‘Chance favors the prepared mind.’ – Louis Pasteur.
One of the objectives of the companies going through Techstars and other accelerators is to secure financing. Most companies are coming in focusing on accelerating their business and then securing capital to continue to accelerate growth. As the common shareholder in the company, Techstars is completely aligned with these objectives.
The reality is most startups need to raise funding to grow and to become real companies. It’s not typical that you or your accelerator can make money if you don’t fundraise, and certainly very unlikely that anyone will make any money if your company does not grow.
So we love it when companies get funding.
But we’ve seen a clear pattern with the companies that rush into funding too early — they actually have more difficulty closing the financing. Why? Here are the 9 gotchas of seed funding that will help you understand what goes wrong.
1. Lack of Preparation
To be ready to fundraise, you need to have strong knowledge of the problem you are solving – why did you start this business; your business ecosystem – customers, market opportunity, competition, go to market, distribution channels, pricing, burn, and many other things. You are going to be asked a whole lot of questions and then some by potential investors. If you are not prepared it will come through and will be a big turn-off.
2. Lack of Traction
Very few companies get seed funding without some kind of traction. Unless you are a team of successful serial entrepreneurs, and even then, investors expect customer/user traction. This does not mean perfect product market fit. It means early evidence that there is a problem and your solution / product is going to have a shot at addressing it.
3. Being Pulled Into Fundraising
So you weren’t thinking about raising money, but you met a bunch of investors, and they said that you really should. Other founders around you said you should do it too. You then decide what the heck, I will give it a shot. It is a mistake. You are not ready – you didn’t prepare, you didn’t plan it. Don’t fundraise on other people’s turf and time. Control your destiny by preparing, checking the boxes and then going out and raising. No one is going away, and investors will not say no to a meeting with you later if you said no to them when you were not ready.
4. Chasing the Wrong People
This is a big one, and it is bad. All investors are different. They like different verticals. They write checks of different sizes. Just because they are an investor does not mean they are the right investor for you. Doing research, understanding what a particular investor likes and why you might be a fit is important. It is equally important to get an introduction from someone who knows you and knows the investor.
5. Not Pitching Angels & VCs Correctly
Angel investors, micro VCs and VCs are all very different in terms of their objectives and styles and consequently how they need to be approached and pitched. An angel investor who writes 25K-50K may want a couple meetings and a micro VC that writes 100K-250K checks will be engaged for a month and may or may not lead. VCs take the longest, write the biggest checks, and like to lead rounds and take board seats. If you don’t understand how to engage each category of investors correctly, you will waste time and may not get the desired result.
6. Not Having An Overall Strategy
Even if you know who you are going after and why, you still need a strategy. A strategy would entail planning the entire fundraising process, who to meet with first, and who to meet with later. Do you start by raising a few hundred K from angels first, or do you go straight to VCs? Making the right decisions about your financing strategy, especially if you are a first time founder, is really important. Not having a plan increases the chance of not raising the capital you need to grow the business.
7. The ‘I Am Special’ Problem
But of course you are! Me too. Aren’t we all 🙂 When you go to a casino and gamble, you think – all these poor suckers around me, they are going to lose, but me? No, no, no. I am a winner. And this is sad, because as an entrepreneur you actually are special. All of us are. We are this crazy, courageous, relentless, unstoppable breed. But the reality is that it is not a good bet to make when it comes to seed funding. You are better off being prepared and winning because of that.
8. Not Realizing You Are Running A Race
When you are fundraising, the word travels around. Investors are people, and they talk. Not because they are bad or against you. It is natural to compare notes in any industry, and VCs are no exception. When you are going out to raise, you need to do it quickly and get all the conversations aligned. Once you start raising, you have to run the race until you are done or you decide to stop because it just isn’t coming together. Realize that this is the race before you enter it.
9. Running Out Of Bullets
It may be a funny analogy, but it makes sense. In the beginning of the process, you have a loaded gun and you start firing shots and have all of these great conversations. Then at some point, especially in a smaller ecosystem, you find that you’ve talked to pretty much everyone. There is no one left. You just fired all your shots, and your gun is now empty.
The bad news is if you already met with all of the investors, and they didn’t write you a check, then you can’t go back to them next month and try again. The good news is that you actually can go back to them in 6 months, show progress, and if you are crushing it this time around, you will get the check. It takes awhile to reload the gun, and the only bullets allowed on reload are the real traction bullets.
How and When to Fundraise
So how do you actually win this and get funding? Two things – preparation and traction. Get all your things in order. Your deck, your pitch, your funding strategy, who you are going to talk to and why, get the intros, etc. Be prepared.
But even if you are prepared, it may not be enough in this day and age. We see less and less people funding ideas and decks. Investors want to see early traction. Some sort of indication that not only is your idea great, but that you talked to customers, built MVP, and have some kind of traction – proof that you can do it and it may work.
