you? 10http://resources.iaventures.com/11http://www.fundraisingfeldguide.com/56Fundraising Field GuideWhy now? Why your team?Therearemanywaystotellstories.Whilepitching forfundraisingwillhavemanyelementsoftraditional storytelling,itisntentirelyaboutdramatics;storytelling is also about efciency. Some startups are tempted by using certain story telling clichs such as the long build-up with a surprise ending, but when it comes to fundraising, youre better of keeping your technique simple. Specifcally, you should be able to quickly explain what itisyoudo,whyyoudoit,forwhom(yourcustomer)and why now.Ifyouwanttoreadotherresourcesontheartofstory telling, check out some of the resources listed on this books website12. Your Cap TableOnequickwayaninvestorcangetafeelforhowfounders see each others roles within an organization is by reviewing yourcompanysequitydistributionforeachshareholder. This is called your cap table. Inordertoreadsomeofthetermsonthiscaptable model, below are some defnitions you might fnd useful:Fully diluted amounts: Whenever an investor says they want 5percentofyourcompanyonafullydilutedbasis,this means that all promised equity (employee options included) areincludedinthecalculationssothattheyreefectively getting 5 percent at the end of the day.12 http://www.fundraisingfeldguide.com/57Your Fundraising MaterialsPre-money valuation: When people generally talk about the valuation of a company, theyre usually talking about the Pre-money valuationefectively, the worth of the company prior to the new investment coming in. In a later chapter, we will discuss how companies can be valued in greater detail.Round size: The amount of money being raised as part of your current cash needs to achieve your stated milestones.Post-moneyvaluation:Thesumofthepre-moneyplusthe round size. If the pre-money valuation of a company is $20 millionandthefoundersraise$5millionfrominvestors, their post-money valuation would be $25 million. Investors wouldthereforeown20percent($5million/$25million) onafully-dilutedbasis.Yourpost-moneyvaluationsets thebarforyourfutureactivities.Ifyourpost-money afteryourfrstroundoffnancingis$4million,youknow thattoachievesuccessintheeyesofyourinvestors,any future valuations will have to be in-excess of that amount. If subsequent rounds are valued at exactly $4 million, thats calledafatround;valuationsbelowthepost-moneyof thelastroundarecalledadown-round.Noonelikesa down-round. The Fundraising EquationIf you take the values from the above calculations, you get a functional equation to determine what percentage of your company an investor will own (assuming they are the only investor in the round). The equation is quite simple: Round size / Post-money valuation = percent of ownership by the investor(s).58Fundraising Field GuideThe Option PoolAspartofcreatingacaptable,youlllikelyhavetocreate anemployeeoptionpool(Imavoidingthetechnicalities between the diferent variants of these, such as Restricted StockUnits,forsimplicityssake).Unfortunately,the option pool is one of the most complicated parts of your companys cap table and, from the founders point of view, can be very confusing because of how investors expect it to be treated.In simple terms, an option pool is merely a carving out of your existing shareholders shares to accommodate new and future employees, directors and advisors. As a general rule, employeesinthesamerolewhojoinyourstartupearlier willreceiveagreaterpercentageoftheoptionpoolthan employees who join later.Where it gets confusing is in how you calculate the pool and the size it should be. In terms of how large the typical option pool is, well, it varies. Ive seen it range from as low as 5 percent to as high as 20 percent depending on the companys stageandupcominghiringneeds.Typicallyhowever,no matterhowlargetheoptionpoolis,itisgenerallyspoken of and calculated on a fully diluted basis. This means that investors are expecting a 10 percent option pool after their moneyhascomein.Inordertodothis,theoptionpool needs to be calculated before their money efectively on a pre-money basis. If you want to go deeper into how this is calculated and why, search for the Option Pool Shufe. In summary, the norm is for investors to expect your option pool to come out of the pre-money valuation of your company.59Your Fundraising MaterialsOne fnal note on