How We Raised $700,000 For Our Startup without a product
- The Options
- Our Process
- Pitch Deck
- 10 Things We Learnt About Investors
DISCLAIMER ALERT: This post is not intended to be a guide as to whether or not raising money is for your startup or when the right time is. Neither is it a definitive guide to raising capital. It is merely a recollection of the process taken by us while raising funds for our previous startup and what we learnt along the way.
Saying that I would really advise that you think long and hard if you really need to raise money for your startup. I still think Chrys Chrysanthou from Notion Capital put it best when he said
“Not every startup needs rocket fuel”
As exciting and challenging fundraising can be for a startup founder, it is also a long and tiring process that will keep you away from your business at a time where it needs you most.
You will need to be prepared to face a lot of rejection and making sure at the start that it is the right move for your startup will help you through the hard times.
There are also many options to raise capital for your business and picking the right one depends on a lot of different components which I will not discuss here either, but will quickly run through a few of the options and let you know why we made our decision.
The 3 Fs otherwise known as friends, fools & family is one of the most commonly used funding sources by startup founders for many reasons but probably the most common being that it is their only source of capital.
It is known as friends, fools, & family because most of the time it is friends and family that fund the startup and most turn out to be fools for investing at such an early stage with all the risks stacked up against them.
Probably the root of all evil (I have a big bias against institutional funding). A bank loan is not common practice for startup funding but there is always the option.
In my opinion if you are able to clearly articulate your business to a bank manager to give you a loan with his limited startup knowledge you can convince any one of the alternate funding sources to fund you.
Something I was told after building my first startup by a super successful entrepreneur was
“The only way to make money is with other peoples money.”
You will spend more time and take higher risks than any sane person is willing to do while building your company. There is no point in putting yourself at more risk in the end by adding a financial component to it as well.
You also do not need to own 100% of your company and having strong investors on board who have been through it all before can really put you at a big advantage over those who don’t.
Investing your own money is one thing but taking a loan to do so is a totally different ball game.
Government grants should not be a source of funding you rely on as the arbitrary process takes way to long to come through than most startups lifespan.
Government grants should be treated as a nice little bonus if and when they do come through and you should always weight the effort vs the return before making any applications.
We were accepted for a grant in 2014 and turned it down in the end as the time it would take and the procedures required to receive the money would cost more in effort than we would receive in cash.
We did not learn our lesson the first time and made a second application as we told ourselves the amount was much larger and would justify the effort.
We were once again pre-approved for the second round. Almost a year has gone by since the grants where meant to be distributed with still no sign of any news coming soon.
So I repeat, grants are a bonus not a source of funding.
Crowd funding can be an incredibly powerful source of funding if successful and seriously devastating if unsuccessful. I would advise crowd funding when you have a product that has proven product market fit and you need the additional capital to move into production.
I would be weary if you have not reached product market fit as if you put out a campaign and are unsuccessful it sends a very bad signal to anyone else contemplating investing as the market has spoken for you.
Equity Crowd Funding
Equity crowd funding is a practice growing in popularity that gives people the option to purchase small stakes of equity in startups listed through the various platforms. The upside to this is you not only get to raise money but you will also have a large amount of ambassadors for your company.
Speaking with friends who have taken this route, one piece of advise they all mentioned was to make sure you have a lead investor before launching your campaign as having the majority of the round upfront helps a lot with investor confidence on the available platforms.
There are some issues involved with equity crowdfunding and would advise you do some in-depth research before deciding to take this path.
Angels are called angels for good reason as more often than not they are the only ones to come to the table with money and normally at the time startups need it most.
Angel investors are high wealth individuals who, more often than not, are entrepreneurs themselves and having a good Angel on board can open a lot of doors for you moving forward.
We had an option at the start to choose between a venture deal and raise more capital than we needed to at the start at a great valuation, or go with a group of Angels at a slightly lower valuation but only raise the capital we needed to get started.
We chose the latter for 2 reasons:
- They were great guys and what really stuck out was the terms they would agree to. They did not ask for any share preferences and believed that the effort required on our behalf was equal to the capital they were going to invest so there was no need for special treatment.
