The Fundraising Field Guide Book

The Fundraising Field Guide

The Fundraising Field Guide was written to help early-stage tech startup founders decipher and navigate the fundraising process. It provides an overview of the soft and not-so-soft challenges you will need to prepare for as part of your fundraising journey, including things like reaching out to investors, dealing with rejections constructively, preparing materials and financials, understanding valuations and deal terms, and how to manage the legal process.

I hope you enjoy the book and get lots of use from it. I’ve adopted a ‘free-to-download-and-donate-if-you-like-it’ model because hey, if you’re fundraising, you’re bootstrapped right? If you do enjoy it, however, please consider donating to one of the charities in the “Get & Donate” section of this site to support organizations that are helping people around the world with their social entrepreneurship challenges.

To download the book, go to the book’s main website –

http://fundraisingfieldguide.com/donate

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Deciphering Crowdfunding For Startups

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One of the options that founders are reminded of more and more above and beyond VC and Angel funding is Crowdfunding via online platforms such as Kickstarter, AngelList, and Seedrs, to name a few. However, these platforms are not all the same and in this post we’ll cover how they differ as well as what makes them unique.
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To help better categorize the use cases for the different types of crowdfunding platforms, let’s split them into two:
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1) Cash for Product Pre-Orders – Kickstarter, IndieGogo, etc.
2) Cash for Equity – AngelList (USA), Seedrs (UK), Crowdcube (UK), etc.
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The Top Ten Fundraising Fails

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Fundraising isn’t easy, even if done well, its fraught with all sorts of ambiguity and frustrations. To that very point, I recently wrote a blog post about the fundraising mindset in order to help you set a tone on approaching the process.

That said, there are things you can do to make it go better than others and things you can do to make it go worse… and in the spirit of the ‘Tonight Show’s’ top ten list, below are my top ten things that will likely cause a fundraising fail situation.

Avoid them and learn from your mistakes and you will increase your likelihood of success.

– 10 – Presenting with a style that doesn’t capture the right attention. Yes, being over the top and dropping ‘f bombs’ might get you attention, but is it the right attention? Is it focusing the attention on what your message or just you? Also, what about a boring slide deck? Or a a deck that is missing product shots? Do these represent you well? What if you say your product is simple, but then your deck is really over complicated.. does that sound right?

– 9 – Not having a proper fundraising plan. Fundraising requires research. Find out if your potential investors are even interested in your sector.. have they invested in your competitor? What amount do they typically invest in? Going to someone that is a late stage investor when you are raising a little bit of money is like putting in a minimum order of 10 pizzas when you can only eat one.

– 8 – Not understanding your customer and how to reach them. When presenting or speaking about your customer, do you show a mastery about their issues? Do you understand what makes them tick and why your solution is the one that will likely best serve their needs? Do you also understand how to reach them? Where do they shop? What media do they consume?

– 7 – Unable to demonstrate a real pain for your customer (and how your solution fixes it). It is always tempting to create something that is useful to you, but is the solution you’ve created really a necessity or just a nice-to-have? Demonstrating a real pain, usually through some form of customer validation, is crucial in making a convincing argument for your startup.

– 6 – Assuming that a general market size study applies to your startup. One of the things you can do to quickly show that you don’t have a full grasp of your market is by showing a much larger segment than the one you operate in.  For example, I’ve seen pitches where an iOS app that is for sports tracking, mentions all mobile users worldwide as their market size… when actually, its more like mobile-sports-tracking-enthusiasts, which is a sub-segment of that bigger pie.

– 5 – Not truly understanding who your competitors are. This one is easy. If you think you don’t have competitors, then you probably haven’t researched hard enough. Rarely are there ideas that no one has thought about, but secondly and perhaps more importantly, sometimes there are substitutes which are ‘good enough’ which you need to be aware of and show how your solution overcomes the momentum that those existing solutions already have.

– 4 – Not knowing your cash needs & cash burn. If you’re going fundraising and you don’t know how much money you need, how long it will take you, to achieve what, and how you will spend it… well, then don’t fault investors if they aren’t impressed with your request for investment.

– 3 – Not explaining why your team is the team that will make this happen. Your team is 99% the reason why your company succeeds, and the idea is probably like 1% (I’m guessing on the numbers, but this guess feels right). If you skim through the ‘why’ of why your team is the right one for this investment, then you’ll likely miss an opportunity to impress an investor. I recently wrote a blog post about how to best think through your team slide here. Also, if you want to learn about how an investor evaluates your team, read this one.

– 2 – Having your existing investor shareholders own more equity than the founders. Toxic rounds that precede the round you are raising for can really negatively affect your fundraising plan. Read about why here. In general, try and make sure that you take investments that don’t jeopardize your future ability to raise follow-on funds.

– 1 – Not reaching out to an investor through an introduction. Lastly, the best thing you can do for yourself is get an introduction to investors that you want to meet. Introductions are great ways to have immediate validation. Here are some other ideas on how to reach out to other investors.