cap tables: there are many great online tools to help you build your cap table. As useful as these can be to get started, nothing compares to you building your own cap table to get a feel for how future rounds, including those withconvertibles,warrants,optionsforfutureemployees, etc can afect your and your investors economics. By doing cap tables manually, much like driving stick shift, you can get a better feel for the impact diferent deals will have on your company. Once you are able to internalize this, youll be far quicker and more efective when negotiating with potential investors, as you will be able to visualize the impact of their suggestionsonyoureconomics.Ifyouwanttoseewhata cap table looks like and use one for a starting point, visit the website13 for this book or go to: http://bit.ly/1ayKk8p.13http://www.fundraisingfeldguide.com/614The Fundraising ProcessThe Investment Materials Cycle62Fundraising Field GuideThe Cycle of FundraisingThefundraisingprocessishighlyiterative.Itsalmost impossible to understand what to say and how to say it for maximum positive efect without going through several fail cycles frst. Assumptions that made sense between just you andyourteammembersallofasuddenarentasclearto strangerswhohaveneverheardyourideabefore.Demos fail, jokes bomb, and people get distracted by materials you thought were crystal clear.Thus,liketheTaoistfarmerwhosestoryservesto introducethisbookbynotjudginganyonesituationas either good or bad, you have to view every interaction with investorsasalearningopportunity withoutcoloringthose experiences as good or bad. Observe reactions and learn from your encounters with investors; constantly fne-tune your materials, including your pitch, to achieve better results each time. As a caveat, fne-tune does not mean cater to your audience. For sure stick to the core of what you believe your business is about, but learn to decouple what the core ofyourbusinessisfromhowyoupresentit.Manytimes, whatotherpeoplerejectisnttheideaitself,buthowitis represented.Additionally,itisimportanttokeepanopen mind when receiving rejections to see whether the rejection and reasons for rejection made sense as you iterate and evolve your pitch. Remember that a persons mood a factor over which you have very little or no control might afect their interpretationofyourpitchasmuchasthequalityofthe pitch itself. Thinking, Fast & Slow provides insight into how eventhingslikehungercannegativelyafecttheoutcome of a decision. In a study done in Israel on verdicts by judges, it turned out that approaching meal-time, approval verdicts 63The Fundraising Processwere close to zero, yet after meal-time, approval rates would spike up to 65 percent! The study suggests a signifcant link betweenexternalandoftenpersonalconditionsand decision-based outcomes.Before going further, lets take a look at how to stop the cycle of fundraising in its tracks. In other words, what NOT to do whenfundraising.Belowisthetoptenlistoffundraising fails. 10. Presenting with a style that doesnt capture the right attention.Yes,beingoverthetopanddroppingf-bombsmightget you attention, but is it the right attention? Are you focusing attentiononyourmessage,orjustyourself?Ontheother hand,whataboutaboringslidedeck?Oradeckthatis missing product shots? Do these represent you well? What if you say your product is simple, but then your deck is really over-complicated. Does that sound right?9. Not having a proper fundraising plan.Fundraisingrequiresresearch.Findoutifyourpotential investorsareeveninterestedinyoursector.Havethey invested in your competitor? What amount do they typically invest?Goingtosomeonewhoistypicallyalate-stage investorwhenyouareraisingalittlebitofmoneyislike putting in a minimum order of 10 pizzas when you can only eat one.8. Not understanding your customer or how to reach them.When presenting or speaking about your customer, do you demonstrate a masterful grasp of their issues and identity? 