The Secrets Of Early-Stage Fundraising
Early-Stage Fundraising Tips From A Top Angel
Zach Coelius is an entrepreneur turned early stage investor with a billion-dollar exit to his name. He’s even been called “the Unicorn Whisperer.” His first startup was ad tech company Triggit, which he eventually sold — but not before eight pivots. Coelius has felt both the heartache of running a failing startup and the joy of striking gold and piloting a company that’s taking off. Now, as an investor, he invests in early-stage startups, and has secrets from the other side to share.
In this talk, Coelius speaks candidly about how investors really think and his own trials and tribulations as a former entrepreneur who struggled to fundraise. Here, he gives the top mistakes that cause entrepreneurs to stumble or fall. Then he lays out the process for finding the right investors, along with hacks on how to locate and contact them. Finally, he talks about the top startup proof point investors are looking for, and gives concrete tactics on how to nail it even if you’ve never done it before.
The Biggest Fundraising Mistakes Founders Make
To start, here’s what Coelius says not to do. These three mistakes are all ones he’s made and learned the hard way:
Mistake #1: Failure to understand how investors think.
First, Coelius pays tribute to the emotional hardship of being an entrepreneur. “It’s excruciating to talk to some idiot, like me, who doesn’t understand what you’re doing. It’s so hard to explain to them why your baby is going to be the next Michael Jordan. It’s an incredibly hard process,” Coelius says. But brace yourself for a lot of no’s and a lot of people who don’t get it, too. To weather the ups and downs and avoid emotional backslides, lean into your ability to empathize with others. “It’s your baby, and you know everything about her. But put yourself in the other person’s shoes when you’re raising money from them. They know nothing. All they see is a weird-looking face and they’re trying to imagine how this baby will become a multi-billion dollar company.”
“Just because an investor tells you ‘no’ doesn’t mean your baby is ugly. It means there’s a gap in their knowledge or imagination you might be able to bridge.”
Mistake #2: Lack of selectiveness in choosing Investors.
Once you’re a little further along and have interest from people, it’s still for the best that you don’t take money from an investor who doesn’t understand your startup or space. Pinpointing the right investor is mission critical. “Investors are two things: First, they’re a cost on your time. You’ve got to spend time convincing them to sign up, and then you have to spend time dealing with them after they’ve signed up, and then you have to do a bunch of things with your company that may not be the right thing because it’s what your investors need. They can be very problematic,” Coelius said. Secondly, you’ll also have them forever — or close to it. “You can never get rid of them. You’re stuck with them for the rest of your life. It’s worse than being married. You can divorce a person if you’re married. You’re stuck with your investors.”
Mistake #3: Give Up Too Soon.
It can be hard to know when to throw in the towel. In Coelius’s case, he preaches persistence. He once gave 100 pitches in a one-year period. “The most important lesson I learned is to just keep talking to investors. The best companies in the world almost always get a ton of no’s. It’s okay. Keep going. That matching process really is very hard,” Coelius says. His own ad tech company nearly died in 2008 after multiple pivots. “Lehman crashed and the world just went bone dead. You couldn’t raise money if you tried.”
The company nearly ran out of money and got a last minute but terrible offer from one investor — Coelius spent the last of the company’s $5,000 in the bank to fly last-minute across the country to meet him. He eventually negotiated a $1 million loan and better investment terms. The lesson is to not give up too early. “It ain’t over till it’s over,” he says.
The Three Types of Companies
The next step in your knowledge is to think how investors think, and know how to respond once they’ve stuck you in one of the below categories of startups, Coelius says. Figure out which bucket yours falls in, because it determines what you need to do to convince investors to invest.
1. Known Quantities.
These are companies that fit into frameworks investors feel comfortable with because they’ve seen them before. “It’s like a SasS business. It has certain SaaS metrics, certain MRR and other metrics and a certain perspective to it. And investors can look at the cohort analysis and understand it relative to the businesses that came before it,” Coelius says.
If this is you: If this describes your company, then the name of your game will be all about hitting metrics. “Every business that’s in a well understood business model with a well understood approach, whether it’s e-commerce or social networks, you’ll just have to hit those metrics to be successful in raising capital, and if you don’t, it will be very difficult,” Coelius says.
