🦠 Fundraising During COVID

In October 2018 my co-founder Emily and I came up with the idea for Cherry. We moved to San Francisco to go through Y Combinator’s W19 batch. Shortly after, we raised a $700k+ angel round we used to build and launch Cherry V1. Our product solved the engagement problem with employee perks/benefits (historically a 7% engagement rate was ~90% on Cherry). Now, after an unsuccessful attempt to raise a Seed round we’re closing down and sharing our learnings.

This article is part 5 in a 5 part series.

When we tried to fundraise after YC, we did a less than stellar job and made all of the classic mistakes. Amazingly, we were still able to raise $550K from individual angel investors. After the painful but enlightening process of scraping our MVP and developing V1 of our product, we decided to take the same iterative approach to fundraising.

The first points in our favor were our team & our traction. We had seen 57% monthly growth for 6 months, our MRR sat around $5K, and we were a team deserving of trust: YC founders, sisters, and considerably more experienced than the last time we’d pitched.

The first time I had tried to raise money, I was naive and didn’t know what to expect. Learning from that mistake, I leveraged my network and spoke to CEOs who had successfully raised. I started to form a better idea of how things would go.

With this new context, I decided my first move should be to meet with as many investors as possible for coffee ~2 months before we planned to raise. In addition to sales and customer on-boarding — I was carving out time every few days to meet with a new investor. This not only gave them the opportunity to learn more about me and Cherry, but also helped me form an understanding of who I actually wanted to work with. I was able to rule out investors early on that I knew wouldn’t be a fit — so getting a false negative or generally wasting time would not be part of our fundraising process this time. As female founders, the odds are already stacked against you so I do believe that things like this are meaningful.

During our first raise, a big mistake we made was allowing VCs to control our process. I would often leave meetings frustrated by the questions asked, or feeling like neither party got the essential information across to the other. We would also often be waiting (sometimes indefinitely) for a follow-up response from these investors.

This time, we were confident and prepared to lead the charge. We had ~20 strong points we wanted to always cover in our meetings and ensured that our conversations stayed on track. We never left a meeting without getting the important points across.

Finally, for our previous raise — we didn’t have a deck or materials to lead our conversations. This time around, we prepared a beautiful deck that gave structure to our conversations and got investors excited about meeting us. We hosted it on DocSend to track open rates & analyze focus.

To top it off, we practiced our pitch relentlessly with our existing investors, friends, family, and other founders. This time, Emily would attend every meeting with me, so that investors could get to know and evaluate our entire team. Unlike our first raise — when we worked solely with angel investors — this time, we focused on securing a lead. We already had six impressive angels committed to the round, but weren’t going to accept their money until we had the majority committed from a lead who would anchor us and help set the terms.

Practicing our pitch

The process started off strong. By the first week, 2 VC firms were “ready to give us term sheets.” As we shopped that info around to other VCs we could see they were excited and moved quickly. Some wanted to be on our board & gave us sample terms while they worked to put together an official offer. Two months in, there were 4 firms that were very interested and we had no reason to believe we wouldn’t close our raise.

As we reached the end of the process with those people, a shelter-in-place was instituted in San Francisco due to COVID. Their response times began to slow. Initially, we attributed this to attention firms needed to give their suddenly distressed portfolio companies, and moving their own operations fully online. In-person meetings started moving to Zoom. In the end, though, the terms never came through.

Why did people pass?

Here was the most common feedback we got:

1.Concerns around defensibility

“We’d need to see more traction and depth in the product to be able to invest in a competitive category.”

When we first had the idea for Cherry (Oct 2018) there was 1 other company in the space that was only offering a limited wellness wallet. Today there are 7 (YC has funded 4). Our early private beta access to card-issuing technology + the YC network proved not to be unique early advantages. Therefore our only moat was our data & unfortunately, many of the investors we spoke with wanted to see a non-data moat already in place.

2. Not a need to have + fuzziness around sales process = low market pull

“I ran this by two HR leads in our network and they think it’s a great solution but don’t see it as an immediate priority on their list.”

This we agree is a valid concern we were planning to address. We’ve learned that a product may benefit consumers but it doesn’t guarantee they will adopt it — people aren’t always logical. (In our meetings, we discussed product and sales strategies to tackle this)

3. Market size doubts

“We have concerns around growing ACV over time.”

This one was initially surprising because just as many people said our ACV was high ¯\(ツ)/¯. However, with unemployment set to be the highest in years, we think the market opportunity has certainly been affected in the near future.

4. Larger HR platforms might do this / early acquisition

“Established HR platform companies may become competitors”

We believed our unique data would act as a moat around large companies trying to pivot into the space. However, concerns around an early acquisition were legitimate as we would learn from conversations with an HR unicorn that was interested in either building the product internally or acquiring us.

What about an acquisition?

We were disappointed with our fundraising experience but not ready to give up, especially because we had been in touch with one of the founders of a Unicorn startup — first as an angel investor. After pitching him, he wanted to know if we were open to an acquisition. With investor meetings drying up we were ready to consider it. Unfortunately, the COVID situation exploded between the first few meetings and our last call. At that time the founder expressed to us that their company and all of its customers were focused 100% on relief. They could no longer consider an acquisition.

The Decision to Shut Down

It became clear to us that we were not going to have the opportunity to raise money or talk about acquisitions for another several months and had to consider our options.

The writing was on the wall that it was a matter of math — given our runway, we didn’t have enough time to wait this out. More importantly, we didn’t want to become a zombie company. Instead, the most responsible (and respectable) option was to shut down with enough time to give our customers a grace period and help them through off-boarding.

Conclusion

I sincerely believe that the iterative effort we put towards fundraising paid off. Though we were not able to secure the funding we needed in order to continue operating Cherry, our process was better in February 2020 than it was in April 2019. We were able to meet with every investor we were interested in, VCs were prompt and responsive, and we got much further in the process than we ever had before — entering diligence and negotiations.

Though we’re disappointed to be shutting down, we truly feel that running Cherry was a net win and we could not be more grateful to have had the opportunity to serve our customers and grow alongside them. This experience has given us invaluable tools and skills that we’re excited to bring to our next roles and future startups.