64Fundraising Field GuideDoyouunderstandwhatmakesthemtickandwhyyour solutionistheonethatwilllikelybestservetheirneeds? Do you also understand how to reach them? Where do they shop? What media do they consume?7. Inability to demonstrate a real pain for your customer (and how your solution fxes it).Itisalwaystemptingtocreatesomethingthatisusefulto you,butisthesolutionyouvecreatedreallyanecessity orjustanice-to-have?Demonstratingarealpain,usually throughsomeformofrealcustomervalidation,iscrucial tomakingaconvincingargumentforyourstartup.Note that you should avoid asking someone an obvious question where the answer is yes but doesnt validate anything. If youarentsureabouthowtoasktherightquestionsto ascertain whether there is real customer pain, the best book on the subject is written by a friend, Rob Fitzpatrick, and is called The Mom Test14. I highly recommend it.6.Assumingthatageneralmarketsizestudyappliesto your startup.One of the things you can do to quickly show that you dont haveafullgraspofyourmarketistoshowamuchlarger segment than the one you operate in. For example, Ive seen pitcheswhereaniOSappforsportstrackingmentionsall mobile users worldwide as their market size, when actually, the market is a sub-segment of that bigger pie. Understand thediferencebetweentarget/addressablemarketandthe general market your company operates in.14 http://momtestbook.com/65The Fundraising Process5. Not truly understanding who your competitors are.Thisoneiseasy.Ifyouthinkyoudonthavecompetitors, youprobablyhaventresearchedhardenough.Rarely arethereideasthatnoonehasthoughtaboutbefore.But moreimportantly,sometimestherearegoodenough substitutesforyourproductthatyouneedtobeawareof. Showhowyoursolutionovercomesthemomentumthat those existing solutions already have.4. Not knowing your cash needs and cash burn.Ifyouregoingfundraisingandyoudontknowhowmuch money you need, how long it will take you to achieve what, and how you will spend the money you receive well, dont faultinvestorsiftheyarentimpressedwithyourrequest for investment.3. Not explaining why your team is the team that will make this happen.Yourteamis99percentofthereasonwhyyourcompany succeeds,andtheideaisprobably1percent.Ifyouskim throughthewhyofwhyyourteamistherightonefor this investment, youll likely miss an opportunity to impress an investor. Later in this book, well cover how an investor reviewsyourteam,foryoutounderstandwhatVCsand angels are looking for.2.Yourexistinginvestorshareholdersownmoreequity than the founders.Toxic rounds that are unfairly skewed to a few shareholders (typically external investors) that precede the round you are raising for can really negatively afect your fundraising plan. 66Fundraising Field GuideIn general, try to make sure you take investments that dont jeopardize your future ability to raise follow-on funds.1. Not reaching out to an investor through an introduction.Lastly,thebestthingyoucandoforyourselfissecure apersonalintroductiontoinvestorsyouwanttomeet. Introductions are great ways to have immediate validation. BONUS: Not learning from your mistakes.Learn from your mistakes. You will make many, and thats okayaslongasyoudontbeatyourselfup.Understand what went wrong, then iterate on it. In the words of Albert Einstein, Insanity is doing the same thing over and over and expecting diferent results.Conventional wisdom maintains that if you had to boil downtheroleofaCEOintojusttwoactivities,theywould be fundraising (communicating the vision to investors to get cash to keep the company going) and hiring (staf up to get stuf done). Fundraisingcaneasilybecomeacyclethatcompanies startandneverreallygetoutofuntiltheychoosetostop (typically at an exit). So it helps to just put yourself into the frameofmindthatyouarealwaysfundraising;evenright after closing a round, you should know who you will need to make relationships with for the next round.In summary, the fundraising cycle starts with: Creating your fundraising materials and networking.Shopping around and building relationships.67The Fundraising ProcessReceiving initial ofers.Choosing an ofer(s) and negotiating. If you feel confdent about one of your ofers, sign a term sheet before drafting & managing the legal process.Closing & transfer of funds. When completed, simply rinse and repeat until you are either cash-fow positive and can fnance growth internally or no longer need to fnance for other reasons.Now that weve looked at the basics for the start of the fundraising cycle, its time to move on to the most important element in your fundraising eforts: building relationships.695The Human Element70Fundraising Field GuideThe Best Way to Reach InvestorsGetting in touch with an investor in a way that increases the