In the summer of 2018, the UK experienced a heatwave with temperatures soaring as high as 35ºC. This happened to coincide with our first proper fundraise at Klydo; a much needed investment to help grow the team and deliver on our exciting proposition.
I spent two very hot months cycling across London pitching to over 30 institutional investors, from the trendy backstreets of Old Street to the prestigious lanes of Mayfair. Finally, in September 2018, we closed a £1m round led by Episode 1, one of the most highly regarded Seed-stage VCs in London.
Apart from learning how to rapidly cool down in a nearby Tesco freezer isle, before walking cool and collected into a pitch, I discovered a number of insightful lessons on what to do and what not to do when raising investment. Although fundraising is unpredictable, full of luck and unique for every founder and investor, I decided to write these lessons down in the hope that they could help improve the odds for other first-time founders looking to raise venture capital.
1. Tell a story that captures the investor’s imagination
Stories are the glue that bring people together. If starting a company has taught me anything, it’s that a founder’s number one job is to craft a story that captures the imagination of others; from investors to new recruits to early adopting customers. Chip and Dan Heath’s book Made to Stick highlighted to me the attributes that make for a “sticky” idea, namely simplicity, unexpectedness and emotion, and helped me bring these out in the Klydo story:
Klydo stands apart from other machine learning startups. Instead of focussing on automation as the ultimate goal, we’re building technology that enhances people’s creative thinking, giving companies the confidence to innovate.
Our message is simple; we use technology to help companies innovate. Yet it is also unexpected; the idea of merging AI and creativity seems counterintuitive, almost paradoxical. This engages the audience who immediately question how we’re going to achieve it. And suggesting that companies can lack confidence when it comes to innovation is both emotive and relatable. As a B2B company, the emotional aspect of our story has always been the most challenging!
2. Get going early and iterate your pitch, but avoid overcorrecting based on a single investor’s opinion
I waited too long before I began pitching and speaking to VCs. I wanted everything perfect before unveiling our story, held back by the worry of only having one shot with each investor. In reality things are always in flux and your story will never be watertight. You’re better off gathering feedback as soon as possible and you can always line up your preferred funds for later in the process when you have a more refined story and greater confidence.
Feedback from investors is crucial but be careful not to adapt your story too quickly to a single investor’s opinion. Investors can be persuasive individuals (to put it lightly!) and you can easily be lulled into thinking they have all the answers. Only when you start to hear the same feedback consistently, or you receive feedback from an investor who has a unique insight into the problem you’re solving, should you be quick to iterate on your story. I found using a spreadsheet to systematically track all the feedback I received in meetings and over email was key to spotting the patterns and improving my pitch.
3. Don’t tailor your vision to suit an investor, say it how it is and let your story self-select
As the pressure of securing investment built up, I sometimes found myself deviating from our vision and strategy to align it more closely with what VCs wanted to hear. A good example was the pressure to monetise too early. Many VCs want to hear that you are going to start generating revenue as soon as possible and it’s tempting to tell them this is the plan, even if you know that it’s unlikely given the time it will take to first grow the team and build the product.
Fortunately, I managed to resist this short-termist urge as I knew that even though it might help us secure investment quicker, it would also come back to haunt us post-closing if our investor pressured us into implementing a plan that we didn’t agree with. You’re much better off presenting your strategy and vision exactly how you see it. Although this may result in more rejections, the investors that do ultimately invest will be more aligned with your thinking and in a much better position to offer useful advice.
4. Put a positive spin on your problems and show that you’re excited to solve them
VCs know that no-one’s business is perfect. Whether it’s a gap in your team’s skills, not enough customer traction or the “wrong” type of revenue, they’re going to find out at some point. In fact you want them to find out because only then can they do their job of offering advice that is practical and relevant.
What I learnt is that although you can’t shield your problems, you can definitely cushion their blow. Do this by demonstrating confidence in every answer. Even when you don’t know the answer, show that you’ve thought about the challenge and done everything you can to mitigate the risk. Investors expect to see problems, what they care about is if you’re up for solving them. Show that you are excited by the challenge and, better still, make the investor excited too.
5. Generate a sense of urgency without coming across as desperate
When we started fundraising, we were in the “fortunate” position of having more than six months of runway, thanks to it just being myself and my co-founder. This gave us a stronger negotiating position as we weren’t desperate for the cash but it also limited our urgency — we weren’t pushing for an answer from investors. It was only when our discussions with one fund started to approach the term sheet stage that we began to tell other funds that we were aiming to close by the end of the month. This rapidly crystallised interest from all the other investors.
