Fundraising 101

Fundraising is one of the most difficult aspects of founding a company, and a process every Founder must go through—for better or for worse. But how do you know if you’re going about it the right way? How can you optimize for the best fundraising experience? As we always say at True, we believe the best answers to these questions are “in the room”—True Founders have raised over $800 million in 2014, and we can all benefit from their hard-won expertise. Below, four Founders in the True portfolio—Tony Conrad, about.me; Matt Straz, Namely; Sophie Lebrecht, Neon; and Tim Prendergast, Evident.io—weigh in on the most important aspects of fundraising, from timing and decks to pitching and closing the deal:

When to Fundraise

Tony Conrad: Don’t try to time your fundraise with your perceived momentum. A lot of people say, “Okay, I’ve got 13 months of cash and I’ll go raise in 6-7 months because I’ll have so much more progress.” You have to understand how much your equation is really going to change in 6-7 months, because if it’s not going to change that much, then time is your best friend. The truth of fundraising is that you’re selling potential sometimes more than reality, so starting the process sooner rather than later can give you more confidence. You don’t want to wait until you’re desperate. If you give yourself plenty of time and you learn that the funding is not going well, it’s early enough in the cycle that you can have conversations with existing investors, move runway out and make other adjustments.

Identifying Potential Investors

TC: Make a short list of investors you ideally want to meet. That’s a little easier for me than others because I’m also a partner at True so I know a lot of people on the investor side. If you’re not in that position, I’d recommend you work closely with people already around the table with you and ask them for one person they think you should talk to. I would keep the list as narrow as possible—I wouldn’t go to more than five investors to start, and I would go to your top choices first.

Sophie Lebrecht: It’s always important to get trusted introductions. The better you and the investor know the person connecting you, the more the investor will value the introduction. Getting introductions to investors from other VCs is one thing, but it always helps to get introductions from companies already in their portfolio. Often, investors look to the Founders in their portfolio to have the best understanding of the space and to know whether the person pitching is not only doing something novel, but can handle the ups and downs of being a startup Founder.

Decks

TC: It’s important to have a handle on your materials and don’t rush building your deck. We built our 6-page intro deck over the course of a couple of months and were able to refine it and rehearse. We followed a lot of the practical advice that Tim Young laid out in his post “365 Days, $10 Million, 3 Rounds, 2 Companies, All With 5 Magic Slides.” Before presenting your deck to investors, I highly recommend presenting it to your team. Talk about a gut check. Your team is the one group of people you can’t side-step on fundamental issues and challenges—they will make sure your data is right and you aren’t being grandiose. My team was pretty brutal on fact-checking our deck, which ultimately made it much better when we met with investors.

Tim Prendergast: Make an exercise of constantly updating your pitch deck—it is the soul of your company on paper, and helps keep your vision focused and enables you to verbalize the targets you’re trying to reach and what you’re trying to build. It gives you a linear path and a cohesive story. At first, we didn’t update our deck from our seed round to when we were raising our A round. Big mistake. We went to a few meetings with that deck and the investors didn’t get it. You need to show investors where your company is going and how it’s going to captivate the market. Once we reworked our deck with that in mind, we started getting great traction.

Meetings and Pitching

Matt Straz: The round you’re raising and how much you’re raising will determine a lot about how your pitch is shaped. There is a huge difference between a seed round versus an A round versus a B round, and what investors want to see in each of those presentations is very different. An angel round is largely personality driven while a B round is largely numbers driven. If you’re doing a B round, you need to know exactly what those metrics are and what you need to be hitting before you even give a presentation. Know where you are in your fundraising lifecycle and what people are looking for in each stage—as you progress, it gets much more quantitative than qualitative.

TP: If you have a Co-Founder, you need to show investors that you are both leaders. My Co-Founder Justin and I got in a pitching rut, where I would go into autopilot and pitch, and then Justin would take questions. We wanted to better show investors that we were equal and aligned with the same passion for the company, so we switched to presenting alternating pieces of the deck and taking turns answering questions. It really sent a message about the power of our team. We also emphasized that as Founders we may have great backgrounds and be awesome leaders for what we’re trying to build, but the team around us is everything that’s making the company exciting and great and new.

TP: Investors are interested in the longer vision for your company, so have a depth of field for your vision that goes well beyond what you think you need. We’d be in pitch meetings talking about 12 months and investors would ask about 2-3 years. We had to show projected evolutions for the market and what we were going to do. It only took an hour or two to develop, but as engineering Founders we didn’t think about that early on—it was good for us to think more strategically and for the long term.

TC: Always pitch in person. Brad Feld, who ended up becoming our Series B lead investor, said, “We can do this over Google hangouts.” And I said, “Brad, I’m not going to present to you on Google hangouts. This is our company and I want to be thoughtful and I’d rather do it in person.” So I flew out to Boulder to talk to him. And, as a result, we had a much more robust deep dive.

SL: Make sure you understand the fund’s process for making a decision. Always ask at the end of your meeting, “What are the next steps?” You may think that because you have had three meetings with a junior partner that you are close to having them write you a check, but in actuality you may still need to present to a general partner, and then to the partnership as a whole. Time is not on your side: being sure you understand the next steps—if you have a good chance of advancing toward funding, or working to get a quick no if it’s clear that they’re not ready invest—is always better for you and your company in the long run.