likelihood that theyll reply is one of the most challenging things youll have to learn quickly, but those interactions can also be one of the most rewarding parts of the fundraising process. Youlldevelopfairlydeeprelationshipswithinvestors thatbecomeshareholdersinyourcompany,sotheworst thingyoucandoisde-personalizeyourintroductionby sendingavague,nondescripttemplateemailtoinfo@investordomain, that goes to no one. Remember our dating analogy?Wellsendinganemaillikethatistheequivalent ofwalkingintoasinglesbarandannouncingloudly,HI, SINGLES.HEREANDREADYTOMINGLE.ILLBEATTHE BAR. Not a great way to promote the kind of intimacy youre looking for in either scenario. Instead1.Researchtheinvestorandhisorherfirm.Itsa hugewasteoftimeforyou(andthem)toreachoutto someone who invests in the wrong sector or stage of your business.Reviewtheirwebsite.Readaboutwhatthey areinterestedin,professionallyandpersonally.This willmakeyourinteractionwiththeinvestorfarmore relevant.2.Rely on a 3rd party for an introduction. If you can fnd someone who knows the person youre trying to reach, a personal introduction will serve you far better than trying to reach the investor in question directly. LinkedIn is a useful tool to fnd out who within your network knows thepersonyoudliketogetintouchwith.Thismakes the introduction process far more relevant.71The Human Element3.Keepyourinitialemailshortandtothepoint.Dont overdo it content-wise and length-wise, you dont want tohavetheinvestorglossoverthesheermassofyour email and relegate it to the to read bucket.4.Thinkofyourinitialemailasmerelyapreviewor elevatorpitchwithacalltoaction,suchasemailingor calling for more information if they are interested in the idea.5.Dontforgettothankthepersonwhointroduced you.Ifyouwantto,feelfreetokeepthemupdatedon theconversation,butremovethemfromtheccofthe initial intro email (move them to bcc). You dont want to overburden their inbox either!6.Twitterisincreasinglybecominganefcienttoolfor contactingpeopleforquickthings,ifusedsparingly andinaveryspecifc,non-genericway.Youcan@replysomeoneyouareinterestedintoengageina conversation or comment on what they said as a starter. Avoid sweet-talking though.7.Get out of the ofce. Go to events and make new friends! When there, fnd people to introduce you to others; avoid interrupting ongoing conversations but dont be afraid to work your way into the conversation if they are open to it and you feel that you can make a valuable contribution. If the person you want to meet seems engaged, back away and come back later. Remember, you might be a relief to the conversation they are having, but you dont want to be the distraction either. Feel it out, but dont be afraidtotaketheriskofspeakingupandwhenyou do, get to the point quickly. You have about 30 seconds 72Fundraising Field Guidetomakeyourconversationwithsomeoneanyone relevanttothem.Ifaninvestorgivesyoufeedback during this conversation, the worst thing you can do is come across as defensive. That will make you stand out for all the wrong reasons.Remember,itsthejobofinvestorstofndamazing companies.Ifyoureamazing,theyrelikelytobejustas eager to meet you as you are to meet them. However, they are also very time-starved and dont want to waste time on opportunitiesthatdontpiquetheirinterests.Forfurther reading on how to get a meeting with investors, read Robin Kleins post on the matter here: http://bit.ly/1HP65Gx.Invest in YourselfBecause building relationships is so crucial to the fundraising process,Ihaveconsistentlyseengoodrelationalskills makeabigdiferenceforfounders,notonlyintermsof fundraising, but also in terms of fnding employees, clients, and partners for their company. The old adage, Its not what you know, but who you know, is very much consistent with what Ive observed over the years. Keeping in mind that you are the biggest factor in your ability to build relationships, a substantial investment in yourself is needed to fne-tune this essential aspect of fundraising.If you are the kind of person who is panicked by the idea of meeting and speaking with lots of new people at startup events, there are many ways to practice that can hopefully ease your pain. Lets take a look at a few:73The Human Element1.The easiest place to start is the self-learning route, with two books I rank very highly in this space: Never Eat Alone