- They were investing their own capital and would add a lot more value in the short term being directly vested in the company and having their combined hands on experience would help us grow and learn a lot faster.
VCs are a very important part of the startup ecosystem but it is really important to understand when the right time to partner up with a VC is and for what reasons.
If you are going to raise money from a VC you should only aim for the best because working with a top tier firm will be literally like adding rocket fuel to your startup, but to get a top tier firm to invest you, you yourself need to be top tier!
There are many great firms out there that deal with startups at different stages such as Accel Partners, Kleiner Perkins & Greylock Partners to name a few but by far one of my favourite firms is First Round Capital for many reasons that we will hopefully get to discuss with them one day.
When selecting a firm to target make sure you do your research to understand what stage startups they are looking for, what areas they invest in, and how they can really add value to your startup. Going in prepared knowing who & why will really give you a boost in confidence and make you come across as being prepared.
I left this one for last as it is the ultimate source of funding without a doubt.
If you are able to bootstrap long enough to reach product market fit and start generating enough income to grow organically you have nailed the fundraising process.
At this stage you can raise money from anyone, anytime and on your own terms if you are looking for that extra fuel to drive huge growth.
Raising any sort of capital can be a time consuming process and the better prepared you are for the process the greater chance you have of being successful. Here are 10 steps we followed during our process.
When we started out looking for investment one of the first things we did was sit together as a team and discuss what an ideal investor would look like and put together an investment proposal we all agreed on. We then decided on one person to focus on fundraising who would be the only one involved in negotiations & pitches. We would advise this as a best practice for a few reasons.
- Raising capital is extremely time consuming and distracting so by having one person focus it allows the rest of the team to give focus where its most important which is building the business.
- It avoids any miscommunication and stops any mixed messages being received by the investors.
- The pitch is constantly evolving and being perfected each time so the more you pitch the better it gets.
Before you get started there are millions of resources, books, articles, videos, slide decks, and podcasts to help get you up to speed with how to raise venture capital.
Make sure you know the process inside out from preparing your first deck to negotiating your first term sheet.
You do not want to arrive at a meeting and get jumped with questions like:
What is the LTV of your average user?
What is your monthly churn?
Is your valuation pre-money or post-money?
Through the process we would advise looking into a CRM system to manage and remember all conversations you have with the potential investors.
We setup a salesforce account for the process whereby all investors were listed and meetings documented to make sure we always remembered our last conversations and could recall previous conversations when following up.
This also allowed us to keep track of the last deck shared with the investors and helped as a reminder of who needed to be updated on the latest progress.
Having all the details in a central location also helped us to schedule a bi-weekly investor update mail that was sent out firstly to update our investors and secondly to ask for any help where needed.
The mail was broken into 3 sections:
- What we need help with
- Product Developments
Being organised not only helped to keep our potential investors up to date but also allowed us to leverage the network we were building through the fundraising process.
Investors will do their due diligence when they are interested so make sure your team members profiles are updated on LinkedIn and have reference to your company.
They will check you out and you do not want a social profile being out of date to raise concerns.
We were approached by a couple of Angels through Angel.co and even though they decided not to invest at the time, we were still able to make contact and expand our network.
Investors see thousands of plans a year; they like it simple. More often than not entrepreneurs will go out of their way to try an include every detail they expect investors to be interested in. The problem with this is the more information you give the more room there is to find a reason why it is not a good investment proposal.
Keeping it simple is an art that requires constant adaption to include only what is absolutely critical for an investor to make a decision.
Keeping it simple does not mean you should not be prepared. Putting together a pitch deck is just one part of the process.
Once you have grabbed an investors attention they will want to see financial projections. You don’t want to be scrounging around at the last minute trying to put the numbers together.
A strong professional sign is having everything you are expected to have ready as and when a potential investor requests it.
Saying that here are 5 things I would advise you to prepare:
- One pager
- Pitch Deck
- Investor Deck
- Business Plan
- Financial Projections
Send me a private message on twitter @andrewmichaelsa if you would like to see an example of each. I will be updating this post with downloadable templates.
