Do I need to raise a seed round?
Rapid growth is what makes a company a startup
Take outside money if and only if it will help you grow faster
Don’t raise money if, You don’t want to grow faster, or Outside money will not help you grow faster, If you won’t be able to convince investors.
Every instance you raise money, you dilute your holdings – getting traction is not just about getting funding, it is your negotiating tool.
Quick tip: “Do not raise money unless you want it and it wants you.” Paul Graham (YC)
When should I raise funds?
- Fundraising is a full time job
- Do not get into fundraising if you think your business will suffer
- Pitching takes time
- Negotiation takes time
- Ideally, once you have at least Proof of Concept. Investors do not
favor startups at IdeaDon stage.
- Traction speaks loudest
- Get beta out (MVP)
- Show growth
- Show ability to execute
Beta > PoC
PoC > IdeaDon
Fundraising can impact your startup’s growth. Do not start unless you are completely ready.
How much do I raise?
Not too little, and not too much either.
Raise enough to reach a critical milestone.
Where you create a entry barrier for competition, and/or
Can raise more money at better valuation.
Typically, seed round should last you 18-24 months with conservative spending.
Probability of having unaccounted expenses is always 1, be sure to double check your spending plan
Fundraising is an incremental process. You only need enough to reach the next critical milestone. “Raise as much as you can. Without giving away control, and without being insane.” - Marc Andressen
`There are downsides to raising too much money.” - Marc Andressen'
Milestones, Valuations and Raises?
What is dilution over lifecycle?
What are different types of investors?
Source of investment
- Accelerators / Incubators
- Angel Investors
- Seed funds
Investors can be classified into 7 types
- Connectors,
- Product people,
- Tacticians and Builders,
- Smart Business People,
- Domain Expert,
- The Brand,
- The Filler (aka Dumb Money)
Takeaway: Accelerators / Incubators may be a good option before you approach angel investors and seed funds. You want to be in a position to be able to choose investors. Know your investors and be sure why you are bringing them on-board.
Angels or VCs?
Institutional Money beats Individual Money, unless
VC is not adding any value apart from money, or A pro active Angel is a ready to get on-board
If a VC invests in your seed round but doesn’t follow through in
Series A – it may send negative signal
Not every VC likes to participate in another VC in Series A,
potential signaling issues
There are sector specific funds – here VCs add a lot more value;
if you are in niche market then look out for them
Takeaway: Super Angels may be a better choice than a VC firm. Take on a VC firm if they are adding more value than just money. Typically, angel investors with their domain experience may better choice. In case you do opt for a VC then have a strategy in place to handle signaling issues.
How do I choose an angel investor?
Look for domain experts, tacticians, smart business people, connectors and product people.But most importantly, look for like minded investors who understand you, your startup and what you are out to do Fewer investors are beYer than many, but not necessarily.
Your first objective should ideally be to look for a lead investor, introductions matter as you reach out to more investors.
Do a reference check – speak to companies they have already invested in.
How do I connect with investors?
- Network
- Reach out to college alumni networks
- Check if there are angel investors in your alumni network
- Reach out to fellow entrepreneurs – introductions will save your time and energy.
- Offer value to people you meet – make meeting you worth their time
- Leverage platforms like AngelList, LinkedIn to reach out to individuals and groups you wouldn’t have access to.
- Cold emails work – keep them simple, straight and exciting.
What financing terms should I know?
- Termsheet
- Equity or Convertible notes
- Liquidation Preference
- Anti Dilution Clause
- Option Pool
- Board composition
- Shareholding Agreement
- Founders Agreement
- Remember term-sheet is a non-binding document.
Takeaway: Before you get into a room understand the term-sheet and SHA clearly. Have a founders agreement in place to ensure there no bad blood later. Read every line of every document. Ask if you have any doubt.
What are investors looking for?
- Business (not an idea!)
- Nobody has monopoly on an idea
- The Team
- Can you execute? Can you adapt? Are you coachable? Easy to talk to?
- Risk Management Plan
- Key is to talk about the potential risks for your business and more importantly your action plan towards mitigating them
- Clean Structure and Governance
- Clear and unambiguous record of in-house IP
- Simple holding/ownership structure
- Exit Plan
Expect lots of questions. Prepare and keep fine tuning your answers. Keep it simple and straight. Questions will also help you ascertain what sort of investor a person is (smart money or dumb money).
In case you do not have an answer – be honest and be pro-active in getting back with answers and insights.
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How do I make perfect deck?
Investors may spend only 4-5 Min on your deck. They are short on time, hold their attention. Follow of information is important, not just headings. Break your time into 5-15-30min - 5 min to get aYenDon for next 15 min, and which in turn will keep their aYenDon for 30 min.How do I run investor meeting?
Prepare with your sponsor, you are a team as you enter that room – be in sync with your sponsor and co-founders
Setout the mandate before you begin.
Nail them in opening minutes.
Pitch your product and vision – execution > team > idea.
Pitch your ability to build.
Before you end the meeting, setout Timeframe for follow-up and next meeting.
Takeaway:
Attention span drops with time.
Keep it simple, straight and precise.
Investors want to see if you can deliver, that
is execute an idea.
Break your time into 5-15-30min - 5 min to
get attention for next 15 min, and which in
turn will keep their attention for 30 min.
Do I need a lawyer?
- Lawyer should be hired if you are not confident in your understanding of documentation
- Go with an experience startup friendly firm.
- Read every word of every legal document.
- Use standardized documents when possible.
- Do not send lawyers to negotiate!
- Ask them questions! Lots of questions
Takeaway:
Lawyers are there to ensure what is
discussed is translated on paper, and to
make you aware of potential pitfalls.
Any lawyer will not do. Work with someone
who has startup experience.
How do I negotiate on valuation?
It is not just about pre-money and post-money valuationsIt is also about terms and conditions set out by investors
Do not hesitate to ask investors to match the best term sheet you have received
Traction is your biggest trump card, it favors you and only you
Share data, get market information where possible – but leave ego at the door
Understand their priorities and that one metric that maYers to everyone, and then chase that number
Takeaway:
Terms and conditions are very important, not
just the valuation.
Traction is your best friend
If X gets $10M does mean you will get it too,
be informed but leave ego at the door.
How do I get money in bank?
Term-sheet is not legally binding documentBe forthcoming with information wherever asked
Commitment to closure is a tedious process – work with service providers experienced in working with startups
Due diligence takes time – be sure you understand the timeline and have factored it in
Companies take 4-12 weeks to get money in bank – talk to fellow funded entrepreneurs to understand process and avoid pitfalls.
Takeaway:
Job is not done until money hits the bank.
Don’t think about PR until you receive the
funds.
Due diligence is time consuming process but
one can save time by working with
experienced service providers / teams.
How do I create a Board?
Keep it smallChoose wisely, you don’t want to rush on this Seek experience to supplement your own.
Takeaway: Like minded board members who supplement your skills and do not shy away from pointing out faults while supporting you on course correction.
Hope you got most of the things clear about funding.
Thanks you.
Well said
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