byKeithFerazziandTheCharismaMythbyOliviaFox Cabane. These books will help you understand many of the social cues necessary for you to efectively network, andtheydoagoodjobatexplainingthewhyofall things social, which is necessary for you to understand andinternalizebeforegoingoutandpracticingyour skills. These are must-reads.2.Next,ifyouwanttostepitupabit,engagingwitha professionalcoachcanhelpyouunderstandhowto overcomesomeofthechallengesyoumayhavethat preventyoufromnetworkingeffectively.Acoach doesnt necessarily set goals for you, but instead helps you understand what steps to take to achieve what you set out to achieve, considering all the variables you may have in play. Coaching works.3.Lastly, the most extreme step would be to enroll in an improvisationalcomedycourse.Ididitandtried outimprology.comhereinLondon.BoywasIinfora surprise. It was like shock therapy, but it gave me a crash course in some of the social dynamics that connect us to othersthatwefrequentlyforgetaboutorignorewhen outsocializing.Oh,andifyouthinkimprovisational comedy is all about telling jokes, you couldnt be further from the truth; I dont think we told a single joke during the entire program. It was more about learning to read others and react to their signals.A key concept that arose during the improvisation course was how to amplify other peoples emotional ofers. Many times we are too closed in the way we converse and dont pay 74Fundraising Field Guideattention to how others are reacting (perhaps because we are toobusythinkingaboutwhattosaynext!).Improvisation teaches us how to interpret peoples emotions. Another key conceptinimprovisationisunderstandingtheinherent social status we all have relative to each other and how that canchangeindiferentcircumstances,andhowviolating status hierarchies can drastically afect how others perceive you. Lastly, by practicing these concepts and dealing with the anxiety you will naturally feel as you experiment, you start to learn to identify social ofers that others give you to engage withthem.TheclosestexperienceIcanlikentotakingan improvisation course is jumping into a freezing pool of water on human social interactions. Its a bit radical, but it can help tievariousconceptstogether.Thebookaccompanyingthe course I took, Improv by Keith Johnstone, is also an amazing readand a must-read if you take a course.In the end, all of this takes practice, time and patience. There are no shortcuts. Youll spend a lot of time trying to cultivaterelationships,andyouwontalwaysachievethe outcome you anticipated. One thing that was constantly said during improvisation class was Dont beat yourself up; we are all our own best critics. But if you are going to work on these skills and they dont come naturally to you, it will take perseveranceandpatiencewithyourselftoovercomethe natural anxieties you feel.756The Search for an Offer76Fundraising Field GuideWhat to Look for in an InvestorI am often asked by founders to identify what tier a prospective investorisin.Asin,whatdiferentiatestheirprospective investor as better or worse than another, and on what basis.Justtoclarify,althoughthereisnoformalranking system for the tiers of investors, generally speaking, every investor sort of knows where they rank relative to others, or at least relative to top investors. The best funds, generally knownastier1investors,arethemostin-demand,andthe tier organization thereafter is largely subjective. There isnt ahugebenefttospendingtoomuchofyourtimefretting over a categorical rank of investors you are speaking to, astherearemanyvariablestoconsiderandnoformallist anywhere (unless you count historical returns as one metric, but then you rule out some amazing new funds with excellent partners that dont yet have a realized track record).That said, what is worth exploring is what diferentiates thebetter-tierinvestorsfromothers.Belowaretheseven attributes that I believe diferentiate the best from the rest. As you seek out potential investors, keep an eye out for these variables; the more of these your prospective investor has, the better of you will likely be as a founder.1.Hasagreatnetwork.Thebiggestvalue-addthatan investorcanbringtothetableistheirnetwork.The larger their network, the more doors they can open for you. Nothing beats a direct intro to someone you need to meet.2.Has a great brand name. This