– Bonus – Not learning from your mistakes. Learn from your mistakes. You will make many, and that’s OK, so long as you don’t beat yourself up, understand what went wrong, and then iterate on it. In the words of Einstein – “Insanity is doing the same thing over and over and expecting different results.”

Below is the video of this presentation.

Below is the slide deck that I used to present at Google Campus’s Fundraising Day.

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The Fundraising Mindset

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Originally posted on Netocratic.com

Fundraising is not easy. It is one of the most frustrating and time draining activities you as a founder will have to do as part of your company’s growth strategy. Unless you are really lucky and investors come to you, it will likely involve taking many meetings with investors of all kinds, both good and bad before you ultimately succeed in finding someone who believes in you.

You will likely meet many types of investors along the process of fundraising, including:

  • Investors that doubt you as a founder/ceo, and your capabilities to execute.
  • Investors that are just meeting with you because they want to invest in your competitor.
  • Investors that don’t have the money to invest but want to be seen to be active by the ecosystem.
  • Investors that will want every inch of detail about what you will be doing for the next 5 years, when you both know your projections will be speculative at best and hogwash at worst.
  • Investors that don’t get what you do at all, but will have an opinion about your product because their child or spouse has a view on what you do.
  • Investors that are amazing and give you insanely relevant advice, but unfortunately say you aren’t far along enough traction-wise for their fund’s investment focus.
  • Investors that provide you with great feedback and would help you greatly if they were involved, but will only invest if someone else leads the round.

…And then… there is the one investor who ultimately believes in you and backs you. That’s all it takes. Just one.

The earlier the stage your company is in, the more that successful fundraising is about personal human connections and story telling. At the early stages of your business, as much as some investors will want to know your projected numbers (revenues, traction, etc), because there is so little to go on, it will always come back to your inherent abilities and vision as a founder. As such, fundraising meetings are mostly the way that founders can assess investors for value-add to their startup, but also for investors to see if they can work with the founders and to see how they think.
Because of this mutual assessment by both founders and investors during fundraising meetings, an analogy that people use frequently to describe the fundraising process is that of dating. As funny as it may seem, I do think the comparison works well…

Dating and fundraising

For example, in dating (as with fundraising):

  • You have to be willing to put yourself out there to meet anyone in the first place.
  • It’s a numbers game: you have to meet many people, this can be at in-person at networking events, parties, or online.
  • Connections usually happen in the least likely of places and are strongest when they come through a trusted 3rd party.
  • Being a good story teller gets people to laugh, open up, and remember you.
  • Chemistry matters.
  • Sometimes its just plain luck: being at the right place at the right time.
  • The better you prepare yourself, the better your odds get.
  • Being too eager to get back to someone or waiting too long can end things prematurely.
  • You have to go on several dates with several people before you ultimately feel someone is the right one for you.

Therefore, the fundraising mindset is really about four core things:

  1. Understanding that fundraising is a process and that it will take time. Only a very few are lucky to have it be quick and painless. 
  2. You have to embrace rejection as part of the process and not take it as a personal rejection.
  3. Treat every meeting as a form of practice that is merely making you better for the next meeting, rather than putting the full importance of any one meeting on your shoulders and beating yourself up if it goes badly.
  4. Analysing what was said during your meetings and learning how to improve on your mistakes is the most crucial aspect of reducing the time it takes until you find the right investor.

As you will likely never know where, when and how you will meet your future investor… as you go through this process, just remind yourself: Good news, Bad news – you never know…

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Investment – Are You in Danger of Raising a Toxic Investment Round?

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Fundraising for an early stage technology startup is always a challenge. You have to navigate many meetings with potential investors and hopefully reach agreements that make everyone happy so you can continue to work in good faith after the negotiations are over. However, in some cases, after the dust has settled in a negotiation, it isn’t always a win-win for everyone.

For example, what do all the following company circumstances have in common? (note: all these companies are real early stage companies.)

  • A founder who gave away > 60% of his company for 100K in funding in tranches.
  • A founder that gave away > 75% of his company to his ‘investors’ in a pre-series A round.
  • A company that gave away > 70% of their company for < 100K to investors, but still wanted to go through an accelerator.
  • Another company with 51% ownership to existing investors.
  • Another company where the investor offered the founders a sub €30K investment but it came over tranches across the year (as in no cash right now).

As you read the above examples, you might find these offers as ’normal’ (then this post will hopefully help you think twice in the future about these kinds of deals), or you might reel in shock as you read each one of the above anecdotes. Either way, in this post I want to highlight the concept of a ‘Toxic round’ or a ‘Toxic cap table’ in an early stage startup to help founders navigate potential investment offers and avoid getting themselves into a difficult situation in the future.

What is a ‘toxic’ round?

‘Toxic’ rounds (not a technical term) can be defined as fundraising rounds that can pre-dispose a company to  struggle to find subsequent financing because newer investors shy away from a potential investment once they find out what the state of the company’s current cap table and or governance.

