Inside the raise: how to raise your first million dollar round from multiple VC funds
Raising funds for startup is a game of numbers and timing. It’s hard work: there’s a lot at stake, navigating shoals of investors is daunting and every minute you spend away from your company is costly.
Over the last five years I’ve spoken with hundreds of founders who raised capital, first as a reporter for the Financial Review, then as a growth and marketing consultant for startups and now in venture capital. So let me start this post by sharing: not one of them would run their first round or two exactly the same again.
It can be bewildering and frustrating. Those of us who work in VC know this, and we’re constantly exploring about how to make the process better (faster, fairer, less draining, more transparent).
Two of my favourite founders, Mentorloop’s founders, Heidi Holmes and Lucy Lloyd, recently raised their first round from professional investors. They closed the oversubscribed round from three Australian VCs plus a few individual investors.
All up, they’ve raised more than $1 million from rampersand VC (the fund I work for), Blackbird Ventures (who are excellent investors in Canva, where I used to work) and Tempus Partners (who we love co-investing with). So I asked them to share about their fundraising experience, as honestly as possible.
The tl;dr version (detailed deep dive below)
- Lucy: You don’t necessarily need an investor or fund to lead. While it can be much smoother, we didn’t have a lead and we’re really happy that’s how it ended up because we did get to set the terms of the round. We also have a more balanced cap table because of it, with great direct relationships with a range of investors.
- Lucy: Take any exoticness out of your legal documents. Boring is good. Invest in them to save you time and hassle in the round.
- Heidi: Choosing investors is not just about the money, it’s about access to the mental capital you’ll get, which includes networks and advice. It’s really valuable.
- Heidi: There’s a load of fear about how intimidating VC can be. We were intimidated by VCs, before we actually got to know them. We thought all VCs were the same so it was actually a really big surprise to learn about the different philosophies and how they differentiate themselves.
How we got our $1 million round going
Heidi and Lucy decided to raise their seed round immediately after graduating from Startmate, Australia’s leading accelerator. The program brings together more than a hundred founders and investors to support the companies through an intensive 14 week program.
They didn’t have to raise at the time, which gave them more freedom. But they also knew if they didn’t, they could continue to plod along as a small company growing slowly, or they could accelerate growth through raising a bit of capital to get the team they needed to take off.
“We knew we weren’t going to get a better opportunity to make a splash in the Australian investing scene, so we decided to go for it,” Lucy says.
“All the main VCs in Australia look at the companies coming out of Startmate, and you meet with many of them directly throughout the program. A lot of companies use it as a kind of jumping off point for a raise. We had performed quite well in Startmate so we felt like we were ready to take advantage of the opportunities in front of us after it had opened our eyes to how fast we could grow the business with the right support.”
The Mentorloop founders had raised a small amount from friends and family previously, as well as taking on the $75,000 investment that comes as part of Startmate. But this was their first round targeting professional investors. Even with warm leads or pre-existing relationships with many of them, they knew it was going take a huge amount of effort.
Creating an investor funnel
Like many founders, they kicked off their exploration with this great guide to all the Australian investors put together by our friends over at Airtree VC. Heidi and Lucy made a list on Trello of every investor who was remotely relevant to what they were doing.
“People have asked us what our raise strategy was, and it was the volume game,” Heidi says.
Their list clocked in at 150 different entities. They reached out to every single one of them. The founders estimate they heard back from about two thirds, had conversations with 60 and ended up with a list of 25 investors who seemed genuinely interested in Mentorloop’s vision, who could offer more than just money and were therefore reasonable prospects to invest significant time in the relationship.
Skipping the pitch deck
“We had a clear communication strategy for the process,” Lucy says, sharing they eschewed a full deck instead for a one-page summary. “Our first goal with investors was to get a face to face meeting. We knew we could do our best work if we got to a conversation with someone, not by email or decks. We wanted to be able to quickly introduce the company to get a genuine expression of interest signal from the investors.”
Their one-pager included the trajectory over the previous six months, an infographic about the rise of mentoring and the size of the market, as well an outline of where the business was headed in the next year.
“I guess it is quite an unusual document,” Heidi says. “It’s more marketing than an actual IM (investment memorandum that can run for 30+ pages). It’s easily shareable so it doesn’t give a lot away about the business but showed investors the opportunity and gave them a sense of us as a team.”
From that 25, the list dropped down to 10 as the founders clarified what they were looking for — a few investors were ruled out at that point, either because the investor said no or because there didn’t seem to be a fit to Heidi and Lucy. In the end, there was a strong resonance with three funds and five new independent investors, as well as a couple of people from Mentorloop’s friends and family round.
“One of the best pieces of advice we got was to actually hear the ‘no’. You don’t want to, but you have to hear it when it’s said. Feedback and advice are useful, but when you’re there to raise money you need to keep moving quickly. Momentum matters and you’ve got to kick forward,” Lucy says.
Proving your startup is a painkiller, not a vitamin
Discussing investment rounds by numbers is a good way to make the process seem easier than it is. Even though Heidi and Lucy were able to close all ten investors, it required some significant strategic communication works about two key sticking points: the size of the market/opportunity, and related: was mentoring wanted or needed by companies?
There’s a maxim in startup investing that summarises this question: is this startup a vitamin or a painkiller? The idea is you want your product to a painkiller: something that people definitely need, and will therefore pay for. It’s not hard to sell an effective painkiller to a person with a headache, but your chances are going to be a lot lower if all you’ve got is a vitamin. It doesn’t matter if it’s an organic premium vitamin made from a rare plant up in the Himalayas if your customer needs something to make their headache disappear.