helps with introductions, buthavinganinvestorwithagreatbrand name either 77The Search for an Offerasanindividual(usuallyisthecasefornewfundsbut alsoolderfunds)orfund(usuallythecaseformore establishedfunds),cannotonlyhelpopendoors indirectly (as in, not requiring an introduction), but also provide your startup with instant validation to potential customers, partners, and new investors.3.Has sufcient levels of capital to support you. Although diferentinvestorshavediferentstrategiesaround this(i.e.anangelcanrarelyfollow-onasmuchasan institutional fund), it is generally a good thing to have an investor who can invest in your company throughout its lifecycle. The age of the fund has a large part to play in this. The older the fund, the less likely it is to have as much capital available.4.Hassectorexpertise.Onewaythatinvestorscan diferentiate themselves as a top-tier investor from the usualsuspectsisbyhavingfocusedexperienceinyour sector.Forexample,aninvestorcouldbeageneralist tier 2 fund (remember that this is subjective), but as an e-commerceinvestortheymaybetier1greatifyou areane-commercecompany,butjustokayifyourea fn-tech company. This is because they will likely have a large network in their sector of expertise.5.Hasdealexperience.Youwillgothroughalotof uniqueandstressfulsituationsduringafundraise.It really helps to have someone who has gone through the process before and can help smooth things out between all parties involved if needed.6.Isntburdensome.Anexcellentinvestordoesnot burden the founder during the investment process with 78Fundraising Field Guideunnecessaryorunusualdiligencerequirementsfor the stage your company is in. For example, a company thatisveryearlystagewilllikelynothavemuchtobe diligenced. If an investor is requiring you to have an accurateversionofwhatwillhappeninyourcompany fveyearsfromnowandyoustartedyourcompany threemonthsago,questionwhethertheytrulythink theinformationyouwillgivethemhasanylikelihood of being true (and whether you think theyd make a good investor for you).7.(Lastly, and most importantly) Has a big vision. Good investorsonyourboardwillhelpyoubyworkingwith youonbestpracticesforcompanybuilding,butgreat investorswillhelpyousettherightvisionforyour company.Betterinvestorshelpyouthinkbigbecause they think big themselves. This means not only having anattitudeofcan-dovscan-not,butalsohavingthe experience to coach you through this type of thinking.With this list of key investor qualities in mind, consider:There are many new investment funds and/or individual angelsthatcometotheecosystemandtherefore maynothaveanestablishedbrandname,buthave greatnetworksandexperience.Dontdismissthem prematurely;however,doaskotherstheyveworked with what its like to work with them.Although founders that have done well and gone on to join a fund can be awesome people to have on your board, investors dont have to have been founders themselves to be great investors (e.g. Fred Wilson of Union Square Ventures). Experience as an investorhaving done many 79The Search for an Offerdeals and knowing how the best companies operatecan count for a lot, so look for a blend of all attributes in your investor and not just a founder-turned-investor that can empathetically relate to what youre going through.Ifyoureeverstuckbetweentwopotentialinvestors, really consider that the person who will be working with you on the board will help you defne many things about your company over the coming years. Choose wisely and ask yourself who you would rather work with long term. You wouldnt want to chose someone based on a brand name alone, who causes you hair loss, heart burn, and emotional stress on a regular basis.As always, do your due diligence on your investor. If possible and the opportunity presents itself to request it, ask to speak totheirportfoliocompanyCEOsandseewhatvaluethat investor brought to the table for them. Creating and Managing Your PipelineOnce youve identifed who you want to talk to, organizing the process is simple. Your list for reaching out to investors andmanagingthoserelationshipsisnodifferentthan creating a simple sales pipeline. In efect, you should have a list of people youd like to speak to, a log of how many meetings youve had and how many you think you need to have until a potential close (more on this later), and the probability of the