Whilst it is very hard to make any judgments about the quality of investors because each company’s financing history is unique, a common view is that investors that ask for terms such as those highlighted above are usually not of the sort that one wants to take investment from. However, the focus of this post isn’t to highlight the qualities of ideal investors (if you want to read more about the ideal qualities of a new investor check out this text), but rather why subsequent new investors might shy away from investing in your company if you have taken on this kind of round in the past. Additionally, in this post I’m only focusing on founder dilution and not on other potential aspects of a company’s shareholdership that could make it difficult for new investors to invest.

Therefore, the reasons why a new investor might shy away from a company that has experienced a ‘toxic’ round in the past can include:

  1. Because the company will likely require more capital in the future should it prove successful, and potential new investors feel that the founders will be less motivated to stick with the company as the value of their equity declines over time through premature excessive dilution.
  2. New potential investors feel that current investors own too much of the company and perhaps the company has a governance issues as a consequence.
  3. Because the investors have a large stake, it brings up a lot of questions about how the company got itself into this situation. Did it happen through a down-round? Was it due to other negative circumstances which could affect the future of a new investment? The circumstances raise a lot of questions and doubt in a new investor, and considering how many investment options an investor receives per year, frankly, as a founder raising capital you just don’t need any more reasons for a new investor to reject you.
  4. In the specific case of ‘debt’ or an ‘early exit of existing investors as part of a new financing’; potential new investors can sometimes object to having the money they are putting in as part of a new round be used for anything other than to expand the growth of a company. This means, potential new investors may shy away from companies that have investors that are eager to dump their shares as part of the financing transaction or companies that have too much debt outstanding that is repayable as part of an upcoming round.

Having said the above, how do you more precisely define a toxic round? Well, a toxic round could be where either “too much money” comes in too early at a too low a valuation, or where a company is too under-valued, or both. All of these cases lead to founders being greatly diluted too early in their company’s life.

To help you visualise these potential scenarios, let’s look at the following equations:

  1. Money Raised / Post Money = % dilution to founders
  2. Money Raised / (Pre Money + Money Raised ) = % owned by the new investors

These two equations represent the same thing, the only thing that changes is the definitions, but the numbers are all the same. If you don’t know what Pre or Post money mean, check out myrecent blog post which defines some of the components of a round.

What is the solution for toxic rounds?

Knowing the above, it would seem that the solution for toxic rounds would include both raising the right amount of money AND setting the right valuation for the company early on so that as the company grows, it doesn’t find itself in a ‘toxic’ situation. If you want to read more about how much money to raise and setting the right milestones check out my following posts below:

So if that solves the ‘Money Raised’ part of the equation, how about the valuation parts of the equation (pre-money)? Valuing an early stage company is always a source of much debate and causes many people lots of stress. As I’ve described on my previous blog posts on the subject:

There are many methods one can take to arguably ‘price’ a company. However, the larger point is that no matter what method you use, it will always be subject to current market dynamics… meaning that no matter what “quantitative” method you think you are using, it is subject to the variability of how the overall market is trending… if we are in a boom, the pricing will likely be higher, if we are in a bust, it will likely be lower. It’s a simple as that.

Taking these market dynamics in consideration, take a look at a recent Fortune blog post on what the average dilution hits are in the USA for Series Seed, A, B, and C rounds. In the Fortune post, you can see the average dilution per round for the typical rounds and you can see the market dynamics over the years (check out what the 2007 recession did to % dilution per round). What you realise is that none of these rounds, no matter how big, take as much equity as the real life examples I noted above at the start of this post. Even if you consider that different countries have different country risks, the range of numbers is a multiple of 3x what is recorded over the last 6 years in the USA.

What if your investment round was toxic?

So what if you’re already in a tricky situation similar to the examples I noted above? If you find that you are in the situations described in this post, unfortunately the available solutions aren’t always easy and straightforward. The single best solution is to have a tough talk with existing investors on how to rectify the situation before new investors either walk away or make it conditional as part of their new investment. There can be many ‘creative’ solutions to solving the problem with your investors, such as investors giving back equity if founders hit milestones, but they will all seem ‘creative’ to a new investor rather than ‘clean’ if not completed before they invest; hence why the ideal solution is to work through this topic with existing investorsand help them understand that by not helping you overcome the situation, they very well may be jeopardising the long term value of their own investment. Perhaps counter-intuitive, but true. In the end, any progress you make with existing investors on fixing these situations if you are already in them, is better than no progress, no matter how tough the discussions.

I leave with you with the following thought of prevention for you to discuss with your potential new investors if they offer you a hard deal… yes, they are taking a huge risk by investing in your early stage startup, but by taking too much equity or debt too early, are they really just pre-disposing your company to failure? Something to discuss.

Originally Posted at Netocratic.com: http://netocratic.com/toxic-investment-round-2451

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