Feedback first, fundraising second
This is still a WIP, but here is how I recommend fundraising:
First, think about the business as if you had $100 million in your bank account right now. How do you build it with this amazing resource of cash? If your first response is to buy users, think again. Try to be very strategic, the purpose of this exercise is to think about what you could do with unlimited resources (abundance mindset).
Second, determine when you’ll need funding. Six months before you need funding have conversations with investors that you want to be on your team. If you’re not connected to many investors, I recommend applying to StartX and/or YC and ask for feedback (and don’t worry about getting in). You will get a good amount of feedback on your company that will help you get focused on the right things early.
When talking to investors, explain to them what you’re planning on doing and ask them what parts of the business that you should focus on de-risking. Venture capitalists are very good at giving this type of feedback.
Spend three months building a great business. And don’t do it in a vacuum,TALK TO USERS.
Having accomplished a lot of really useful work over the last three months, have a follow up conversation with the investors. It will make the investors feel very good that you listened to them and they will like you because it’s very gratifying to see someone actually take action on your advice. Communicate to the investors that you plan to raise a round in 4–5 months to give yourself padding. It’s always good to under-promise and over-deliver.
Now is the hardest part: How do you get that first investor to say yes especially if you’ve never raised capital before? From my experience, I believe the two reasons someone makes a commitment are: 1) There’s a personal relationship/friendship, 2) Someone else is going to do the deal.
Once you have the first investor with a hard commitment for the round, you will be more confident in yourself. Investors will recognize this and it will be easier to get your second commitment. Once you have two investors that you’re very sure will put in money, communicate to the other investors that you’re ready to close the round.
Your increased confidence in the meetings with them is enough to show that you likely have commitments from other investors. You do not need to tell them that you have other commitments.
While running this process, be respectful and compassionate. Recognize that fundraising is step one of the relationship with the investor and you do not want to leave a bad taste in their mouth.
Once you have a number of offers, I recommend working with your favorite investor (not necessarily the one that gives you the best price). The one that was on your team from day one and wants to genuinely see you succeed.
Good luck, and most importantly have fun and be sure to learn the right lessons. Be confident and trust yourself. Always maintain the frame that you are in control and if you don’t feel that way, try to reduce your burn. If that means asking people on your team if they would rather leave your company or stay for a significantly reduced pay, do it. Hard times highlight who the best players on your team are and how much they care about what you’re building together. Be honest, be authentic, and most importantly always be compassionate and treat people with the highest level of respect.