deal closing based on how the previous conversation went, and next steps for each. The better you manage the process of meeting people, the more efectively youll be able to get to a close quickly.80Fundraising Field GuideRegarding how to reach out to investors, there are many strategies out there and its not always clear which is best. Thereisnosilverbullet,buteachhasprosandcons.Here are a few (with my names for each):1.The One and Only. You speak to one investor that you like a lot and have a good relationship with because of personal reasons. If you can lock this one down, thats greatforyou.Butthisisriskyformanyfoundersasit greatly limits their options and makes them reliant on someone elses timeline and willingness to fund.2.The Cluster Bomb. Efectively, you start with your top fve, then the next fve, and so forth. That way, you dont dilute your eforts and spread yourself thin replying to emailsfrominvestorsyouarelesskeenonbeforeyou have fnished meetings with those you prefer.3.TheSprayandPray.Basically,youcontactthemall atthesametime.Thiscancreatemanagementissues for you, but on the plus side, you have many investors talkingaboutyou,whichcanincreaseyourpotential buzz provided they dont all start rejecting you at the sametime,thusacceleratingyourdownfall.Investors willlikelysecond-guessthemselvesifeveryonethey know is rejecting you.4.ThePreview.Althoughyoushouldalwaystreatevery meeting as a real meeting, a preview meeting difers fromaproperfundraisingmeetinginthatitsamore friendlydiscussionaboutyourbusinessinthepre-fundraising stage. This lowers the pressure on everyone, but doesnt do away with an investors tendency to judge youasafounder,yourteamandthemarketsizeyour 81The Search for an Offercompanyoperatesin,sobemindfulthatpreviewscan still be damaging if youre unprepared for them.When considering any of these strategies, keep in mind thatcompetitivedynamicsbetweeninvestorsareareally strong source of negotiating power, arguably the best one. Withmorethanonedealofer,youcanbetternegotiate termsforyourinvestmentbyleveragingonedealagainst another, and being able to walk away from a deal you dont like.Anadditionalpointtokeepinmindduringthese discussions is that investors talk amongst themselves, even if they are in diferent frms. It just happens, either via social eventsorthroughestablishedfriendships.Ithappens.So be mindful that if you say you have spoken with Bob while youre speaking with Bill, dont be surprised if Bill calls Bob anddiscussesyourcompanyandisswayedpositivelyor negativelybythat conversation. Myrecommendation isto keep your cards close to your chest until later in the process when you are considering syndicates (more on that later).Therearemanydifferentwaysofreachingoutto investors; pick one that works for you and stick with it. For the record, my preference is the Cluster Bomb strategy, as it optimizes your time best. The Typical Institutional VC Investment ProcessVCfrmsinvestmentprocessesvarytoomuchtothinkof themasstandardized.ThereareCorporatefunds,funds backed by professional investors called Limited Partners, 82Fundraising Field GuideEvergreenfunds(thattypicallyinvestfromtheirbalance sheet), and Family fundsjust to name a few. Additionally, therearedeal-championpartnerships,unanimous decisionpartnerships,andinvestmentcommittee-heavy partnerships, and naturally all sorts of variants in-between. Thus, with so much variance between investors, what is the best way to know where you stand in a VCs process?First and foremost, do your research. You can do a lot of it online, but there are other things you can do as well:Ask. Yes its that simple. When your frst meeting is overandtheinvestorasksifyouhaveanyquestions, simply ask. Whats your usual process? What are the next steps?HistoricalResearchonCrunchBase,AngelList,etc. Findoutwhattheyvedone,whotheyvedoneitwith, and how theyve done it.Portfolio.Researchtheirportfolioofcompaniesand seeifyouknowanyoftheCEOsofthosecompanies; if you do, or know someone who does, have a chat with them to understand how the fund works and how their investment decision process works. People. Research the partner and associate that you will be talking to. The more you know about them, the better you can tailor your message to their area of investment interest. You also want get a feel for whether you want to work with