Although VCs will typically just play by their own terms and timelines, a couple of tactics that could generate this sense of urgency are: communicating a date that you’re hoping to close by because you need to get on with building your business (opposed to a date that you run out of money); and subtly making each VC aware of the interest from others, without giving away too much (if an investor pulls out it can send negative signals to the others).
6. Don’t give up on a VC until you know your story has been properly heard
Intros to VCs can often start with a quick meeting with an analyst or associate, after which they present your business (without you there) to the partners of the fund at their investment committee meeting.
I found that associates tend to be stricter with their evaluation criteria, focus on traction and metrics to gauge your business, whereas partners, if they are excited by your vision, are more open to stretching the rules of what qualifies as “too early” (this holds at Seed-stage, probably less so for Series A). As a startup pitching a bold vision over proven metrics, it was key that we had the chance to pitch to the partners to make sure our story was properly heard. To do this, ensure your intro is with a partner, where possible, and aim for multiple intros with a single fund to increase your odds of being properly heard.
7. Make sure you know what you’re getting yourself into
Fundraising should be a two-way selection process: you need to decide whether you want to work with the investor as much as they are deciding whether they want to work with you. The most useful insights for your decision come from the questions the investor asks and through feedback from their portfolio companies.
The investor’s questions shed an important light into how they think, how well they understand your challenges and the type of investor they are. Avoid those who only ask stock questions about traction and metrics and focus on those whose questioning demonstrates the clearest grasp of your vision (this ability to ask beautiful questions is one of our values at Klydo).
Make sure to also gather feedback from other founders in the investor’s portfolio. Request introductions in addition to the ones that they offer up (as these are likely to just be their success stories) and try to uncover how the VC behaves during difficult patches. Founders are rarely going to criticise their investors, so be prepared with questions that can subtly uncover the negatives. One I like is “let’s say you rate your investor 7/10, what could they do to turn your score into an 8?”
8. Evaluate VCs on more than just their investment and valuation terms
As first-time founders, we were looking for an investor who could provide more than just investment; we wanted someone who we connected with on a personal level and could become a trusted sounding-board for when challenges inevitably arise. On top of this, it became apparent to us that our choice of Seed investor will signal the type of company we are and the level of ambition we have to later-stage VCs. Our decision of investor was therefore crucial to get right.
So when it come to negotiating terms, although it helps to take advantage of the competitive nature and herd mentality of VCs, you want to avoid playing them off each other purely to drive up your valuation. As long as your offers are in a similar ballpark, you should just pick your preferred partner and commit. This will avoid giving the impression that you don’t value their added benefits and will help you maintain their trust, something that can disappear as quickly as it comes…
Fundraising is a delicate and unpredictable balancing act. Each time you stop one component from falling, another starts to wobble. All you need is one point where everything holds just long enough to push the deal over the line.
The best advice I can offer for achieving this is sheer perseverance, and to enjoy the thrill of it all!
Good luck 🤞
Nick Schweitzer is Co-founder and CEO at Klydo, a creative AI startup based in London. We’re hiring! Check out our careers page for more info 🙌
Here’s some additional quick-fire tips that didn’t quite make the cut of the main blog post:
- Prepare small anecdotes about yourself that you can drop in during meetings that reinforce your story and help you connect with the investor on a more personal level.
- You’ll often receive conflicting feedback from different investors. Listen to and adapt your story to the type of investor you want to attract.
- Question the investor throughout the process as much as they question you. It will help you learn about what kind of investor they are and will make you come across more confident.
- Don’t waste your time with unresponsive investors. A good investor will pretty much let you know by the end of the meeting whether they’re keen to set up another one.
- Always try and line up face-to-face meetings. If a call is scheduled, try dropping them a note saying you’re nearby and it’s no trouble for you to drop in instead.
- If you get a “too early” response from an investor, more often than not, read it as “you haven’t convinced me”.
- For every no you get, try and get another intro. If the investor likes you, chances are they’ll be happy to offer an intro to someone more suitable.
- Don’t be the first to suggest a valuation. You’ll either suggest too low and miss out on a higher valuation or you’ll go too high and be negotiated down. Let them set it and then negotiate.
- Seed-stage valuations are more art than science. The higher it is, the more it reflects an ambitious and bold vision, but too high and you can struggle to raise your next round.
- Always have a backup plan in place. Keep conversations with other VCs warm (while respecting exclusivity periods) and have a plan for if you haven’t raised by a certain date.