While an imperfect analogy, at rampersand we often use a slightly extended version of this idea: jewellery, aspirin, and oxygen. Jewellery has its point, but it’s a nice to have — and therefore much harder to invest in. Aspirin is effectively solving a real problem, so is much more promising. Oxygen is something your customer can not live without. We want all of our investments to be a painkiller that will upgrade into oxygen (proving you’re oxygen in your first few rounds is hard).
Mentorloop encountered questions around if their service was an essential for their target clients from every investor, including us (the team at Rampersand VC).
“This question kept coming up,” says Heidi. “Everyone saw the trend of mentoring, and that successful companies were increasingly focused on people-first culture. People thought it was a nice to have, but we knew it is a critical must-have for successful organisations. Some investors saw that fairly quickly, others didn’t.”
The pitch breakthrough
The breakthrough for Mentorloop was recognising that startup investors have mostly had very lucky and privileged lives, so felt able to be personally proactive in their career development.
Almost everyone Mentorloop was pitching to had been fortunate enough to be mentored so felt that it just wasn’t so hard to get a mentor if you wanted one. What they didn’t understand was how few people are in that same position. It took some work on Heidi and Lucy’s part to help them understand the enormous potential mentoring programs for everyone, not just those few who ask for it.
This kind of mentoring is exactly what Mentorloop was created to transcend. They knew a company that mentors only their high potential staff members will experience diminishing returns, and struggle to keep and get the best out of their staff. However, companies that create a broad based culture of mentoring benefit from an organisation-wide increase in collaboration, excellence, seeking support when needed, lower turnover, greater engagement, as well as a greater diversity of thinking from sourcing great ideas and insights company wide.
Heidi and Lucy recognised they needed to be more explicit about how differently they saw the world during a hard conversation with a mentor over in Silicon Valley. The mentor explained she loved the founders and was pro mentoring but just couldn’t see anything in the pitch about why this was essential, why now was the right time to launch it and why the founders were the right ones to do so. When the pair tackled her assumption of what mentoring was and showed her their own different view, the penny dropped.
“Once we could demonstrate we had an insight around mentoring the investors didn’t, it was easy to show the market we were creating was so much bigger than previously understood. The questions about why mentoring was a huge opportunity, and why we were the right team just stopped being asked,” Heidi says.
“Our breakthrough was stepping outside of the standard pitch: problem, solution, competition, size of market and everything. We reclaimed our pitch, focused on an insight the investors didn’t have. This helped show them the world we were going to build, in which everyone could access mentoring and where the individuals and the organisation benefited.”
Once people were sold on why mentoring was critical for the future of businesses, the questions became about just how big it could be — the basic VC question of total addressable market. The founders tried to extrapolate out an impressive figure by identifying what kind of businesses they had some success with, and how many there were in English speaking markets, but never landed on a number they felt comfortable with.
“Market sizing is a really hard task for founder,” Lucy says. “Because every investor wants it, but then they’re all tremendously skeptical of whatever you put forward. We tried and we tried. Then just doubled down our plan and said: well look, mentoring is for literally everyone.”
The Mentorloop founders credit having several of each client type already signed up as a helpful proof point for investors. It’s easier to convince investors you can sell to your target market if you have a handful on board already, especially if they weren’t already in your network.
With most of the hurdles cleared and provisional yeses hardwon, it was time to descend into the weeds of due diligence, and then the swamp of term sheets and legals.
Different investors = different questions
“We ended up working with three funds and a handful of investors, and they were all quite different. Each had their own processes, and even character-wise, what they needed to get confident with us was very different,” Heidi says.
The Mentorloop founders discovered that each investor had a different standard of proof that needed to be met, but it got easier as more investors signed up. The impact of this was a very large dataroom, something the founders recommend.
A data room is a folder or shared drive of documents, spreadsheets and contracts (clients, staff, freelance workers etc). Sifting through it is a core part of the due diligence process. Corralling ten different investors through a round can be challenging, so rather than share documents just with the person who requested it, the Mentorloop team just kept adding any requested information into the folder.
Don’t scrimp on your legal fees — however tempting it is
With the data room stage cleared, it was time to start workshopping the legal documents. Like many founders, Heidi and Lucy were keen to save money. Lawyers are expensive.
They asked a founder friend for a similar document, swapped company names, updated a few details and sent it off for several rounds of edits between them and their investors.
It took longer than it needed to and was more painful for everyone involved.
“Approaching our legal docs this way was the biggest mistake we made throughout the whole process,” Heidi says. “We had wanted to save money, but it ended up costing us so much time. We should have followed Sam Wong’s advice from Blackbird (the partner who led Blackbird’s investment in Mentorloop) to use one of the off-the-shelf standard term sheet docs and customised that.”
Because the documentation was a little unusual, this made the process harder for the founders to navigate in a range of ways.
“Because the docs were exotic, it created a fair bit of friction that caused a lot of emailing back and forth, during which several investors suggested additions,” Lucy says. “If it was a templated doc they could have just gone, okay, that’s the standard thing. But because it was non standard it actually opened the door to more things being negotiated. So, definitely don’t make the same mistakes as we did.”
Despite the delays, the founders went on to close the round, radically increase their rate of customer acquisition and doubled the team in fewer than six months. They are now set for significant growth as they expand their team further to take advantage of the inbound demand they now see from companies across the world.