Want $1M? Here’s how we did — anatomy of an Angel.co fundraising
This story was originally published as GuestPost on AdEspresso, Jul 10th 2014.
Raising your first round can be a huge challenge. I know something about it, I was involved in raising $2.5M+ for two different companies with chunks anywhere between $5k and $250k. Now, if you’re an experienced founder with an established network, you probably don’t need any of this. But if you are instead a first time founder or an international founder coming to the US, there is a strategy that worked pretty well in my experience. I wrote the email below to the internal 500Startups’ Network a few months ago, in response to a founder asking for suggestions. It’s my secret sauce, also because we initially had the same challenge. Since then, I realized I spoke about this a dozen times, so maybe -just maybe- it’s worth sharing. Here goes the inside scoop:
a) define a fairly low funding goal and a fairly convenient -but not cheap- valuation (let’s say $300k at $3M cap, if it’s the first external raise). Prioritize the people more likely to put some $$ in the company. The fastest you can get to 35% then 50% of the target, the easiest it gets.
b) ideally the first ones to put money should be your same customers (I wrote about it here: https://medium.com/1-000-whys/baa3add2e2d7). That makes a hell of a story: “hey, when they heard I was fundraising, my own customers wanted in also”. You could get $50–75k this way.
c) the second best choice that you have is the people who know you from previous ventures and you have good relationship with, that you have kept in the loop with the progress so far. Knowing you and that your customers are investing should be enough to make them move.
d) at this point you could/should have around 40%-50% committed (don’t think even for a second of a priced round, go for a CN and close $10–25–50k as they come in). The third best option is angel.co: you should message *every* single angel connected to you and your company.
e) you could say something like “hey X, we are growing Y and W with MYCOMPANY; so to do Z we decided to open a round of funding, which is as of now 50% committed… and our customers actually invested as well as they learned about the opportunity. Worth talking more?”
f) you’ll have 3–5% inbound replies back of angels actually *interested* in what you’re doing. Take the call and use the fact that you’re receiving a lot of attention (at that point you’ll be most likely trending as well on AngelList) to put a forcing function on giving you a quick feedback/reply.
g) by leveraging AngelList+customers+friends you shouldn’t have issues closing the first $300k. At that point you can go back to the ones still in doubt and say “hey, wanted to let you know that we already closed the round *BUT* due to big interest we’re extending it of X. Want in?”
h) this way it’s very likely that you’ll be able to extend the round of another $100–200k, reaching your *true* goal that you set for yourself from the beginning! Up to you to decide if it’s worth to keep the same conditions (cap/discount) or to increase them (i.e. from $3 to $5M cap)
The last company I helped that executed on this approach closed $500k in less than a month (they had good traction and a strong product; I understand that for you 500FOUNDER it’s the same). Final thought: along the way you’ll start talking to Seed Funds interested in you as well.
Approach these conversations in two different ways: by using them as a further forcing function for the smaller guys (“hey, I need you to take a decision within next week, since when one of the big guys decides to move it will want to take all the available space left”).
On the other side, by using the fact that you have already what you were aiming for (or almost all of it) in the bank, to say to the Seed Funds: “hey, the round is currently oversubscribed; but happy to talk about $250–500k more to do X and Y already, and boost further operations”.
This way it won’t be you that will need the money, but they that want to get involved… and of course you’ll be in a much stronger negotiation’s position in that conversation (because it’s them that, if they want to be involved, will have to accept a valuation; not the other way around)
Bottom line: final recommendation is not to build your funding top-down but bottom-up, building on the interest/hype you’ll gradually generate. Hope useful. Happy to talk more if needed!
You can see this as a ‘Sales Cycle’, with the only difference that you’re not selling your product, you’re selling yourself and your company. Still, lots of founders use an ‘outbound’ approach, reaching out to investors they *think* will be interested one at a time; while the approach described above uses the same guidelines of ‘Predictable Revenue’ (I really shouldn’t say this, but when I designed this approach I hadn’t read the book yet) with the goal to identify the investors that *demonstrate* interest. It’s super easy: they’ll either follow the Company or ask for an introduction.
