100 failed attempts of fundraising to 40B$ company.
Stats from Crunchbase show that more than 1,900 seed and series A investment rounds happened in June–August 2020, despite it being the peak of the coronavirus. Even a pandemic couldn’t discourage entrepreneurs from seeking capital to fund their dreams.
I think it’d be fair to say that investors have been more cautious than usual as markets have softened globally as a result of COVID-19. Entrepreneurs should be able to seek the money they need to ensure the success of their business. However, many of them have trouble deciding whether it’d be a good idea in the first place.
Dealing with VCs can sometimes feel like you are embarking on a treacherous journey because you may be at a disadvantage when it comes to negotiating a good deal. However, seasoned serial entrepreneurs will tell you that it is possible to get capital as and when you need it, without sacrificing your future options. You should know precisely what you are in for before you step into the fundraising process.
I often find budding entrepreneurs wondering whether it’s a good idea to look into VC funding. I can tell you that each company has its own set of circumstances. So, if you are asking whether your business should or shouldn’t raise capital, I won’t be able to give you a yes or no answer. Instead, I recommend the following simple and practical framework to figure out what’s right for you.
Q1 When do you need an investor meeting?
First, you need to be very clear about what it is exactly you need money for.
If you have no idea what to do with money then don't think about raising, instead work on your product and company.
If you have an idea then make sure it’s not from the following.
- Hiring employees : I know it is counterintuitive but hiring kills companies because hiring is expensive and costs time. It also raises the question if the founder is going to spend time on designing the job description, marketing those, selecting people, onboarding them then who is spending time on customers and products.
- User-acquisition : Spending investor money on google-ads, facebook-ads, may not be that promising because it raises a question: are you doing it profitably?
“As a VC, I have sat through many presentations like this, and in most cases, the service is actually interesting and compelling. However, in the majority of these presentations, there is little or no focus on how much it will cost to acquire customers. As I ask questions to understand the thinking, what usually comes out is something vague along the lines of web marketing, and/or viral growth with no numbers attached.”
Good reasons maybe
- Customer service. - This might be a good reason to be raising funding because Customer retention is cheaper than customer acquisition.
Q2 Who do you need them with?
- Friends and family
- Seed funds
- Vc funds
Types of investors:
To answer this question you need to understand
Q2a. Which stage of startup you are in?
- If you just have an idea.
- If you have a prototype
- If you have users
- If you need money to grow
Knowing where you are in your journey will help you reach out to the right people when it comes to raising funds for your startup,”
Once you are clear on the stage at which your startup is, it's good to know that you can raise funds at any of these stages.
The more of these things you have the better it gets.
Now the important thing is to figure out
- Who are these investors?
- How to get a meeting with them?
- How to convince them to give you money?
- What motivates them?
- How do get in touch with them?
Type A: Friends and family.
Most Common for startups just at the idea stage.
Who are these people?
Mom and dad, granny pop, rich uncle's people who have a little bit of extra money that they can give you because it feels good.
Why will they give you money?
- They love you, they remember you when you were in diapers.
- They give you money because you have the conviction that you can build something and they want to support you.
- If you decide to raise money from friends and family treat it like a real meeting and treat them like real investors. Be respectful.
- Go in with an actual pitch and actual understanding of what you're doing.
- Do it as a real thing because it will help you train for the next stage of raising money.
- Don't take advantage of friends and family, only take money if you know they can afford to lose money.
- Don't raise $50,000 with your grandma at a $50M valuation. Don't do that you will get the inheritance anyway.
Accelerators are basically Investors with an education program attached to them.
They help you initially + provide some seed funding + prepare you to help you raise more funds from other partners and investors.
Some of the well-known accelerators are
- Techstars, USA
- 500 Startups
- Venture Catalysts
- Melbourne Accelerator Program
- CIIE – IIM AHMEDABAD
What founders need to know is that there are 1000’s of accelerators and not all of them are good. Some of them even hurt companies because If there is no progress after the accelerator investors might think “hmmm what's wrong with this company it might not be the money but the founders.”
Some of them have Never funded any company outside their own accelerator.
Think: why should I take money from someone who has never done anything in the field or never seen any of these things work.
These are basically rich people with time and money in their hands.
Why do they Invest?
- They really wanna see new technology come out.
- When they were new founders someone gave them a chance.
- Sometimes they invest just as a sport (something like trophy hunting to flash on Twitter).
- Be careful: Some of the angel groups, People who like to get together for meals and grill new founders and then not Invest.
How to reach them?
It's easy to get in front of professional angels.
- You can directly Email them.
- Network to them if they are local.
Before reaching out to them, do some research and see if they are active investors or not.
Have they made an investment in the last 6 months, 12 months, 5years?
If they have not invested in a year or two they are probably not investing actively.
So probably not a good idea to waste your time chasing them down.
Type-D: SEED FUNDS
Seed investors are supper professional angels who have raised funds from outside to invest in startups.
They generally invest on the behalf of angels who probably don't have enough money or time.
These can also be newer but professional investors who are trying to learn the ropes.
They are often great, recent founders, they are probably aggressive about finding good deals, quick processes, because they know they have to move quickly.
How to reach them?
- Do research on them. Their whole job is to meet new founders.
- So email them, cold email them with a nice pitch deck.
What do they want?
- They are investing for a return so that they can raise their next fund.
- They are not interested in things that will produce just a small return (10x ) they want something with massive scalability potential.
Type-E: VC Funds.
There are VC funds that invest millions of dollars and then there are VCs that invest billions of dollars. They're not only investing their money into your business, but they invest their brand too.
VCs have a specific structure for what they do and how they make decisions.
They have multiple partners who tell them hey we need you to invest our money and give us X% of returns.
This type of funding comes in later stages, series A.
So if you are already a startup with seed funding you might need not worry about how to reach them.
What do they want?
When a Vc invests in a company they are not only looking for a huge return but something that can cover their whole fund.
- Will this investment return my entire fund?
- When you walk into that room you cannot pitch a small version of what you are doing, you have to do something big.
- Look for investors who have invested in ventures in the industry you’re aiming to enter.
How to find them?
A syndicate: where one person has money from a bunch of other people. Who says we are gonna invest in this thing and everyone else follows.
These are Wide open listings: they will list you and people will send you money without ever meeting with you. This is good if you cannot figure out another way to find funding.
It is not a good way because generally, it does not exist and even if it does exist it will become a nightmare to manage all the individual tiny little investors on your cap table.
This article has been possible because of Y-combinator and Aaron harris (Founder, Investor, Former YC-Partner ) we thank them for sharing so many valuable insights with the startup community.
At last, most investors are receptive to cold emails. The challenge is to get those emails right as there are good ones and bad ones. Attaching a quick and crisp pitch helps in a better response as gives the potential investor the idea about everything they would want to know initially without much effort.