Thursday, April 23, 2015

Raising Money From Strangers: Working The Intro

Raising Money From Strangers: Working The Intro

Startup founders, going all in to the process of raising money from angel and VC investors, can increase their chances of success by having an organized and focused process. I offered my thoughts on this, based on my experience on the angel side of the table, in my "Get Serious" post. (See the full series HERE.)
I talk about about drawing up a list of target investors ... using tools like angellistand crunchbase to help with discovery side and then other tools, so linkedin andconspire for example, to work out who you know who in turn knows those targets.
But I didn't take on the: "OK I have names ... but now how do I work the intro?" question. Having had a fair number of founders come back to me on that after that post here's what I think - the approaches that follow are some obvious entry points, listed in increasing order of effectiveness.
1. Comes in Cold = #FAIL
So Angelist and Linkedin might be good ways to triangulate on your targets but they are pretty much useless when it comes to connecting with any active investor - well, this one at least. In my case this is for two reasons: a) I get enough referrals or meet enough founders at in person events that I simply have no bandwidth to review cold incoming inquires. I suspect I am not alone in that. But also b) sorry: you just failed a test. If you can't find a way to get a warm intro or otherwise make a creative connection to me then my assumption is that you aren't what Paul Graham calls a "formidable founder". And that is what any investor is looking for!
2. From a Non-Investor (so an investor ... just not in your company)
So you identify an active investor you know who seems to know me. You validate that and ask them if they will make an intro for you. OK so now you are making progress. Assuming the person is someone I know/respect then I will pay attention to the intro and at least review the materials. BUT this route can suffer the obvious credibility challenge - "Thanks for referring Joanne to me. But her business isn't something you wanted to invest in. Errr ... so why should I?" (That's less of an an issue where Joanne is not in a space the referrer is active in, so the "not an investor" part is less of a red flag.) Still option 2 is a heck of a lot better than option 1. Also intros from service providers fall into this "tier" - so better to get an intro from a known startup attorney for example than a cold call. But you get more traction if the intro comes ...
3. From an Investor in your company 
Now you are making real progress! You have an investor in your company who knows me. Maybe they even offer to make an intro without you asking them. Or maybe you ask them and they say "Sure, will do." I am definitely listening now. I know that, because the person making the referral has skin in the game, they aren't objective. But ... they have skin in the game! They believe. I assume they did due diligence and, assuming I trust their judgement, this is something I want to hear about. (I made an investment end last year through a chain exactly like this - thank you Jerry Neumann! Jerry has the coolest early stage investor website out there btw.)
4. From an Entrepreneur 
Statement of the blindingly obvious: Founders are busy people - but they know what it takes to do what they do. So when a founder I know recommends another entrepreneur I pretty much always "take the call." By spooky coincidence just as I was writing this paragraph I got an email from Gillian Morris of Hitlist with a "would you be interested in meeting this founder?" message. I replied "yes" - immediately. Why? Because I know Gillian won't by wasting my time, I know when she infrequently makes an intro like this it is for a good reason and crucially I am pretty sure she is a damn good judge of other founders.
5. From an Investee Entrepreneur
An intro comes in from the founder of a company I am invested in. So the answer "yes" is easy and in this case there is a higher level of commitment.Part of my role as an investor, as I see it, is to make value added (I hope) intros that might benefit my investee founders. And in return if they make an intro for me I feel pretty much obligated to respond positively and return the favor. Of course, if the investee founder that pings me has a business that is rocking, then the fingers typing the reply message work even faster - this isn't just a recommendation from an entrepreneur ... this is one who is making me money!
6. They find you
The connection nirvana is of course where investors contact you. Much lower IAC (investor acquisition cost!) than endless pitch meetings. As leads for your cap table build out plan they come in pre-qualified, at least in the sense of having demonstrable interest. And the way they find you can be multi faceted. Having a glowing write up across the tech media can obvious generate interest. And you can proactively work to generate that sort of earned advertising. But being visible and engaged through social media in the normal course can do it for you too. So blogging interesting content on your space and pushing out there. A specific example: I invested in Snaps a while back after I saw something founder and then CEO Vivian Rosenthal put out on twitter. I think we got into a twitter convo which promoted me to look into the business some more. Then an in person meeting when I got more interested. Then some due diligence ... and in due course I wrote a check. It happens!
You can find me at: @adamquinton