Spend some time on the design as it is one part all investors appreciated about our team and pitch. The pitch deck is a high level view of your business and the first impression they get of your company — make it count.
Investors know other investors, what might not be a good fit for one could be for another. Never leave a meeting without at least a referral to someone that may be interested.
Referrals are key — Make LinkedIn your best friend!
Once you have a list of investors you would like to go after start from the bottom up. Pitch the one’s you would least like to invest in your company first, that way you have plenty of time to practise and mould your pitch before getting to those you would really like to join you and your team on the journey.
Investors are people too! They want to see passion, they enjoy hearing your story. Don’t be afraid to tell them; let them know what journey they will be taken on when joining you. Take the investors on a journey when pitching to them and make sure by the end they want to be a part of your fairy tale.
PITCH DECK SLIDES
*The pitch deck material used in this section is 3 years old and merely for demonstration purposes.
The pitch deck is the deck used when presenting to an audience; it should not be confused with the investor deck. Keeping it simple applies to the pitch deck more than anywhere else in the process of fundraising.
Your job with the pitch and deck is only to create enough interest from an investor to want to book a follow up meeting. Most of the time you will be pitching to an audience with a limited amount of time and keeping this in mind will ensure success.
More often than not I have seen pitches where the founders tried to cram as much info in the pitch as possible to try and answer investors questions but in the end turned out only to raise bigger ones and the unfortunate thing about pitching to an audience is you cannot answer every question on the spot. At that point you have most likely lost them forever.
Keeping it simple allows for you to answer the essential questions and raise enough intrigue for investors to ask the harder questions in a more controlled environment where you are not under pressure and limited by time to provide a good answer.
Below I have highlighted the points I believe go in a good deck. The deck should be seen as elastic in that it can expand and contract as needed for various events. You should have enough content for a 3 minute, 5 minute, 10 minute, and 15 minute pitch that can be adapted as needed but also be able to deliver a complete overview in a minute when the time calls for it.
Having the slides ready below allows you to mould the pitch as necessary.
The slides are in no specific order and you should move them around as you feel. The most important part is that the story should flow.
Although it does not make a difference to the order in which you present the 12 points I would strongly suggest you start with the problem. You want to paint the picture in the investors mind as early as possible as to why what you are building is important. The more personal you can make it the better.
The problem validation
It is one thing to make it personal to show you have a deep understanding for the problem but it is also important to show that this is in fact a big problem and you are not the only one suffering. Any validation you have of this goes a long way. Google search results is often a good place to start looking.
Once you have clearly laid out the problem you want to show why your solution is 10X better than the current one and how your users will not be able to live without you once they start using your product.
This is one of the most important slides in your deck as at an early stage as it is your biggest asset.
You need to sell your investors why you are the team for this job. Show how you have executed in the past and why you will do it again.
The market size is one of those slides that often gets over complicated and can cause doubt in investors minds. The only thing they want to see is that you understand the market and that it is big.
Do not make the mistake of over complicating it or narrowing down from the TAM to SAM. If it is big and you understand it clearly that is all investors want to know.
How are you going to make money?
Whilst you may not have all the answers to start it is important that you have a clear idea of the revenue channels you will explore first.
Most investors know, however, that things can change in an instant but what’s important to them is that you have thought about it carefully and have a direction to start in.
What have you done or tested to show that your product will work?
The more data you collect on these slides the stronger your case becomes and the more of a no brainer it becomes for an investor.
User testimonials, beta list subscribers, website visitors, email list signups, revenue, and user acquisition costs are just a few traction points you could show potential investors that your idea has potential and the market is showing an interest.
Go to market strategy User aquisition
How will you go to market with your product?
What is your user aquisition strategy?
Why have you chosen the specific market?
These are the questions you should be answering here.
Project plan/Key milestones
Most investors will expect you to raise between 12–18 months worth of runway as though know that is the time it will take to prove if there is potential to continue or not. Make sure you have an outline of what you expect to do during this time and how the money will be used.
Having strong advisors onboard at an early stage can really add credibility to your team.
If you have really strong advisors chances are the investors will know who they are.
