Raising Capital As A First Time Founder
A year ago, in mid September 2014, I walked out of a Starbucks in San Francisco with the very first check from an angel investor for Glassbreakers. Though it was only $5,000, it was enough to prove to myself and my co-founder, Lauren Mosenthal, that we could actually fundraise for our startup. We already had 1,000 women signed up for beta on our landing page and we needed to start building. We quit our full time jobs that day after bootstrapping the company for months with nothing but our shared ambition to rely on and never looked back.
Though I’d studied finance and entrepreneurship during my MBA, nothing in a classroom could have ever prepared me for the art and science of fundraising. Every CEO and every startup will have a different journey but first time founders experience many of the same pitfalls and challenges. You learn by doing, failing and persevering.
In the past year we’ve raised over a million dollars in funding, netted some revenue, faced over a hundred rejections, and also had the opportunity to work with some of the greatest investors on Earth. It’s a brutally emotional, physical and mental roller coaster when you’re fundraising but it sure is exhilarating.
If you are a first time founder feeling lost about raising capital — or you’ve got a big idea and don’t know where to start — here are some of the lessons we’ve learned through both experience and mentorship.
- In order to take outside funding, you’ll need to have your ‘ducks in a row’ legally. This means your startup should be a registered c-corp in the state of Delaware, fully formulated with bylaws signed and with the founders equity and your board seats confirmed. We partnered with Orrick as our legal team and they’ve been an incredible resource for us. Seek law firms with ‘emerging companies’ programs located near you so you can have the occasional face to face meeting.
- Understand that only accredited investors can really invest in your company. Sure, laws are changing so that non accredited investors might be able to go in and there is always crowd funding, but for the most part you’re going to be raising capital in your first year from accredited angel investors. If you are unsure if an investor is accredited your lawyers can help you draft a letter for them to sign with the details of what defines ‘accredited investor’ to confirm they meet the criteria.
- Set up a bank account (we recommend Silicon Valley Bank) for your startup so that you can deposit checks from angel investors into your company account the moment they are written.
- Don’t waste your time trying to fundraise until you have all of these items set in stone.
Setting Yourself Up For Success
- If you are launching a technology company and you are not technical — ie you have no product, design or software engineering experience — you need to partner with a technical co-founder. Launching a startup is incredibly hard. I wouldn’t recommend for any person regardless of technical ability to do it alone. If your idea and your people skills aren’t good enough to find a business partner with the opposite skill sets a tech startup needs to divide and conquer then it’s a poor reflection of your ability as a leader. As much as the CEO needs to get a business model off the ground, the CTO or CPO has an equally if not more difficult challenge building, iterating and strategizing product and architecture. Very few super humans can manage both.
- Spend time ‘co-founder dating’ with your business partner before you take the leap. Lauren and I spent months working on how to communicate best with each other, establishing boundaries, and sharing our strengths and weaknesses by practicing radical transparency. As the founders of a c-corp, this also meant investing all our financial resources and preparing to have zero salary together to get the company off the ground. We took the time to build a solid foundation for a strong business partnership as well as a great support system. It’s made a huge difference in our ability to move so quickly with so much focus.
- Bootstrap your startup for as long as possible; ie as long as you both can handle the financial and mental burden of investing all of your time and money into your idea till you reach your north star metric. Your cofounding team needs to be 100% ready to jump and it’s really valuable to push yourselves working nights and weekends on your idea till you’ve gotten enough traction to signal it’s go time. You’ll know when that moment happens.
- In the beginning, only raise the amount from your immediate network that you need to prove your business model. Without any revenue and without a prior record of founding a startup, it’s going to be hard to pitch your idea to legitimate angel investors. Fundraising is a time suck — don’t waste your opportunity and your time with your target investors until you are ready to say, “Here’s how we are going to make you money and I can prove it because we already have paying customers.”