Wednesday, April 15, 2015

Raising Money From Strangers - Founder Tips … In Their Own Words

Raising Money From Strangers - Founder Tips … In Their Own Words

By way of follow up to my post on “Raising Money From Strangers - First Time Founder Tips” I am delighted to share some “from the front line” dispatches from founders who offered advice based on their personal experience. Specifically their thoughts on “things I wish I had known when I started fund raising”.

Gillian Morris is the co-founder and CEO of Hitlist, the travel app, and offers up a key observation that speaks to the opaque (and hence frustrating) nature of early stage fund raising.

What I wish I had known - How to find the appropriate stage investor: I spent a lot of time trying (and usually succeeding) in getting in front of top tier seed stage investors when our company was still very young - so young that there was no chance that they'd invest. Unless you have a very obvious track record with previous early stage startups, you're not going to get a brand name seed fund to invest in you until you have very solid metrics. Before that, they'll be happy to have an associate talk with you and mine information, but they're not going to get involved (which would be too risky) and they're not going to help out. I wish I'd known that at the very early stage, angel investors are the only ones who can really help your business get to the next level.

Allison McGuire the co-founder & CEO of Walc, a groundbreaking landmark-based navigation app for walkers offers these three pieces of advice:

It's okay to say no - This may come as a shock, but all money is not equal: Sometimes you negotiate on terms, sometimes you take a check and thank the universe, and sometimes you walk away. If an investor prove to be a giant pain or it just doesn't feel right, walk. Clarifying what your deal breakers -- either internally or with your co-founder, if applicable -- makes negotiation that much easier.

Confidence is key - You can't manufacture confidence: Well, I suppose you can manufacture what looks like confidence, but in actuality, this is hubris or bravado. If you know you'll be successful with your raise, you will be successful. It's one of the most simple things that's easy to forget. If you're struggling with confidence, spend some time with yourself and your advisors (note: if you don't have advisors, get them now). Find the answer to why you, over anyone else in the world, are going to pull this off. That will help you more than any traction stats.

Listen to opinions, then make a choice - This is, perhaps, the most valuable piece of advice I can give: I wish someone told me this before I started my business. People will always have opinions. Some voice these thoughts more loudly than others. For example: lawyers will give you the most protective, conservative advice. Advisors can be really helpful but can have conflicting advice. Investors are all over the map. But here's the deal: you're the decision maker. Oftentimes you have to make unpopular decisions, if it's best for the business. Thank those that have given you feedback, then just go with what feels right. If you mess up, you mess up. Welcome to startupland.

Andrea Guendelman and Silvia Travesani are the co-founders of BeVisibleLa Primera Social Network for US Latinas”. They also have three messages based on their journey:

Focus on investors’ backstory:  investors are not just judging companies by potential returns.  They may hear lots of pitches and see lots of companies with promise.  But the final decision – the decision on which companies to pick out of a herd – often seems to come from the gut or the heart.  Our company, BeVisible, is building a social media platform for Latinas.  Our mission is to help Latinas, particularly millennials, connect with educational and career opportunities.  This resonates with some investors on a personal level, and not just because they are Latinas.  For many it is about finding hidden potential among underdogs.

Don’t focus just on dollars:  Potential investors can contribute in many ways before and beyond just money.  They can provide valued advice and open up networks.  You do need to be direct with “the ask,” but don’t let that get in the way with developing long term relationships.

Recognize the dynamics in the pitch team - Investors are focusing on people more than products:  They are carefully watching how your team interacts during the pitch.  If people on the team have similar personalities, you need to work hard to assure the investors that the team will be balanced and firing on all cylinders.

