Editor’s note: This post is written by guest author Darius “Bubs” Monsef, who is founder & CEO of the new design marketplace CreativeMarket. He is also the founder of the popular creative community COLOURlovers and is a mentor with 500Startups & PIEPDX. Bubs blogs at HelloBubs.
I’d started raising 3 rounds. One fell apart and the others raised $1M & $1.3M in a few weeks each. The startup game is a marathon and while I’m not yet qualified to give advice about crossing the finish line, I feel like I know a lot about the first 5 miles… It’s from that perspective I give the following advice to fellow founders who are looking to raise their seed rounds.
I learned a ton when the first round fell apart. We didn’t need it, which is why it fell apart… but the interactions & lessons learned were invaluable in us later successfully raising two rounds. When we set out to do our first, we had just completed YC and were bootstrap profitable. We had some ideas of where to take the business, but they were largely influenced by what we thought investors would want to hear. That didn’t sit well with us and made my pitch less impassioned. And we weren’t sure we wanted to raise… So I took meetings and got some interest from investors, but those meetings were scattered over the course of a few weeks. (We were dealing with an acquisition offer at the same time, so my full energy wasn’t in raising.)
As weeks went on, investors that were interested and had given us verbal commitments started taking longer to respond to emails and some were never heard from again. You could feel things going cold. After we closed that big partnership deal, I proactively shut down the round. I reached back out to investors to tell them we had some capital to take us further down the road and that we would circle back later on. I wanted to shut it down from a position of strength instead of letting it fizzle out.
There’s a lot more to say, though.
Below are the lessons I’ve learned. I hope they help you raise your rounds.
Let me first be very clear: This isn’t about lying or being dishonest. It’s about preparing yourself and your strategy for a key time in your startup’s life. The same way you should optimize a landing page for conversions, you should optimize your pitching for conversions.
It’s a lot like dating. Attraction matters. And you can’t just Photoshop your Match.com photo for your seed round. You’re going to have to meet people in person, so make sure the person you present in your deck is the person you are… the best version of who you are.
I heard advice once from a fellow founder that agreed that manufacturing heat is important, but he took it further and said something to the effect of… “Take meetings just to cancel them.” That kind of move can work for some people, but that’s not how I roll and in my opinion you don’t want to start any kind of relationship by being dishonest. If you can’t raise your round without lying & trickery, then maybe you should reevaluate what you’re trying to do.
Some founders are lucky to bathe in the light of hype. They raise big rounds fast. The rest of us, however, have to really work at it.
When my company is in fundraising mode I’m dedicated to that 100% of the time. My team knows I’m not on product or other biz dev tasks. For a solo-founder company or one where the person pitching investors is also the sole developer, this can be a big drag. But you can’t half-ass making heat and without the heat you probably won’t raise your round.
One Does Not Simply Walk Into Fundraising
The moment you tell anybody you’re raising a round, the clock starts ticking.
The longer it takes you to close your round, the less likely it will actually happen. If you’re hot you should be able to get interest and close a round pretty quickly. If you’re still dragging ass two months in, things can get cold and often freeze up.
An honestly packed schedule forces you to be busy and appears less desperate. “I can talk to you anytime this week” sounds like nobody else is interested. “I can talk to you at 1pm on Wed or 3pm on Thurs” sounds like your schedule is full (and it really should be). “My schedule is pretty full, but I really want to connect and will move things around” is your first line if the meeting is really important.
So, don’t say you’re raising until you’re really ready. Here’s how you’ll know:
– You have an early commitment.
– You have your list of 30-50 investors in a spreadsheet ready to work.
– You have intro requests queued up from 3-5 people for each investor you don’t know.
– You have your calendar cleared for the next 4 weeks of intensive fundraising.
How to Raise Before You Raise
It might not make sense to have an early commitment before you start raising, but it’s hugely helpful. Flex your networks and figure out what investors you have the best relationships with. If you don’t, then start working on it now. And don’t stop.
Months before we started raising our first successful round I thought a lot about who we could get in early and how we’d round it out. I’d met Dave McClure a few times and thought he and his newly created 500Startups would be a good fit. So I reached out to offer my help as a mentor in design & community for 500Startups. And for a couple months I added value and got to know him. I also knew Alexis Ohanian and had talked to him a few times about our personal alignment around our philanthropic work.
Then when I knew we were getting ready to raise, I approached Dave and Alexis about being in our round. Remember to get verbal commitments for the round before you start.
