Although fundraising is hardly the most important and urgent thing a startup founder needs to do (creating what people want and getting them to use it is the most important thing in the company-building journey), he still has to deal with it — because fundraising still matters for so many reasons. The startup founder must and should, therefore, go through the fundraising process at least once in the company-building process if the founder is to build a world-class company — fast enough!
To be sure, you don’t have to necessarily fundraise or deal with professional investors in order to build a successful startup. You can bootstrap your company–creatively building it all the way through (and maybe raising money later!) and still end up with a world-class company. And there are companies that have done that. It is just that it is a lot harder to bootstrap and still build a great company fast enough than it is when you fundraise from outside investors (who are necessarily richer than you, don’t care about what you care about, and can usually add value to your startup beyond money). And that is why the majority of startups take outside funding.
Having said that, fundraising is likely a great option for you if you are working on a difficult problem that you would like to make a big difference in the world — at scale!
To fundraise and to deal effectively with investors are some of the hardest things you’d do as a founder. If you want to succeed with them, you must then learn how to go about them effectively and efficiently.
Paul Graham of Y Combinator has dealt with a lot of founders and investors alike. He knows what it takes for founders to get money from investors. Paul said you need three things: at least one formidable founder in your team, a promising market, and (usually) some evidence of success so far.
That’s probably all you need to know about fundraising since the real lessons come only by going through the actual fundraising process. Nonetheless, at the risk of oversimplifying the process, I want to elaborate more on what you should know and what you probably should do if you are fundraising.
The common theme among all the points below is that they are all related to sales. There is no gainsaying about fundraising being a sales process. Therefore, everything that applies to sales applies to fundraising. Period!
Things The Strategic Founder should note so he doesn’t get overly surprised when they happen.
1. Deals fall through.
Starting out, assume that nobody will give you money since it is so hard for most investors to release their money to founders. There are many reasons for this. (1.) It is hard to make money, as you must have noticed yourself. (2.) Most startups fail and investors are looking for those that have a higher chance of succeeding; it is most unlikely that they think your startup is one of those that have a good chance of succeeding. (3.) Most great ideas seem wrong at first and most investors are bad at judging startup’s ideas; you must, therefore, do some work on yourself, on your idea, on your business, and on the investors to be able to convince them of your qualification to be funded. Follow the other points below.
2. Raising money is hard and time-wasting.
It has killed many startup companies. You must, therefore, be careful with the fundraising process and investor management. Manage this process well by following the other points below.
3. The best way to get investors’ money is not to need investors’ money.
As is the case with everything in life, you become an object of seduction and enticement when you seem not to be interested in something – when you seem to have a lot of bargaining power.
Humans, including investors, generally want what they cannot have but see others having. (Prof. Robert Cialdini and the other great psychologists have written extensively on this.) And it even works best when you genuinely have a great bargaining power – what Paul Graham calls “being formidable”. That is when you would be getting calls and invites from investors that would otherwise be reluctant to pick your calls or respond to your emails.
As a startup founder, you get to the point of getting calls and invites from investors if you have enough bargaining power. You get enough bargaining power by (1.) being formidable i.e when you can get what you want even without the investors and they are aware of that power. (2.) showing great traction of your startup success so far. When you have these two qualities, you really don’t need investors’ money. They need you because you will likely get them paid in the long run — since your company seems like a good bet.
4. You have to seem formidable.
You have to seem like you will succeed without them. To be able to do this, you need to earn it by doing the hard work involved. When you have built a strong track record of dependability, reliability, and getting shits done, then you will win the game of formidability — and therefore, of fundraising.
5. Show the prospective investors your results.
People may doubt what you say but they will believe what you do.
6. Get really creative.
Paul Graham talks a lot about attaining Ramen’s profitability. This is where you hack the process to earn enough profit from your business to keep the team up with their leaving expenses, while you keep up with the company-building and the fundraising process. Since the fundraising may linger beyond your imagination, you need to get really creative: presell to customers, reduce your staff size and other overhead costs, do consulting by the side, etc.
7. Don’t spend all your time talking to investors.
Most investors will waste your time and won’t even close deals with you later on. And building the company is more important than talking to investors (you should be building great products and talking to users), and talking to investors takes away the time for doing the real job – building the company. It is therefore very important that you manage investors well.
Since you likely have more than one founder on your team, the founder who is the CEO (the startup’s default visionary and marketing evangelist) should dedicate his or her time in talking to investors while the remaining founder(s) which should include the CTO (if you are building a technology startup) should be focused on building the company.
8. Just raise money and stop.
Focus your attention on raising the money when you have to, be done with the process quickly, and stop raising money so you can get back to the most important work — getting users and making them happy.