Sunday, April 5, 2015

Raising Money Strangers: Some First Time Founder Tips From An Angel PART III

Raising Money Strangers: Some First Time Founder Tips From An Angel

PART III - Assets To Protect And To Use, Plus A Few Landmines

This is the third of a part of a three part post on tips for first time founders raising money from strangers. PART I can be found HERE and PART II HERE.

1. Protect your customers time and only open them to the most serious investors.
In a B2B context your most valuable assets can be your pilot/live customers. So the last thing you want to do is annoy them by opening them up to a multitude of intrusive investors. Also by doing that you expose the fact that you are a startup with no money! So guard access to your customer contacts very carefully. Only open them up to investors who you are convinced are serious and are likely to impress the client because they are thoughtful, ask smart questions etc (so no jerks!). If you have a number of clients who might be of interest to investors be selective and only facilitate access with the ones you have a strong relationship with. And don’t be afraid to prepare those clients - meaning briefing them on who they will be getting a call from, what their interest is and the sort of questions they are likely to get asked. Most obviously only open up clients who you are confident are big fans. The investors will assume you have been selective anyway. So if they speak to a client who comes across as lukewarm that will be a big negative signal to them.

2. Use your Board/advisors - they can be big advocates.
Your advisors (and existing fiduciary Board if you have one) can be big advocates and if they are relevant domain experts (as one hopes they are) they can be an impressive validation of you and your business. Obviously they are partial but what they say will carry weight because they know you and your space. But caution: If you have advisors listed on your website investors may contact them whether you want them to or not - they are “public domain information”. (Hence my own Rule 4 of Advisory Boards. ie don’t have a “vanity” Advisory Board … have one with people you actively engage with and who like and add value to your business! Personal example: I met recently with someone listed as an Advisor to company X. They didn’t know I was talking to company X and I casually said them. “I think you know Y the founder of X don’t you?” When I got the reply … “not really, I think I met them once at a conference or something” I knew founder Y was definitely running a vanity board!

3. For the more advanced startups … use your existing investors - with their permission.
if you already have stranger money on board esp from more active/visible investors they are great advertisements for you and your company. Like strong advisors provide an element of social validation but crucially, as I noted in Point 2 in the prior post, investors know investors so use that when you raise again. Some of your investors maybe be listed on Angellist, Crunchbase and/or your website/investment materials. But typically unlike advisors they are not all in the public domain. So, subject to their approval, make them part of the process. They a) are used to talking to other investors and b) should be very open, their time permitting, to support your next raise which is obviously in their own interests to do anyway.

4. Beware of competitor issues - know your own disclosure limits.
Whether they tell you so or not assume that investors are likely to check out your competitors (easy to find them even for the non expert because you will have listed them on a slide in your deck!) and possibly investors in those companies if they know any. So establish in your own mind a sense of what is information that you just don’t want to share. Forget about asking for an NDA by the way, investors in most cases will see that as a “rookie mistake”. They simply can’t sign NDAs because they see so many companies. Yet another reason for working out who your regard as trustworthy asap. Easy to say but don’t be too paranoid … there are plenty of good ideas out there inc people who might have ones similar to yours already. The key to your success most like will not be your idea per se … rather your execution. As Paul Singh, then a Partner at 500 StartUps put it a few years back: “Traction is the new Intellectual Property”.

5. Watch out for investors with potential conflicts of interest.
For any really active investor, angel or VC, you will be able to see on their website/angellist profile/crunchbase profile etc if their portfolio has any companies that are competitive to yours. But they might not have everything in the shop window … you can always ask for clarification. And don’t forget to check out the profiles of angels/players in a fund on linkedin/their site - it’s a red flag if you spot some connection to a competitor there, say on an Advisory Board even though they are not investors. Trust me it happens. Even then you can get caught out … for example when an investor is talking with you but, unbeknownst to you they are in due diligence with a competitor but haven’t closed anything yet. They could just be having a dialog with you to gather competitive/market intelligence. (Yep, that has happened to one of my investees too! Not much you can do about it and don’t be paranoid, but open the door of secrets slowly just in case.)

