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.

• Choose who is in charge of the fundraising operations / process.  Choose one person and one person only.  This person will be the point person in making sure all of the emails go out, answering any questions, etc.
• Now it is time to let people know you are raising money.  Each founder should put together a list of at least 100 people that they know.  This can be anyone you know.  You don’t have to worry if they are angel investors or if they even know you super well.  You are going to start by going broad.  Do not take out family members (remember this is a good opportunity).  Do not take out people that you “do not think are investors” (they might know someone who is.  We recommend that you extract every email address you have sent an email to.
• Combine these lists into one excel file, with one workbook for each founder with the columns First Name, Last Name, Email, and Personalization.
• Create one line of personalized text for people you want to add a little personalization for.  Do this quickly – no more than a couple hours.
• Edit this email to fit your company.  Note how simple the email is.  The only goal of this email is to see who might be interested and figure out who you should ignore.  Do not include a PowerPoint deck, or provide substantial details about your business.  This email is just bait and you want to see who bites.
• Use a mail merge tool to send the email to your list of people, including the personalization line you wrote.  Have each of your co-founders send the email out to their lists as well.
• Create a PowerPoint deck that outlines the investment opportunity, what we call an investor deck.
• Edit this email to fit your company.  Notice the closing deadline.  This should be 2 or 4 weeks from when you get the response.  It is fine to change it frequently for different people.  Even if you don’t have a deadline, make one up.  You need to give investors deadlines or they will just wait.  Also – keep this email very simple – the biggest mistake that most founders make is trying to say too much.  It is important that potential investors have an opportunity ask the questions that interest them.
• Create another workbook on your spreadsheet labeled Interested with the columns, First Name Last Name, Email, Last Communication.  As people respond and say they are interested in learning more, move their row of data to the interested tab, note when you do this in the “Last Communication” column, and send them the email above and the PowerPoint deck.  Have your co-founders respond that “the point person” will respond with the details.
• If someone doesn’t answer who said they were interested, send a reminder email about two weeks after you sent the follow-up email
• Answer people’s questions as they come in.  You will get some window shoppers – we will discuss this below.  Just be aware of this and try to get people to make a yes or no decision and not waste too much time.  Many people will want to meet you.  Set up a time and meet them, but again give them deadlines and put pressure on them to close.
• Repeat this process until you close enough money.  Ask any one you meet if they are interested in learning about the investment opportunity and keep adding people to your “lead list”
• In another workbook in the spreadsheet, list the people that have committed to invest, with the columns First Name, Last Name, Email, Amount Committed, Sent Agreement, Signed Agreement, Amount In Bank
• When someone commits to invest, move their row of info into this workbook, send them the documents to sign via EchoSign or DocuSign, and email them with instructions to wire the investment, send the check, or have you pick up the check. Give them deadlines and do what it takes to get the money.
• If you get checks, photocopy each check for your records.

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).