2. Unknown Quantities.
Coelius likes this category most. “It’s where there’s no base set. Nobody’s seen it before. It’s new. There’s no market there. I like the stuff that nobody gets. In those cases, you just need to keep talking to more investors and do a better job of finding people who actually understand your idea because, oftentimes, when they say, ‘Oh, you need more traction,’ what they’re really saying is, ‘I can’t get my head around your idea,’” Coelius says.
If this is you: Validate your idea. “It’s hard for me to tell you that your baby is ugly, so I’ll say something like ‘It’s a little too early for me.’ Which might be true, but if you validate it to the point of it being a billion-dollar company, then I’ll invest,” Coelius says. “Sometimes you just need to keep searching for the person who really gets your business. But oftentimes, investors come up with very gentle excuses to get out of having to continue the conversation. I try to be as truthful as possible, but it’s still very hard because sometimes founders don’t take that feedback very well.”
3. Businesses that would work if not for X.
Often, these cases boil down to traction. “Maybe something is slightly wrong with the business model or where you’re at. Hopefully, if you talk to enough investors, they’ll give you feedback on that part of what you’re doing, and maybe you can adjust it or change it in a way that they get more excited,” Coelius says. “It means you’re not there yet, but you might get there.
If this is you: Try to find out why investors don’t feel comfortable writing a check, even if the response is hard to hear. “The way to do that is to not be the entrepreneur I mentioned above — the one who takes investor feedback poorly and makes the investor reluctant to share her assessment. That kind of behavior encourages the gentle excuse-making that drives founders nuts,” Coelius says.
Steps To A Successful Round
If you’re going to raise smart money — as Coelius stresses — you’ll have to start by knowing your league. It sounds harsh, but it reflects reality: “Recognize that a lot of the professional investment money goes into entrepreneurs who’ve already sold successful companies for huge amounts of money. If you’re not that person, you’ll have to operate by a different set of rules. If eight-year-old kids were playing soccer on a professional pitch, they would never succeed. But if they play at their level, they have a chance of getting somewhere.”
Coelius breaks down his advice on early-stage fundraising to the three phrases — identifying the investor, contacting the investor and then pitching the investor. Along the way, he shares his best principles and hacks for each step of the journey.
1. Finding the (right) investors.
Be smart when you make your list of who to approach. Here are Coelius’s top tips and hacks:
- Surface analogous companies. Find people who already understand similar spaces or industries.
- Do your research on specific people. “Too many startups I know will say, ‘I went to this VC and they hated my idea.’ Well, which partner did you go to? ‘I went to X person.’ ‘Well, X person does this and you’re doing that. Why did you approach them?” Coelius says. “In the early stages of fundraising, only pitch people who understand your space. Otherwise it’s very, very difficult.”
- Tap into angel syndicates. Coelius runs one of the biggest AngelList syndicates, and he expects to invest around $8 million this year through it. “If you raise money on AngelList, do it with a syndicate lead. Have a person put their name and reputation on your company. It elevates you above all the other startups in the database — the social proof helps tremendously.”
- Raise from area experts. Don’t just look to professional investors when you’re starting out. “Find professors. They generally don’t have a lot of cash, but they do have great names and they’re experts on a particular problem,” Coelius says. “If they invest $5,000, you’ve gotten three things: more money, an expert who’s put their own skin in the game and an advisor who can make introductions and be a sounding board.”
- Just keep swimming. “The hard answer is you’ve just got to keep searching and looking for those people and talking to those people. Like I said, it’s a matching problem. Again, think of it like marriage. You’re going to be stuck with these people for a long time,” Coelius says. “Keep looking for someone who has the same imagination you do.”
Find investors who can actually help you with your business. Don’t just work with anyone who’ll write you a check. Be discerning.
2. Meet prospective investors.
This is where a lot of founders hit roadblocks. How do you get in touch with busy people with lots of money? Many entrepreneurs try cold-emailing investors and asking for money. Coelius gets 50 of those a week. He has a better way: ”Don’t just spray and pray emails to every investor whose contact you can find. Find the ones you really want to work with. Then, if you can’t get a warm introduction — that’s the best way in the door — then try a quarterly update email,” Coelius says. In a well-written update, break down:
- What your startup has done in the past few months.
- Concrete steps and evidence of progress in the past few months.
- What you’re doing next and where the company is headed.
- One or two unique insights about your company’s market.