6. Beware investors who ask to be an advisor for equity or a retainer to get you "ready" for investment.
It happens (quite often actually). Said Angel (this is an angel thing) might say she/he sees potential in your business, but suggests say that your deck needs extensive changes or that you need other "training" and offers to help … for compensation. Each case is different but for me this is a big red flag! Why? Two reasons: 1. In my view, the investor needs to invest first and make a decision based on the merits of your business, before jumping into an advisory role. That should be at your request. You ask advisors to be advisors and the best advisor candidates will need persuading. 2. Whilst likely well intentioned, an investor who is not investing, but rather "helping for compensation" is more likely to be an awkward partner. They may feel they have a “right” to tell the entrepreneur what to do and unlike other non-investor advisors (who you should proactively select) stay on your cap table! In addition advisors who are not investors, but could be, are a negative signal for other investors. (“They know more about this company than I do but chose not to invest - so why should I!?”)

Raising Money Strangers: Some First Time Founder Tips From An Angel PART II

Raising Money From Strangers: Some First Time Founder Tips From An Angel

Part II - Herding The Cats (aka Investors)

This is the second part of a three part post on tips for first time founders raising money from strangers. Part I can be found HERE and Part III HERE.

1. VCs should be able to give you clarity on timing and process - so ask!
Rather bizarrely at the early stage the time demands on you by investors during due diligence can be inversely proportionate to investments dollars. So early stage/seed funds are typically experienced investors who know what they want, have a process they stick to and are likely to have some if not a lot of expertise in your space. Hence they can get to yes or know based on a small number of meetings and minimal additional materials over and above what you might have in a well populated data room. With these types of investors asking early about their process is important and usually productive. So they will have immediate answers for questions like: What do you need to see in terms of materials? How long does it take you to get decide to make a commitment? VCs after all are running a business. They have a specific amount of money to invest provided by their LPs and have committed to those LPs to make (roughly speaking) a certain number of investments in a certain period.

2. But with a VC be careful who you are talking to - decision maker or not?
You need to get an insight into the decision maker’s views asap: In the case of seed stage VC which is a one woman/man band if you are talking to that person you are talking to the decision maker. As soon as there is more than one person in the shop it gets more complicated. In particular you need to be wary about spending a lot of time with an enthusiastic analyst/associate at even a two person fund. Their job is to scope out potential investees, do market analysis etc. So they are typically always eager for more information - but that doesn’t mean anything in terms of the likelihood of the fund to invest until you get to “the” decision maker or decision makers. So find a way to do that asap and get a better gauge of where you stand. All too often you can go down that route, feel pretty good about things but then be told … “the partner(s) decided you are too early for us.” But … the partners pretty much knew that when your deck came in the door, they just didn’t tell you right away.

3. Angels and Angel Groups can be more problematic - the cats need herding!
In contrast to VCs individual angels maybe have no organized process, have no deadlines and can be all over the place in terms of what they want and what they think it is reasonable to ask for. And angel groups, while having process, can have too much (ie they go on for months and ask for a large amount of materials, in come cases more than VCs) and can be painful to deal with because typically, however well meaning the investors involved, many members are not domain experts so need to be educated (by you) on your business and can go down lines of inquiry which to you are a waste of time. Also 10 angels in a group or individually gets you only $250K if they are putting in $25K each … so that can be a lot of time invested if each has their own sub-agenda for little cash return for you. Hence the attraction of seeking out larger ticket (often domain expert) individuals if you can identify candidates and get yourself connected with them - see 2 above!)

But, whatever the context, finding out if an angel is serious upfront can save a lot of angst. And in terms of their process, whatever that is, you need to assess quickly if they are going to be too much of a time drain to merit your very constrained time and effort. So an angel group process going on too long/too deep is one you can walk away from. An individual investor who wants a third call on your model … is someone who probably is not a good use of your time. And remember that behaviors at this stage are a litmus test for post investment behaviors - the investors that are respectful of your time, ask limted but pointed questions and show they understand the limitations of dealing with a startup (no, we do not have a team in the finance department who have drawn up an extensive 10 year model) are also likely to be “better” behaved (and likely value added) members of your cap table. (Although all rules are there to be broken, you will do more for the serious investor who is serious for $250K … less so for the perfectly nice and friendly investor whose usual ticker size is $25K.)