In the moment in which they ask for an introduction, they enter a ‘Fast Track’ and your job becomes simply to remove all the friction from the process: getting to the first call as soon as possible, understanding if they are a fit for you and if you’re a fit for them, following up with the investment package, answering whatever question they have, checking in after a few days to ask if they want to know more about specific topics, letting them know of the progress of the latest few days, and ‘moving them across the funnel’ up to a positive or a negative closing.
The people that just follow the company, instead? Staying consistent with the ‘Predictable Revenue’ approach, you should consider them ‘Warm Leads’ that need to be nurtured with different good content related to your company and the progress you’re generating. From this standpoint, *every* progress works: did you release a new feature? Awesome. Did you hire a new team member? Let them know about it. Did you close a new investor? Wow, the room in the round is reducing. Did you hit whatever number in the metric/KPI you’re tracking? Time to share the joy.
Being able to communicate efficiently is everything in this phase, the more you’re able to do it and build momentum, the more your ‘Warm Leads’ will heat up and want a piece of the action. How do you do it? Well, on one side of course by communicating via email with the investors that already established a contact with you; on the other side by leveraging AngelList as *the* platform to distribute the content related to your company and its progress. Here is an example of the update email we sent out to investors that followed the company.
Pro tip: AngelList only allows 3 messages at a time to the same person, if they won’t reply by then you won’t be able to message them anymore… so use those messages wisely. Fear not though, because if you’re limited on the messages, you’re not limited on the amount of content you can put on your Company’s profile. And here’s where you can set the right tone for the conversation with the investors: by adding the highest number of details possible (strategy, screenshots, customers, team, backstory, press) and then of course traction, traction, traction. Oh, I forgot traction!
Be aware that lots of investors actually look at the traction before looking at what you do. So, as Dave McClure says -usually between one fuck*ng and the other- “if you have traction show traction”. How? Two easy things: a) the news updates, b) the -duh- traction’s section. Do consider also that nowadays the global trend is toward transparency, so people are starting to expect that. If you are not comfortable in sharing data, it’s a potential “red flag” of the type of relationship that you’ll have with your investors… and some of them may not like it. As for us, the news update looked like this:
Notice any trend? A few things: a) transparency on the use of actual data to validate progress, b) an higher frequency on updates during the hot phase of the fundraising, c) the mention of third-party validations and/or endorsements, d) the focus on money and on traction to build momentum. e) the clear call to action during the hot phase of the fundraising. For you as a founder the point is not the topic you’re talking about, but the fact that you’re showing excitement for the tangible progress plus the fact that the excitement is shared by someone else that’s not your dog or your mom
Finally, regarding the traction’s section, some guidelines: a) dollars are more important than users or -well- anything else actually, b) trends are more important that absolute numbers, c) month-over-month numbers are more important than cumulative numbers, d) pick the two or three metrics that are more meaningful to your business and allow the best perspective possible. Again: transparency is a huge deal, and wins over the fact that your numbers won’t be perfect (no one has perfect numbers, or you’d be raising already a SeriesB). Ours looked like this on ‘AdBudget Managed’:
Bottom line: the result is that we ended up raising a total of $1M on top of the $300k with which we self-funded the Company through its first year. Around 75% of that can be considered directly generated by the approach above. Three more notes:
- Storytelling plays a big part of this: who’s the villain, why are you the hero, what’s your superpower, what did you achieve already, why you need to team-up with them. Investors -but everyone, really- want to root for you and be proud of you, never forget it.
- Now that you do have investors, remember to over-communicate with them. I wrote some thought on that as well here.
- Finally, of course: fundraising is just a mean to an end. So, congrats… but now go do something, build something, sell something!