Convertible Notes vs. Equity Financing
- Full disclosure, we’ve only raised capital on convertible notes. With convertible notes, the startup sets the terms like the cap on the note, discount and total amount being raised in the round. It’s quicker and most common when raising from angel investors. We’ve led two separate rounds on two separate notes — one at a 3M cap, 20% discount and the second at a 10M cap, 20% discount.
- Equity financing — like a seed round led by institutional investors — requires pitching a lot of venture capital funds. Pitching angel investors and pitching VC’s are two totally different practices. We met with a ton of VC’s when we were too early, which in retrospect was a waste of time. It may feel glamorous strolling through offices on sand hill road but unless you truly understand your options pool plan, five year financial projections and have enough knowledge on late stage financing to negotiate your pre-money valuation for a series A with confidence then push those meetings off till your ready.
- If you raise a seed round or an A from institutional investors, the ‘lead’ investment firm on the round will typically require a board seat (ie more formal control of the company). Sometimes for new founders that is helpful if you only care about doing what’s best for the company and you think the fund knows more about your space then you do. However, if you give yourself more time to figure out the direction of the company in your first year of operating with your cofounder and early team without an investor on the board, you’ll have more opportunities to test new ideas and less pressure to scale too quickly. People don’t talk about this but lots of first time CEO’s are removed from their position by the investors appointed to the board to be replaced with someone with more experience. You don’t want to be Richard from Pied Piper at the end of season 2 on Silicon Valley right?
- Know your math. If you are a CEO and don’t describe yourself as a ‘math nerd’ then this role may not be for you. Whether you are raising on convertible notes, safes or negotiating a term sheet — you shouldn’t take in capital if you don’t understand how the deal will affect the company’s long term financing strategy.
Preparing For Battle
- Fundraising is deeply psychological. Be prepared to get hundreds of rejections and to have your company torn to shreds. Don’t take any of it personally. Getting thick skin and learning from all the feedback you collect every time you hear a no makes you and the pitch stronger.
- A friend and fellow entrepreneur Jasmine Aarons of Voz gave me the best advice when I was just starting with fundraising and I regret not taking action on it. Jasmine told me to write all of my friends and family an email explaining that for the next few years, I was going to be putting everything I had into the company and that it would be my biggest priority in life. My personal life this year hasn’t been great and many friends were upset with me because I haven’t been around to support them or celebrate their life events. I think writing that letter in the beginning would have really helped set expectations on my time so I encourage all new founders to follow Jasmine’s wise advice. The reality is that when your fundraising, all your time is consumed by it, and few people outside of your co-founder will really understand that.
- I listen to A LOT of rap music. I always have but these days, it keeps me motivated to hustle harder. You’re the only one who can pump yourself up on that drive down the 101 to palo alto — be your biggest hype machine unapologetically.
- Keep check on your mental health. Talk about your anxiety, depression or anything else that might be blocking your ability to perform with your team, friends and please seek help if it’s not getting better. Your physical health may take a toll from those sleepless nights and horrible diet but you can’t afford to lose your mental focus. I have an anxiety disorder that I have to constantly monitor but being self aware and seeking professional treatment allows me to function normally though nothing about launching a startup is normal.
Finding Angel Investors
- I spent years working in PR so I know how to build a solid media list. Target investor lists are pretty much the same thing. You need to research investors who have invested in your space, in teams like yours or have expressed interest publicly in the problem you are solving. AngelList is a good resource — look for companies that you might be similar too then record all their early angel investors. Study their Twitter, LinkedIn, Facebook, Quora and then make notes about which connections in your network might be able to introduce you.
- Conferences are a great place to meet angel investors. Before a conference called Scale the organizers made the attendee list public. I looked up every single attendee and made a list of all of the angel investors who were going. Then I figured out who I knew that could make an introduction to each investor and also emailed a few for a coffee meeting based on their portfolio interests if I didn’t have a connection. I pitched 10 investors at Scale and closed one — he was our third investor.
- If you have any friends or family that meet the criteria to be an ‘accredited investor’ then you need to get them on board. Even if it’s just a $5k check — those checks add up. If you can’t convince someone that close to you to invest $5k in your idea — to give them this opportunity to make them rich as early investors — then your idea or your pitch isn’t good enough. Ask them what they would need to see to put in cash and deliver it.