Raising Money From Strangers: Some First Time Founder Tips From An Angel PART I

Raising Money From Strangers: Some First Time Founder Tips From An Angel

PART I - The Front End: Get Serious

This is the first of a part of a three part post on tips for first time founders raising money from “strangers” for the first time. Part II can be found HERE and Part III HERE.

1. Be preemptive and intentional with your information - do the work upfront.
Set your key materials up in advance in a well organized “data room” dropbox or other file sharing service. It saves times dealing with ad hoc inquiries and also sends a positive signal that you are prepared and well organized. The dropbox be password protected and you should only allow access after you have had a live discussion, ideally face to face, with the potential investor and been able to judge how serious they are. (See 2. below) Up to that point the investors will have had your exec summary and pitch deck. So make them compelling. (And when you send the deck use docsend so you can see who opened it, when and how long they spent on each page.)

Your data room should probably include folders on:
a) team (the founders, key employees, advisors w bios)
b) legal/corporate info (articles of incorporation; patent info if relevant )
c) financials (your forward looking model, recent balance sheet, recent income statement/cash flow statement, maybe sales pipeline, more details on use of proceeds for the round)
d) investment materials (exec summary, deck, captable - with prior investors made anonymous; term sheet if you have one)
e) sales and marketing (list of products, pricing, go to market strategy, sales pipeline maybe)
f) market analysis (how you size the market opportunity)
g) competitive analysis (more details on the players than the single slide you will have in your deck)
h) technology (key aspects of the platform you are running on and roadmap for 6/12 mos on how you expect that to evolve)
i) exit strategy (more detail on recent exits and valuations than your deck - although there is a debate about how much to share on this topic!)

Angel Groups typically use Gust, Proseeder or some other tool. If you are applying to angel groups having all of the above will make you life easier when you complete their asks and get into the process. But make sure that whatever you post to them is properly formatted to their specific needs and of course consistent with your own data room materials.

2. Be preemptive and intentional with your process - do that work upfront too.
Whether you are raising your first $500K convertible note or running a multi $bn IPO process most all fund raising has a common element - momentum is your friend. If you follow Tip 1 you will have your materials ready to impress investors when you start your “process”. But do some work on that process upfront too. By using tools like Angellist and Crunchbase you can identify investors who seem to be active in your space. Triangulating with linkedin and maybe their personal or fund websites (mine is Lucas Point Ventures) you can: a) draw up a pre-qualified target list of investors and b) work out close enough connections to get you a “warm” intro to those investors. A neat new tool that can help you with that is Conspire. Once you have your materials ready and your target list ready then when you “pull the trigger” try to pull together as many initial calls, meetings as you can as quickly as you can. Done well and with a good story you can create that all important momentum - so investors talking about and asking each other about you (= social validation) and in the best case scenario creates investor FOMO. (Let’s face it investors tend to have a herd mentality, you need to try and get the herd engaged with you!)

3. Do your own due diligence early to gauge an investor's “seriousness”.
At a basic level being serious means they have the capacity to invest. As you connect with investors you need to work out if they are really … potential investors in your business and right now. Your own due diligence, at an early stage, should include asking: What is your usual check size? How many new investments have you made in the last last 12 months? How many follow ons? How many new investment are you planning on making in the next 12 months? Who have you tended to invest with? The quicker you establish whether you are face to face with a serious investor the better you can allocate your time. Non active investors are likely to be inexperienced and may ask a ton of questions to no end. They are unlikely to be connected to other investors. And of course they are less likely to provide the capital you are talking to them about tin the first place. In contrast serious investors will not only be more time efficient … but they have friends who are also serious investors. Since these folks often share ideas with each other one of them is a route to others, and a source of all important momentum. (I did a webinar late 2014 on entrepreneur due diligence on investors focused on your first VC round with Early Growth Financial Services. You can see the deck HERE.) One useful resource on smaller VCs is the excellent spreadsheet prepared by Shai Goldman at Silicon Valley Bank. This gives you a sense of who raised how much and when. Final point here, even serious investors take time to make up their mind … so each and every meeting/call you do with them close out by asking whether they have any questions or concerns. (Only when you can sense their growing confidence about your company does it make sense to start to make a more concrete investment ask.)