Finding the Right Investor

MS: Not every firm is going to be a good fit for you and your company, and it’s okay to preemptively “break up” with VCs that aren’t a good fit. You aren’t the only one who has to get dumped—you can be the dumper. If you have a meeting that didn’t go well, you can break up with them, which sometimes has a nice psychological effect. It’s also fine to break up if you can’t possibly imagine working with that person for a long time. Like any other long-term relationship, this is one you can’t sever very easily, so get out early if you sense it won’t work.

TP: We took the shotgun approach to meetings, talking to 5-6 investors a week for 6-8 weeks, trying to get a lot of coverage. This helped us refine our pitch and answer questions to have more productive conversations. Not every investor will be for you—in fact most of them won’t be. Remember that it is a marriage; it’s not just about money. We were very intentional about asking firms what they were looking for in an investment, and we’d tell them what we were looking for in investors. We were very selective and allowed for a longer process, and we ended up with single best new lead investor for our company in the marketplace.

SL: Sometimes your company and the fund are not going to be a cultural fit—understand that it’s okay to be selective. Neon is a science-based B2B company, so we’re working with investors that value deep scientific solutions, but we wouldn’t be a good fit with investors that focus only on consumer companies. Research the investment philosophy of the partner you’re going to be meeting with to make sure you are aligned. Read up on the other companies they’ve invested in to gauge whether you’re wasting your time—if they’ve never invested in anything like your company, it’s not likely they are going to take a risk on you. Time is precious, so it is better to cut the relationship short than drag meetings on and on when you sense it’s not a fit.

MS: You need to develop a thick skin; don’t take the process personally. Even the best Founders are going to fail nine times out of ten when they go to do fundraising. Ninety percent of the time, the person you’re speaking to may not have the power to actually do a deal—their fund may not have room for you, the partner may love your idea but can’t sell you through to the others, or they might just be drilling you for information without actually looking to make an investment. It depends on the firm, but some junior associates aren’t empowered to do anything other than source deals. Be prepared for that to happen—don’t get overly excited if you’re speaking with a junior partner at a big firm. The chances that they will actually be able to sell you through are slim.

Feedback and Vetting

MS: When there is genuine interest, don’t take all the requests for information personally or get aggravated with the partner—most likely, his partners are asking him questions and he is trying to sell you. Unfortunately, this will happen at the end, when you’re getting exhausted and tired and you want to tell the partner, “No more information; we’ve provided all we can.” In reality, he’s trying to help you he can combat any objections that have been raised by other partners. That’s when you need to be most helpful.

SL: Be prepared that potential investors may want you to meet other companies in their portfolio. Know that this is part of their diligence process. An investor will often say, “Oh, you should meet this company,” and you might think they are helping you network, but ultimately they are using the market expert in your space to test the relevance and robustness of your company. Be aware that in the same way a Founder can give you a good recommendation, they can also give you a bad one. If you are later stage and have customers, they will also want to speak with them to understand how much pain your product is relieving and how much they are willing to pay.

Closing the Deal

TC: My attitude is: if any of my top five investors raise their hands and want to fund our company, I’m not going to use that to push others. I’m not interested in optimizing, as I believe listening to the market is an effective tool for understanding where you are in the cycle. Instead, it’s important to have a clear sense of the deal you think is fair—how much you are hoping to raise and what percentage ownership you think it should buy. If you get that deal from one of your top prospects, why would you spend time going back and forth with other people? My wife is great at real estate and always says, “The first offer is the best offer.” It’s the same with investors—if you have your top 3-5 prospects and you’d be psyched to work with any of them, once one of them raises their hand, work on closing that.

SL: Just because you get a term sheet doesn’t mean that the deal is done. The work that it takes from the term sheet to money in the bank is not trivial. Early on at Neon, once we signed the term sheet everyone kept saying “drive the close,” but I didn’t understand what this meant. I learned how to drive the close the hard way when our seed round almost fell apart in the 11th hour because of legal issues. Getting those issues resolved and the deal closed actually made drinking coffee and flipping through my deck on Sand Hill Road seem easy! Make sure that you have good lawyers, keep in regular communication with your lead investor, set a date to close, and do all you can to ensure everything comes together on that day.

Relationship Management

TC: Always have additional information that you can feed to current and potential future investors—new hires, updates, etc. about.me gets a lot of user inputs and love letters, and I consistently forward them to people I want to be around my table.

SL: Building relationships with investors is key. It’s hard for an investor to see one pitch deck during the first meeting and make a snap judgment about your company, especially when you are early stage and pre-revenue. It’s good if you can help investors track your progress. The best way to do that is by checking in regularly and keeping them updated. Maybe you only have three customers, but if six months ago you didn’t even have a business model, tell people about that progress. When Neon went out to fundraise, we already knew our investors and had built the relationships before we needed to ask for money, which I think helped a lot.

Winning the Mental Game

MS: Every fundraise is emotional and you’ll be rejected many times. On the surface, when you see all the fundraising announcements, it looks so easy and awesome, but the truth is it’s a really long and difficult road for all of us. Keep a secret list of everyone who ever said no to you, even if it’s mental. It can be motivating to remind yourself that all along the way there were people who didn’t believe in you—then prove them wrong.