- There is plenty of money outside Silicon Valley. Our investors are from Tokyo, New York, LA, Calgary, Toronto, Chicago as well as the bay area. You may have better luck pitching investors who don’t get as many deal flows so definitely expand your outreach to the less targeted angel networks not in SF.
- One of the dumbest things I’ve seen first time founders do is limit their very first raise to a minimum $50k check size. In your first angel round, the one in which you’ll probably raise $500k over the course of a few months, you shouldn’t limit yourself to only taking meetings that are ‘worth your time’. In the beginning you’ll need capital as well as mentorship. Strategic angel investors may not have deep enough pockets to throw a huge check your way but their time is way way more valuable. Many of our early investors wrote checks between $5k-$10k and they are so helpful it feels like they are an extension of our team. When the stakes are higher and you don’t need the money as much as you do in the beginning, like your second round, then it’s appropriate to suggest minimum check sizes before taking meetings.
- Don’t be discouraged when you get a no from an angel investor — just ask them what they would need to see from your startup to invest. Keep pinging them with updates — we’ve had at least 8 no’s turn into yes’s over time.
- Be shameless when asking for introductions. If you went to high school with some kid and he’s in a picture with this angel investor you would love to meet ping him and ask for the intro. Fundraising is a time to swallow your pride and raise that cash. You are going to humiliate yourself along the way but asking for introductions is the best way to connect with investors so you need to just put yourself out there.
- Time to get real. Pattern recognition is where investors recognize a similar trend, product or team they have seen succeed before and so they are more inclined to invest. You have to remember that investors are putting HUGE bets on ideas so they’re more likely to bet on what they know. The problem with pattern recognition is summed up best by Paul Graham’s statement, “I can be tricked by anyone who looks like Mark Zuckerberg”.
- You have to accept pattern recognition is a part of this game and figure out how to use it to your advantage. As a woman CEO & CTO co-founder combo — most investors haven’t ever seen a team like ours before. Even worse, there aren’t many women led enterprise software companies. The problem we’re solving is gender inequality in the workforce — an area that the 96% male venture community doesn’t really care about either or they’d have better diversity numbers in their industry. So we had to figure out how to fit into patterns that investors liked and then make those patterns super obvious in meetings.
- For example, Kathryn Minshew and Alexandra Cavoulacos of The Muse and Maia Bittner and Meagan Rose of Rocksbox are two successful cofounding teams with women leading the product and CEO role. They are often brought up by investors who are also big fans as they can then match us to that pattern recognition. These boss ladies were so kind and helpful when we first launched the business and give us remodels to look up to that are a few years ahead.
- Lauren and I are also straight white cis women so we don’t have the same uphill battle that many minority founders have nor do we have to deal with racial, ethnic or socioeconomic biases.
- Pattern recognition also goes both ways. We’ve discovered our own patterns about investors and funds that have helped us avoid pointless meetings. After pitching over a dozen seed funds with all white dudes on the team and no women — we registered that those funds required too much education on the problem to actually get it. There are plenty of incredible investment teams with women on them who use our product and it’s important to us for our investors to be aligned with our mission.
- Guess which startup has never gotten into YC? Glassbreakers! We made the interview the first time round, thought we had aced it and then got a rejection email stating YC doubted our business model (enterprise software). We applied again with paying enterprise customers, great referrals and a ton of user traction but didn’t even get an interview the second time around. It was a huge relief. We knew YC never felt right for us but we felt a pressure to get in as some startup measure of success. If you aren’t down with YC’s culture — just don’t apply — you don’t have to be a YC company to make a billion dollars.