4. If you have a term sheet make sure that a deal breaker isn’t lurking in there.
Avoid a delayed action term sheet derail! Typically if you are raising a note you set the terms or do so in negotiation with an initial investor. So as you approach other investors the terms are “set” - obviously also true in a priced round with a lead. Note terms are pretty standard. In terms of being “at market” no experienced investor would bat an eye at a note with a 12-24 month term, 20% discount and 4-8% interest rate - so the key parameters beyond the $mn cap. (Memo to first timers: you need to know you way around this language.) But what about the investor who wants to see a MFN (Most Favored Nation) clause (only 15% of notes) - this ensures if future note holders get more favorable terms as a holder in a prior note you are entitled to them too. Or wants some form of preemptive right (some 25% of notes)? If they are deal breakers for that investor you want to find out right away! So once you have shared the term sheet don’t just leave it to chance. Ask the investor if they have any questions or want further clarification. Assessing if the cap is reasonable will be their many focus of due diligence … you don’t want to expend your time doing that then for things to derail if they want the MFN and there isn’t one. (You can of course add terms, esp investor friendly ones, as you go along but that becomes a pain esp if money is already committed and you want existing note holders to approve changes.)

Raising Money From Strangers: First Time Founder Tips From An Angel

Raising Money From Strangers: First Time Founder Tips From An Angel

As an early stage investor it is always an honor for me to be the other side of the table from startup founders giving their all. And obviously as an early stage investor I get to see founders when they fundraise with “strangers” (not friends and family connections but angel investors and early stage VCs like me) to power their vision.

With first time founders you see their pain when they realize that: a) fundraising is (very) time consuming b) “you” seem to be doing it all the time (because ... “you” are). In my experience the most “formidable” founders find ways to be efficient and effective when they raise. They rightly see this is vital to conserving bandwidth so they can keep their company’s show on the road, of course to get the raise done but also to maintain some hope of sanity!

Having seen, from my seat, how first time founders struggle with the challenges inherent in an angel round, and how they overcome them, it seemed worthwhile to lay out some tips on “raising money from strangers” based on that experience. What lessons have successful founders taught me about how they “get it done”?

There is a lot to say so I divided the topic into three parts. The advice is mine and I would preface it by saying that a golden rule for entrepreneurs should always be: "Take advice, but don't follow advice." i.e. whatever anyone says its just one input and no outsider knows a founder's business, their vision, their values and priorities better than them. In that context hopefully some of these tips will be worthwhile inputs for at least a few first time founders, but recalibrated by them into their own context and fully owned by them accordingly.

PART I - The Front End: Get Serious

1. Be preemptive and intentional with your information
2. Be preemptive and intentional with your process
3. Do your own due diligence early to gauge an investors “seriousness”
4. If you have a term sheet make sure that a deal breaker isn’t lurking in there

PART II - Herding The Cats (aka Investors)

1. VCs should be able to give you clarity on timing and process - so ask!
2. But with a VC be careful who you are talking to - decision maker or not?
3. Angels and Angel Groups can be more problematic - the cats need herding!

PART III - Assets To Protect And To Use, Plus A Few Landmines

1. Protect your customers time and only open them to the most serious investors
2. Use your Board/advisors - they can be big advocates
3. For the more advanced startups … use your existing investors - with their permission
4. Beware of competitor issues - know your own disclosure limits
5. Watch out for investors with potential conflicts of interest
6. Beware investors who ask to be an advisor for equity or a retainer to get you "ready" for investment