They will ask themselves what the advisors see in you and that they are smart people, so there must be something there that they are missing.
Investors know you need the money; don’t make the rookie mistake of showing a profit in the first year.
If that was the case why would you go to the investors in the first place.
They know you need the money and they know it is going to take time to build your company. This is one of those slides I would suggest you brush over in a pitch and only discuss in detail with interested parties.
Finally you want to let them know what your needs are and they don’t always necessarily need to be financial but investors do know you are pitching to them for their support in one form of another.
Make it easy for them and let them know what it is.
10 THINGS WE LEARNT ABOUT INVESTORS
When you start out fundraising you are super focused on your business and involved in the process that you don’t really have much time to think about the process.
I remember clearly the excitement of signing our first term sheet as a team together and then I remember at almost the exact same time a feeling of
“Oh shit, this is real. The pressure is really on us now to perform.”
Whilst this is a logical thought process it is also something you should eliminate early on, as the reason your investors invested in you to start with, is because they believe in you. You need to take that belief and put it to good use.
We had many concerns prior to raising funds from investors that most turned out to be irrelevant or not true, but here is a list of things we did learn along the way.
The sooner you realise this point the easier fundraising becomes. At the start you are intimidated by the prospect of pitching to an investor but as you go through the process you realise they are human just like you and the more relaxed you become the more confident you appear in your pitch and business as a whole.
Not all investors but most will favour a team over idea any day. One thing we realised throughout the whole process is that good teams are a high commodity and not easy to come by. If you have a strong team make sure that is your number 1 selling point.
They don’t expect you to make money in the first year otherwise you would not be asking for their money in the first place. Most investors would expect a minimum of 3-5 years before they start to think about a return and most venture capitalists would be between 5 -10 years.
There are not many but when you do come across them you need to make sure you stay far away.
A good sign an investor is no good is when they want to charge you to pitch or look to acquire a 50% stake in your company at a seed level with an investment equivalent to 3 months runway.
When you hear these things run far away! I have heard my fare share of horror stories from friends and fellow startup founders.
They understand the risks and know what it means to invest in a startup (by definition a startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty. — Eric Reis).
The sooner you realise this the easier it becomes to focus on executing rather than thinking about the risk they have taken. Remind yourself you are taking a big risk too; this is something I have found myself battling over in my head many nights.
Keep it simple, they are busy and see hundreds of plans. If they are smart they will know the right questions to ask and will appreciate the efficiency.
They have a fear of missing out. This is not clear to start but I can promise you as soon as you have the first term sheet on the table there will be others.
They expect your cost estimations to be exceeded. Most experienced investors will realise that things don’t always go to plan and most at least account for the chance they may need to help push their team the extra mile when times get tough. The sooner you talk to your investors about any issues the faster you will find solutions together.
Money is not the only thing you should look for. This is a phrase thrown around a lot and not always easy to focus on when you need the money, but if you get the right investors on board, the doors they open will be worth their weight in gold.
They don’t want to run your company. Investors are busy people, they invested in you because they believe in you. If they wanted to run your company they would hire a bunch of people and invest the money in their own company.
If they do start early on, you should hopefully realise before signing any term sheets that they are not the best fit for you.
In this post I have covered the funding options, the process we took, the pitch deck & 10 things we learnt about investors which is a culmination of the knowledge accrued during the last 3 years fundraising.
I have included some great resources below to get started on your fundraising journey and some awesome investors to follow on Twitter for an insight into the mindset of a VC.
I would love to hear how you get on and any feedback you have would be great! Also just a reminder if you would like any of the templates we used to get started just send me a PM on twitter @andrewmichaelsa and I will send them through to you directly.
Investor Deck Examples
Term sheet negotiations
Venture Capital Crash Course With Jason Mendelson
The Best Startup Investor Pitch Deck & How to Present to Angels & Venture Capitalists
How to Pitch a VC Dave McClure
How to Pitch a VC (Sept 2010)
Raising Seed Capital
Raising Money For A Startup
Getting a seed round from a VC
What You Need To Know About Raising Venture Capital (By Mark Davis, DFJ Gotham)
Investors to follow