And if you find it too daunting and complicated, get help! Talk to fellow entrepreneurs who’ve done it before. Apply to Techstars and we can help you accelerate the business and raise funding. Really think through the funding. Prepare. Be thoughtful. Win.
When thinking about financing your startup, it is important understand different types of potential investors.
Not every wallet is right for you.
Figuring out who to raise money from and why will save you time and yield better results.
1. Friends and Family
Often times the first check comes from a family member or a friend. In theory, it is a lot easier to close them because they already know you. In practice, sometimes this is awkward, and may lead to awkward situations in the future.
For example, if a friend gives you $10K and the company goes belly up — you may lose this friend.
Think carefully before taking money from family and friends. It can be awesome, or it could be bad. Every situation is different.
Another thing is that friends and family members may not clearly understand the risk and how startups work. Take the time to educate them, and if they get it and still want in, then you are all clear.
2. Angel Investors
Angel investors put $10K-25K-50K-100K (lower is more common), and can participate in priced or debt rounds. Angels can be very valuation sensitive. It is important to distinguish between active / professional and occasional angel investors.
Ask them how many deals they do per year and look them up on AngelList. If someone only does a few deals a year, only talk to them if they have approached you, someone gave you a warm intro, or they have relevant experience and background in your space. Otherwise, infrequent investors should not be on your target list. Occasional angels will take longer to close and will be more flaky.
Active / Professional angels will do at least 6 deals per year, and usually more.
Expect to close them within the first 1-3 meetings. It is totally fine, and a good idea, to ask them if they are interested at the end of the first meeting.
Before you meet an angel, understand what they are interested in. Read their AngelList profile or ask via email to make sure it is a fit. Don’t go after people randomly – it will be a waste of your time and their time. Confirm with whomever introduces you that the introduction makes sense. Target well.
3. Angel Groups
An Angel Group, as the name implies, is a bunch of angels investing together and sharing deal flow. Angel Groups can do priced rounds, and if a significant percentage of the angels in a group get interested, they can lead your deal.
Angel Groups meet regularly and have a regular pitch process.
Some do more due diligence than others, but typically several members of the group will be assigned to do the diligence if your initial pitch goes well.
Your check will range from $50K to $500K typically, and you will end up with every individual angel on the cap table. That is, these groups are not syndicates, and unlike AngelList Syndicates, they don’t have carry fees. Angel Groups are also valuation sensitive, and will typically price the rounds lower compared to VCs.
4. AngelList Syndicates
AngelList Syndicates are the most effective way these days to raise money on AngelList. Syndicates are formed by influential angels, and range from a few hundred thousand to over a million.
The key thing is to identify angels who have these significant syndicates on AngelList, and get in front of them.
If you can get such an angel excited, he or she will run the syndicate. For example, the angel might put in $50K, and then another $250K will come via a syndicate for a total of $300K raised via AngelList. Note that the amount raised via syndicate varies and is not guaranteed.
5. Micro VCs
This is either an individual writing $100K+ checks or more likely a firm with $10MM-50MM under management. The individuals are basically angel investors with a bigger sized check. They will commit to invest or will say NO after 2-3 meetings. They may lead and be comfortable doing either debt or equity.
Micro VC Funds will likely take longer, and would not be too far off from a typical VC. You will likely need 3-4 meetings to get to a decision.
Micro VCs in NYC typically do $250K – 500K and can price and lead your round.
Micro VCs do care about ownership and ability to follow on, but to a lesser extent than VCs. They are not looking for 20% of your company, more likely 8-10% and re-up in the next round (depending on the size of their fund).
Like with angels, you need to decide whether a specific Micro VC is right for you. Spend time studying their portfolio. Some specialize in SaaS, some are focused on Consumer, some in e-commerce, some in infrastructure. Not only do you need to understand each fund, you need to understand each partner.
Partners have different experiences and focus areas and they have different preferences for companies as well. Target specific partners in a specific fund. Carefully research their portfolio and see if it is a potential fit.
Traditional VC firms have fund sizes ranging from $100M – 500MM. For seed deals, they would do as low as $250K (atypical) to as high as $2MM. Most likely $500K – 1MM would be their sweet spot. They really care about percentage of ownership, and would likely only do the seed if they think they can do Series A as well. That is, they would want to buy up the ownership to be at 15%-20% after series A.
Another thing that is critical for every fund to understand if they are currently investing: Some funds may not have the capital because they are in between funds, but they would spend the time with you anyway. It is probably not the best use of your time though.
Figure out who will be the partner on the deal. With larger firms, it is not always obvious. Look at how many companies they are involved with and ask them how many companies they typically manage. In a 150MM – 300MM fund, a partner would have 8-12 companies at any given time. 10 is really a lot.
If the partner is already busy, they won’t invest even if they like you because they are at capacity.