Let’s be clear, not everyone may be able to get a verbal commit before they actually start publicly raising and in that scenario, what you should do is front-load your calendar with the meetings that will most likely convert. Start with the investors who most understand your product and market fit. Or the investors that are capable of making split decisions (i.e., Angels, not VCs.) and those you have the strongest ties to.
If you’re lucky enough to have family or friends or anyone willing to invest early on, it’s super helpful in being able to approach early investors and tell them “we just started taking meetings about our round and already have $50-100k committed.”
Matching the Right Patterns
Investors, especially the great ones have what’s called ‘deal flow’. They’ve see a ton of deals. In order to be able to get through checking out every opportunity, they look for patterns. They look for things they’ve seen in other successful companies… Harvard, MIT, Stanford educations… Google, Apple, Facebook former employee… up and to the right graphs…
Every abnormality from these patterns, though, is a negative mark for you.
But, this doesn’t mean your deal is dead, it just means you need to position yourself where your strengths are. If you have the pedigree, put it out front; if you don’t but have traction, put that out front.
I went out to raise a seed round for a color website… at a time when game mechanics & social analytics were all the rage. There is now a design renaissance that makes us more appealing as a pattern match because of the success of both Pinterest and Fab.
I didn’t graduate from a great school with a CS degree… I didn’t graduate at all. None of our founders have a CS degree. (We’re all self-taught.) In fact, I was recruited by Microsoft and went through YC, so that’s what helps qualify us to investors. But what we have to show for our team is a track record of building great product and growing passionate communities. So… My team bio slide is not first in our deck.
How Much to Raise
I’ve talked to lots of entrepreneurs that think they want to raise $200k or $300k. But these are abnormal amounts for legit seed rounds. Again, when hot startups are all raising seed rounds of $750k-$1.5M and you say you’re raising $200k, it’s not a good look. Investors don’t hear “we’re smart & capital efficient” they hear “this is a small idea and we don’t need much money because their isn’t a big opportunity to go after.”
So, set a realistic target round size and then try and get oversubscribed. You’d rather be in a position where you have more interest in your round than room to fit investors in. This gives you the option of raising more, or being selective about what investors you really think are the best fit for you. For our seed round we set out with a target of $750k and ended up raising a million. We had some great investors that we wanted to fit in, and the difference between raising the extra $250k was only a couple points of equity.
Again, this isn’t about being tricky and or dishonest. I know a lot of investors that are pretty annoyed at how much founders are pushing the whole oversubscribed thing. For any investor who takes the time to get interested in you and evaluate your deal… to get pushed out because you were just talking to them to inflate interest is a pretty shitty move.
Shoot for a reasonable target, and if you’re not able to get enough interest to close the higher amount, at least you’ve set an amount you know you can close. If you went out to close a $1M round and got stalled out around $800k, it can be a painful road to get that last $200k. At that point you’re not hot. You’re desperate to close and that sends all the wrong signals.
Also, make sure you really are raising enough. Push for explosive growth, but assume a slow rise. “Seeing seed funded startups that raise less than $750K have a very high rate of mortality. Not sure if its correlated or causative.” @georgezachary
Advisors & Investors
Be careful about your advisors. People often like to have big amazing advisory boards… but if any of your advisors are also investors (who aren’t investing in you) it sends up a big red flag. Paul Graham once told me that an advisor is an investor that doesn’t believe in you enough to put cash in. To be fair this isn’t true of all advisors. I advise a couple startups about early stage design & community building stuff… but I’m not investing right now, so there is no conflict. When you have a known investor as an advisor but who doesn’t have some skin in it, other investors are going to take that as a bad sign.
So either get your advisors to invest some cash or don’t count them as an advisor.
When You’re Raising… Rainbows & Cupcakes.
One thing that bothers me about Silicon Valley is how people talk about how they’re doing. Even in friendly conversations rarely do people say anything negative… even when things are on flames and 10 feet from crashing into the ground. This is because the startup world is small. Way smaller than you think. I try to be a pretty direct and honest person, when things are bumpy I’ll tell you about it. I’m confident about what we’re doing and humble enough to ask for help when I think people are smarter than me. But this has come back to bite me in the ass more than once.
When we were first out of YC talking to investors, a prominent investor who was friendly with us suggested we talk to one of his buddies who also ran a thriving community site. So we met this other founder for beers and what I thought was just hanging out. We talked about our startups, ideas, random thoughts about opportunities, etc. It was just a few founders out for drinks and shooting the shit. But it really wasn’t. What was communicated back to that investor was that we didn’t know what we were doing. That we had a scattering of ideas and weren’t confident. And that investor, although he had verbally committed to be in our round backed out. Causing the round to fall apart.
