The most important responsibility of a founder is to make sure their company has enough money to survive. I have personally helped ShapeUp raise $10M+ in equity capital ($1.3M from angels and $10.7M from VCs), over $3M for Blueprint Health, and seen our portfolio companies collectively raise $100M+, including $20M+ in angel capital.
The process of raising money is difficult and can be uncomfortable for many people. I will try to demystify the process and make the mechanics easier for you.
First off, I want you to get in the right mind set. It is very important for you to know and believe that you are giving people a unique opportunity to make a big return on their investment. Most investments in public stocks don’t have the opportunity to double or triple, let alone return 10x the investment. Although most early stage companies fail, the ones that succeed can provide great returns to investors.
Next, I’d like to talk about who your likely investors are. I like to separate investors into three categories: people you know (friends, family and friends of friends), customers, and strangers (VCs, AngelList, etc). Most companies are funded (at least initially) by people the founders know and/or customers.
Let’s talk a little bit about the business model of VCs. Most VCs have $50M+ in capital they need to invest in 10 companies. So VCs are looking to invest at least $5M, if not $10M or $20M in a company. The investors in the VC funds are looking for 20%+ annualized returns on their investments. For VCs to do this they need to return 3x the amount invested. So a $50M fund will need to return $150M+. Because a number of their investments fail they are usually looking for some of their $5M investments to return $50M+. If a VC owns 30% of a company with a $5M investment (a $10M pre-money valuation), they will need the company to be a $200M company to generate the type of returns they are looking for. VCs are typically looking for companies that can be $200M+ companies. Most companies don’t have the potential to be $200M companies and even if they do, most VCs often want to see some traction (e.g. $1M+ in revenue) before making an investment. Long-and-short, understand their business model and be-aware that most companies probably shouldn’t be trying to attract VC money in the beginning.
Ok, so let’s discuss where you are most likely to get funding for your start-up, from people you know (e.g. your network) or customers. If you can get some funding from customers, awesome! That is the best place to get it from (e.g. pre-paying for orders). But even if you get pre-payments for orders, you often need more working capital. So let’s jump into the process we recommend if you want to raise a seed round from “friends and family”.
The Process: Friends and Family
We will talk about terms, valuations, and other details soon, but let’s first discuss the process we recommend that you follow. This is the process I followed at ShapeUp and still follow today at Blueprint Health.
The Process: VCs and Other “Strangers”
The process for attracting VC money or investors from places like AngelList or angel groups is a bit more difficult. Whereas “friends and family” investments are often heavily based on a level of trust the person has in you, there is often little to no relationship between you as a founder and the VC community / angel groups / strangers on AngelList. First you should decide if your story is conducive to funding from VCs (e.g. do you have a $200M+ company story), angel groups and AngelList. If you think you do and are up for the work, you should see the process much like a marketing campaign. Figure our who is on your lead list (e.g. find VCs that are interested in your space), look for connections you have to partners at the firms you want to target, see if you can get intros, if you can’t try to reach out on your own but don’t expect much. Rinse and repeat. Similar to friends and family, you don’t want to say too much initially. Just see if you can get a nibble. If you get a nibble then try to draw them in and close them with deadlines. This is harder to do with VCs because they usually fight for exclusivity in a “due diligence” process. Term sheets often just impose exclusivity, which is a tool of leverage for VCs. Just be aware of your leverage points and try to maximize them (e.g. having other VCs that are interested).