If you keep thinking about fundraising all the time, you will be psyched wrongly. You must manage your psychology well during the fundraising process by ensuring you get over it early enough. This is so you can focus on the most important thing — which is about getting users. If you must be psyched and worried, it must be about making what users want and getting them to use it. That is product development and marketing.
9. Stick to the truth.
This advice is particularly useful to the inexperienced founders who may try to lie in trying to convince investors. Don’t lie; say the truth. First, you don’t want to build your company on lies. Second, investors are good at judging liars – since most of them have been in your position before and have even developed a sixth sense for judging liars because of their many experiences with other founders. It is therefore imperative that you tell them candidly about you and your business. Your results so far, why other investors haven’t signed you a check (if they ask for it, as they almost always do), and so on.
Be clear with them about everything but also show them why you still deserve their own investment, which is that: (1.) you are solving an important problem for an important market segment (2.) you have shown a good track record (whatever good track record!) (3.) you are going to make them a bunch of money out of their investments.
10. Get a reputable individual or an organization to introduce you to the investor(s).
It is part of human nature to want to rely on social proof. That is the reality of life — it is a basic principle of persuasion! That is why contacts and connections and networks all work.
Part of why some people don’t succeed with the business of startup building, part of which is fundraising, isn’t just because of the lack of good skill or bad luck; lack of startup success is also as a result of lack of contacts with and connections to those who could help them get the job done when it is time.
In the investing business, as is always the case with all the other fields where human interactions and persuasiveness are paramount, a few things work more magic than having the right networks and contacts make some intros to their friends and partners on your behalf. (Contacts and networks make experienced founders formidable – the other things being their learnings and skills earned through blood and sweat.)
When you can get a reputable person or people to make an intro for you, you are half-way done with the fundraising hustle. That is credibility and trust-building. Those you are introduced to will believe you more. They will trust you more. They will be less critical of you. Some questions they would have asked to mess around with you will no longer be asked. You will be more likable. Even faults in your ideas or presentations are judged less critically, or can even be completely ignored.
Contacts and networks are the cheat codes of convincing investors, but also realize that you need to have done the first thing first: make sure your idea is worth investing in and that you have the numbers ready.
11. Until a yes is got with resounding evidence.
We are wired to believe in false hopes because we all fear the pain of rejection. This is very much evident from what the British philosopher Jeremy Bentham said about us: “Man is a pleasure-seeking and pain-avoiding animal.” It is all too easy for us to keep believing that a no is a yes. This is most evident in most relationships, including dealing with investors. When investors are yet to say yes explicitly, as must be evidenced by signing you a check or wiring the money into your account, every other thing is a serious “no”.
The human mind is fickle and investors change their minds all the time; so don’t believe in any promise of commitment, no matter how appealing and strong they are. Until the investor commits by wiring the money into your bank account or signing you a check, no deal has happened. There have been cases of “strong promises” from investors that made founders to keep hoping until they learn the hard the way that investors are too fickle to be trusted with mere strong and appealing promises. Don’t allow yourself to be in this situation!
12. Always know where you stand.
As with any other relationship, never leave any meeting or conversation without getting in sync with the investors. You should always know where you stand. Are they going to invest or not? Is there a yes or a no? Is there going to be another meeting? When? What are you going to be talking about?
To avoid wasting your time and being clear that you are making progress, the discussion for the next meeting should be some form of progression from the meeting preceding it; otherwise, you are dealing with either an inexperienced investor or a bad investor, in whichever case you should stop taking with them. But if the next meeting discusses something that builds on top of the previous meeting, then you are making progress.
13. Get the first commitment to convince other investors.
This is social proof at play. As stated earlier, social proof is a core part of persuading investors. People are wired to be herds, and investors are people. You therefore should expect that when you start talking to investors, they will want to know if others have invested.
So, if you can close some “easier” deals first, from less demanding investors, you will be all the better when you are talking with the more demanding ones. Besides, having closed some deals will give you the window you need to execute on your idea and build the company, while you talk to the other investors. This not only gives you an edge, by making you less dependent on the next investor’s money, but it also makes you show the investors results – something they desperately want to see to be persuaded.
If you haven’t closed any deal before talking to a particular investor, make it seem as though you are about closing one. And more so, the best-experienced investors judge you more based on the merits of your idea and you as a founder, and not necessarily relying on what other investors have done – since contrarian thinking, rather than herd mentality, is the rule in investing success that the experienced investors usually have. This also means that if you meet an investor who is particularly concerned about the action of other investors without actually considering the merits of your idea, that investor is either a bad or inexperienced type. In whichever case, you should be careful in dealing with them.