- Acceleprise, on the other hand, felt like the perfect fit so we joined their third cohort. Acceleprise is an enterprise software only accelerator with about 8–10 companies in each batch that share office space for about four months. The mentor network is all SaaS and each week we have the opportunity to learn different aspects of our space from incredible thought leaders. One of the partners of Acceleprise, Mike Cardamone, is in the office so we can turn to him for guidance whenever we need it. Being in an accelerator that is specific to your business — whether it’s hardware, wearables, marketplaces, mobile, bitcoin, etc — is ideal for any early stage startup to scale alongside experts and your peers.
- Beware of the bullshit accelerators. We spent time and energy going through the interview process of women’s startup lab to learn that they don’t actually invest in the companies, but charge startups thousands plus equity for access to their network and ‘mentorship’. Few, if any, accelerators are legit if you have to pay to join them.
- You’ll need a deck — pay a designer to make it beautiful who has done it before. The challenge of making an amazing deck is slimming it down so know a complicated busy deck isn’t going to wow anyone, it’ll only make investors less likely to read it. Your deck will change all the time but it’s the first thing an investor will seriously review to determine whether or not they’re going to take a meeting with you. Deck should include the problem, solution, market opportunity, traction, competitors, business model, customers, team, mission and funding. No early stage startup deck needs to be more than 12 slides and an appendix with research is very helpful.
- ‘The blurb’ — everyone offering to make introductions for you will ask for a quick ‘blurb’ to send about your company. This blurb needs to be one paragraph — like an elevator pitch — with a big number in it somewhere stating your total addressable market. TAM is the total amount of revenue your company could make if it reaches its fullest potential in a year.
- As our consumer product is gender gated we also have a demo available for men and women who aren’t on Glassbreakers to check out. It provides the full on boarding experience as well as in app interactions. Sending the demo to investors in advance gives them an opportunity to create product questions for your meeting.
- Executive summary, like your deck, is a standard. It should be one page max — well designed if possible — and include all the relevant numbers, traction and short visionary statements needed to deliver a full story in less than a minute read.
- Everything you send to investors you should test on mobile. Expect each investor to first read your email on their phone — then open up the deliverables via mobile. If you get bored going through your deck on mobile or if it’s hard to read, then don’t send it out till you’ve got your mobile, tablet and desktop experience on point.
- Always remember never to take anything personally. Your dream investor tells you they just aren’t interested at all and never will be — it’s not you, it’s them — move along to your next dream investor.
- This is hard for everyone — even Elon Musk had trouble fundraising for Space X and Tesla. Your gender or race or sexuality might have a weird affect on how you are perceived as a founder but numbers, traction and revenue speak louder than anything else.
- Every week crunch your company’s burn rate and revenue projections so you can go into each meeting confident in your own financial acumen. As a CEO the sooner you master your accounting and financial modeling, the more strategic you can be selling stock in your company. Sure, in the beginning you might think you are pitching a vision but never lose site of the fact that you are selling your products to customers and equity in your company to investors who you’ll make very rich one day. Your pitch will be stronger when you know in your heart that this is the financial opportunity of a lifetime for anyone you chose to include in your early rounds.
- Never forget your mission and the social impact of all of your hard work. I am inspired every single day by my team and our company’s core values. Our mission is to empower women to break the glass ceiling, together. No matter how the product pivots or our revenue opportunities expand — we started this company to build solutions to solve gender inequality in the workforce and now that’s been magnified to innovate diversity as a core business function. It just seems like such a waste of time and brilliant minds to build something that’s purely profit driven with no core good behind it’s purpose. Having a social impact driven business model has been the key to our success and motivation. Every good investor will ask you how your product is going to make the world a better place so have an answer you believe in with total sincerity.
I hope this has been helpful to all you first time founders as you prepare to fundraise for your startup. You are going to make a lot of mistakes so remember that’s OK and just keep going. Failing is amazing at the right moments so embrace it and don’t fear it. This isn’t going to be easy but the first 50k is the hardest, then getting to that first 500k might take the most time and after that your next big worry is just going to be beating the series A crunch. Talk to other founders, be transparent when things are bad, get into Mattermark research and lean on your investors when you need to. When you believe in yourself, your team, your product, your mission and have a clear business model than you’ve got all the fire you need.