In a world where everybody says things like “awesome, dude. growth is amazing and the team is killer.” It’s not a good look when you say something less confident and that apparent lack of confidence is often the only thing that is heard.
So when you’re raising, and sometimes you’re always raising. Be careful about what you say and to who. This world is small and everybody knows everybody else. Just assume whatever you say is going to get to the ear of an investor.
Not sure I need to point this out again, but this isn’t about lying. Just find a way to see and talk about what’s in your glass… even if it isn’t half full and closer to only a drop left in it.
Convertible Note Or Series Seed
I don’t have a strong opinion on this. Both rounds I’ve raised were done as notes, but I would have been fine doing series seed docs. As a founder with hundreds of things on my brain, the conversion details of the note are just one more thing to have knocking around versus the clear cap table of a series seed round. I think you can also have series seed docs that are just as friendly to founders as notes but notes can be cheaper and quicker to get done.
The Pitch Deck Is The New Business Plan
Pitch decks are almost required for raising a round, but they don’t have to be a required part of your pitch. I’m good in conversation and presenting to small groups, so I’d prefer to have a conversation as opposed to doing the pitch dance. The risk in presenting your deck is that your pitch has to be perfect for any investor. You can say one word about your market that can derail the whole rest of your conversation and it’s hard to course correct when it’s written right there in your slide. During my first round I started getting my laptop set-up to pitch an investor but by the end, my laptop stayed in my bag until I needed to demo something. My pitch deck was really only sent out as a reference tool for partners.
There is also caution in letting your deck speak for you. Even if you’re the best slide crafter in the universe, it’s hard to get 10 slides to be more passionate, inspiring and intelligent than you are. So don’t send your deck out with your cold emails. I only send it out after I’ve spoken to somebody, or if a lead is already really hot and just needs some reference points. My decks are also purposefully not great without me there to weave the story. They’re just a few words on a slide, or a graph, or a picture. I don’t want my deck to tell my story. I want to tell it in my voice.
But if you’re a bit shy or don’t freestyle conversation that well, using a deck to help you tell your story is fine. Like with all founder advice use what works well for you, and don’t worry about the rest.
Exactly How I Made Our Seed Hot
We got early verbal commits from well known and respected investors BEFORE we started raising. (Don’t tell Dave McClure I said he was respectable. That would ruin his image.) We agreed to terms with Dave and then went out to raise.
(Note about terms. The valuations that companies are raising right now are pretty crazy. If you’re lucky to be a YC company your valuation can be close to $10M. For a brand new idea this seems a bit nuts to me… but hey, if you can get it, good for you. We had an established site, millions of users and we raised our first round at a $5M cap. Although we could have raised at a higher valuation, we prioritized investors over a higher cap. The dilution wasn’t substantially different but we ended up with the investors we wanted to and not just the ones who would accept different terms. Do your own math and figure out what’s right for you.)
With our terms set, we put our profile up on Angel.co and they blasted us out to a thousand investors. Because of our advisors & early commitments, we got 25 inbound requested intros and that interest created heat. Enough heat to push our inbound intros to about 65 in the first week or so. (An Angel.co record at the time.) Then I packed 60 meetings into the next couple weeks. Often with 8+ a day. I’m not a bullshitter and I hate sales-y jargon and when a potential investor was giving me grief or not understanding the opportunity, I simply said, “No worries, I appreciate your time” and quickly removed them from my target list. When you have 50 other meetings to take, you can rebound immediately from a crap meeting. When you only have 3 scheduled and take a downer… it’s hard to get back up.
From those 65+ intros we ended up closing a round with about 10 investors. Some large VCs, some growing syndicates and some small angel founders that I respect a lot.
Leverage the Tools You Have
I’ve technically tried to raise four rounds but I really can’t count the first. It was 5 years ago before I knew anything about startups. I lobbed a couple cold emails into top tier VCs and hoped to talked to them. They didn’t get back to me.
Nowadays there are amazing resources like Angel.co (who I credit with largely helping us raise our first round) and CrunchBase (where I go to see who’s invested in who when compiling my target lists).
I’m just one of hundreds of founders who’ve raised a round but feel free to ask for help. Need help putting your deck together? Want an intro to an investor? Want advice about terms / round size? Ask us. We’re busy, but I think most of us are willing to carve out a bit of time to help a fellow founder getting started.
All the best. Build great companies and change the world. Let me know if I can help you.