14. Committed money should always be closed.
If you get any fair offer from a reputable fund or investor, don’t hesitate in closing the deal, so you could get back to do the most important thing: building the company. And besides, investors’ minds are fickle, and someone who makes a promise this second can change their mind the next second. So close deals as quickly as possible and get back to focus on building the company (or in pursuing other investors, if you still have a need for their money).
15. Seem like you don’t want much.
Since you don’t want investors to feel like you can’t do without them, it is a good rule of thumb to say less than you actually want. When you do this; (1.) they would think you don’t spend too much – a quality of every great startup founder (2.) they would think you don’t need them that desperately – something that makes you formidable and enticing to investors. (3.) it forces you to think more creatively – lack is one of the best ingredients that make great founders. All these will work together to increase the chances that you will get what you want from the investors — by not wanting much. So always underestimate how much you want.
16. Avoid investors who don’t take action.
Some investors are always waiting for other investors to take action first. So, start with those take that “lead” and come back later to those who are “led” – if you have the time and need for them. Ideally, the investors who don’t take action or who are indecisive are usually inexperienced or bad ones that waste your time and derail you from the real thing: company building. Avoid investors who don’t take action.
17. Have multiple plans.
Since most deals fall through, it is very essential that you keep your options wide open. It is okay to do your best but never be too attached to any particular discussion. Have multiple plans and pursue them in parallel, with priority to expected values, and probabilities of the plans happening.
18. Don’t be too hard on yourself; valuation doesn’t matter that much at the early stage.
So, accept offers without much hesitation. Startups are all or nothing game. Ideas aren’t that valuable and as you start out, all you have is an idea or a little more than it. If you get any offer from an investor or fund you like, go for it and return to company building. It is your ability to execute (so you don’t fail) that matters most, and not your overvaluing your nascent and fledgling company that is more or less an idea. (Ideas are cheap; executions are costly.)
19. Stop fundraising once it stops working.
Once you realize that you can do without fundraising, stop. That is good news for you. The only reason you needed outside funding in the first place was to help build the company fast, and once you can build the company at the rate you need to without outside funding, stop raising funds. You can stop raising outside funds once you have raised enough or once you have hit a revenue stream that is enough to keep the company going at the speed you want.
20. Have one of the founders especially the CEO handle the fundraising.
This is so you don’t spend your whole time raising funds. As indicated earlier, company building – engaging users and doing what they want – is the most important aspect of a startup. And the counterintuitive truth is that fundraising derails the company building process –something it was meant to support in the first place.
There are many reasons why fundraising stalls company building. When you start raising funds, it becomes the top idea on your mind. And anything that becomes the top idea on your mind anytime always takes the lead. If fundraising becomes the top idea on your mind, as it always does when you are engaged in it considering how problematic dealing with investors is, it dwarfs company building. So, to dampen the derailing effects of fundraising, since you can’t escape the negative effects completely, it makes all the sense to have someone more experienced and formidable in your team (usually the CEO) handle fundraising, while the rest of the people focus on company building.
21. Be nice.
I have said this a lot: Don’t be mean. Mean people, including founders, fail. Your ability to build a valuable company depends highly on your skills, networks, and relationships with others – social skills. Somewhere down the line, you will always need the help of others. The world is too small to support meanness for too long. So be nice to investors — all of them.
22. Keep your presentation short, precise, and to the point.
Don’t just follow some stupid standards. Know what you need to add or remove. Know who you are dealing with and act accordingly. Don’t go on to put a 20-page slide when a 5-page slide will do the job. Don’t add stats that will take people’s attention away from what you are saying. Don’t put some jargons that are useless.
23. Don’t raise too much.
Lack can sometimes be a blessing and abundance sometimes a curse for a startup. One of the easiest things in the world is to spend other people’s money. Unfortunately, once you have collected investors’ money, they would want it to go to work. So you may actually be forced to spend the money once raised, even if you don’t want to. Raise what you need; and realize that the goal of a startup is to do more with less; first, for the company, and second, in helping customers do the same. Don’t raise too; it is a curse and not a blessing.
24. Don’t raise too little.
Even though raising too much is bad, raising too little can be as bad. One of the main things that kill a startup is running out of money. Raising too little does that perfectly and fast. But also realize that spending too much is as good as raising too little. So don’t spend your money – unless when it is necessary, that is to build the product or get customers (if LTV >CAC).
25. Avoid investors until you decide to raise money.
When you do talk, talk to them all in parallel, prioritized by expected value, and accept offers greedily.
In summary (as summarised by Paul Graham), to get money from Investors:
- Make something worth investing in.
- Understand why it’s worth investing in.
- Explain that clearly to investors.