“Tell me something nobody knows about your field. When you’ve done that for me as an investor, you’ve given me the gift of knowledge,” he says. “You’re giving instead of taking. I get to track you over time, and I learn about your space. That’s 100 times better than someone I don’t know asking me for my time and money. Yes, it takes time, but that’s how you can raise the smartest money you can get.”
3. Pitch investors.
The tough trick with pitching is to know what investors are looking for. It really only comes down to one thing: Traction. “If you can’t show a graph and a story of your demonstrable progress and traction as you build your business and learn to walk, you’re really going to struggle. Most of us on the other side of the equation don’t actually know much about the core important hard things about your business. We don’t know how the code works. We usually don’t know how the hard tech works. We rarely know about what it is you’re actually doing. But if you show someone a graph of that goes up and to the right, they get really excited. You’re like, ‘Hey, look at that. Look at the growth,’ and then you can just bet on the stupid graph,” Coelius says. “Most of these investors out here? That’s all they do.”
Focusing On Your Best Fundraising Foothold
Coelius devotes an entire portion of his talk to getting traction alone — it really is that critical. Here are his top principles for thinking about and achieving notable traction:
- Don’t overindex on the idea. “Every good entrepreneur has a great idea. Your idea is worthless,” Coelius says. Instead, what you want is a validated idea. “That means an idea that you’ve proved works. Read Steve Blank’s ‘Four Steps to Epiphany’ or Eric Ries’ work around customer development. There’s a lot of good knowledge out there about the process of idea validation. A good idea with traction can suddenly be very, very interesting.”
- Get your earliest traction by starting small. “A mistake entrepreneurs make over and over and over and over again is that they have a grand idea, and they try to go play on the professional pitch on day one. Instead, take a big idea and figure out how to narrow it down and validate it,” Coelius says. How one startup did this: Coelius invested in a company that sells a device to assess authenticity of a product. “They can look at a $10,000 Gucci handbag and say if it’s real or not. Amazing idea, right? A trillion dollars a year is lost on counterfeiting — you could change the world. But it’s also a crazy idea. How would it ever work?” Coelius asks. Answer: With a prototype in a tiny market. “He started with one set of Louis Vuitton handbags and then he went to pawn shops in the middle of the country. He found the people actually buying and selling those bags on eBay. Then he got people like Susie’s pawn shop in Kankakee, Illinois, to use his device to buy and sell a very small number of Louis Vuitton handbags. By narrowing it down, he proved that it actually worked at this very small scale for this very particular set of handbags. Then he expanded, and now it’s well on its way to being a multi-billion dollar company.”
- Find a customer on fire. In whatever business you’re in, your customer need should be the equivalent of having their hair on fire. “In those eight pivots that we did at Triggit, I learned how valuable and true that is.Your product should be either ten times better than anything else or the customer need is so bad that you can call them at 9 p.m., while they’re putting their kid to bed, and tell them you have ‘X’ and they say ‘Kids, be quiet. I gotta take this call.’ You want that. At Triggit, when we were going through our first eight pivots, I would call up customers and they would say, “Hey, Zach. Don’t call me again. I don’t want to buy your product. This product sucks,” Coelius says. Keep looking until you find that spot — once Triggit did, their revenues grew 15x.
- Nail product-market fit. “In Silicon Valley, the secret to the game we play is that technology scales amazingly well. But you have to find the rocket, and that means finding product-market fit. It means the customer need is so bad that even if you hand them a subpar product, they’ll happily pay you for it,” Coelius says. “That is what you’re all searching for. It’s what you should look for. It’s the secret to this business, and as an investor, that is what we look for. Once you find it, it’s the most amazing thing ever.”
“If you can’t show traction, it will be very difficult for you to raise capital.”
Choose the right investors and understand how they see you — as a known quantity, unknown quantity, or a company that still needs X. Often that X is traction, so buckle down and don’t raise until you have some of it to show. Doing so will save you months of pain. Coelius wraps up with an old adage: time is money. Focusing on traction will help you determine the timing of your raise. “Time spent fundraising is time not spent working on your business. If fundraising is just not working for you, focus instead on validation of the idea and getting traction.”
And finally, give yourself some credit. “Entrepreneurship is the most amazing job in the world. You’ll learn so much in such a short period of time. I have so much respect for what you’re doing,” Coelius says. “And you are making the world a better place.”