Research how many investments the partner has to understand your chances.
Ask them what their process is like and how to best follow up. Each firm may have a unique process and you need to understand it upfront so you can know what to expect. Set up clear next steps and follow ups. Be direct, and ask if they are interested in continuing the conversation. Try to avoid the vague state of MAYBE. If yes, then what is the next step – meeting, etc. NO is okay, you will get a lot of those. NO is better than a MAYBE.
7. Mega VC
Mega VCs are firms that have over $1BN under management. These include Andreessen, Khosla, Kleiner Perkins, Sequoia, Bessemer, etc. Some of them do seed investing, but recognize that the seeds for these guys don’t move the needle at all.
Research whether the fund has a seed program. If they do, figure out who runs it and what the process is.
It is likely that there is a partner in charge of seeds and the process is compressed compared to raising more capital.
Recognize that VC funds need to deploy large amount of capital per deal to be able to return their massive funds. Rather than spending time trying to get their attention for your seed round, it may make more sense to start building relationships with them for Series A and B.
This post originally appeared on Alex’s blog.
5 hand-picked articles from across the Startup Digest Reading Lists. Sign up to receive great weekly content on various topics from expert curators.
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Curator: Katie Chase
Disabled musicians given an interface to write once again and hear their compositions. Amazing. Read More
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Jack Clark at Bloomberg, whose reporting on AI is some of the clearest and most technically rigorous going, explains why a Google computer system beating a master-level player of the game of Go matters:
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One of the questions I get asked regularly by founders is what they have to do to raise a Series A round of investment in the $3M-$10M range. I always encourage them to consider applying to an accelerator program since one third of all Series A rounds in 2015 were in companies that graduated from accelerators. But what about the companies that don’t get accepted into accelerator programs? The acceptance rate is fairly low (Techstars accepts 1% of all applicants), so startups should have a backup plan when it comes to securing Series A.
According to PitchBook, early-stage VCs may only look to top-tier accelerators for their pipeline of Series A-worthy prospects. With the amount of hands-on time these alums receive from mentors, founders, and other great entrepreneurial minds, it makes sense to look more closely at these startups when investing.
So your company missed the cut when applying to an accelerator program – how can your company attract more VC eyes?
Leverage Your Network
When fundraising, your network is critical whether you went through an accelerator or not. Surrounding yourself with the people who have done it right, who know the game well, and can give you the right tips is key to your company’s success in fundraising.
Recognize that there are an enormous number of companies being created each year and ultimately many of them are competing for the same Series A money. Techstars sees tens of thousands of startups applying to our programs each year, and we only fund about 250 at the seed level annually. Of those 250, about half go on to raise Series A rounds.
One reason those 125 or so companies are able to raise Series A rounds is due to tapping their networks early in their companies’ lifecycle. I see a lot of early-stage companies meeting with later stage investors well in advance of being in the market for a Series A round. They build relationships early, maintain those relationships, and knock when the time is right.
The market is currently flooded with seed capital, but there is no more Series A capital than there has been over recent years. So start early, and build genuine relationships before you start your Series A tour. Those in top tier accelerators may have an unfair advantage in that regard, but you can manufacture a strong network and book those early meetings as well.
Extend Your Network
The broader and more global your network is, the easier time you’ll have leveraging your progress and credibility in order to manufacture meetings. This broad network comes easier to companies that can go through an accelerator, as you connect with other in-program companies, investors and mentors, but how can you build a larger network organically?
You may currently have a small network, but growing that network has become easier with the use of social tools. LinkedIn, Conspire, even Facebook and Twitter allow you to grab branches that may have previously seemed out of reach.
Those LinkedIn connections, friends-of-friends, previous coworkers you haven’t spoken to in years, are all at your disposal. They may not be the VC you’d like to invest in your company, but they may be able to make an introduction or give you tips on how to get your foot in the door. You’ll never know until you ask.
Being Series A Ready
I’m often asked what it takes to be “Series A ready” in terms of metrics, progress, and traction. Unfortunately, there’s no easy answer. Series A investments are competitive right now, and the smartest VCs I know are still willing to take a chance before there’s any concrete proof.
What is necessary is conviction on the part of the investor. So think of traction as often necessary but generally insufficient evidence to help generate conviction. At least as important is helping the investor build conviction through a series of meaningful interactions over time.
Having recently raised $150M for institutional investors, I heard many people say no, and you will too. The key is to take as many meetings as possible. Build those relationships early. Maintain those relationships. Leverage angel and micro-VC connections before even thinking of pitching them.
When fundraising, your network is critical. Leveraging it early and often is the key. Don’t make the mistake of waiting until you need money to engage sources of capital. If you’re in a squeeze for capital and you have a solid, mutually beneficial, relationship with a VC, your chances of raising will increase dramatically.
This article was originally published in Fortune.