Raising Capital 101
This is a breakdown of the key ideas from Techstars Anywhere Managing Director, Ryan Kuder, as he walks through what to consider when raising your first round.
The webinar that served as the substance for this article may very well be the best overview of raising capital that I’ve ever seen. Huge shoutout to Ryan Kuder for being a true inspiration.
Indeed, it inspired me to start thinking of ways to convey "longer” webinars/podcasts/books/articles on startups into actionable, digestible information.
As founders, time is our largest roadblock; hopefully, this helps you save some.
I’ve built upon the webinar; so many parts of this include my own thoughts, experience, and research.
Top 3 Things for Fundraising
Build a great company.
Build a great investor pipeline.
Be Prepared.
Let’s start with the overall objective of your raise:
MAKE IT TO THE NEXT ROUND OR GET TO "DEFAULT ALIVE."
STAY ALIVE.
DON’T GO BANKRUPT.
Most startups focus on raising capital before building a great company. Your job as a founder - first and foremost - is to build a great company. The first steps to building a great company are: (1) building a list of assumptions and (2) validating/invalidating those assumptions one at a time. For example:
Is there a demand for your product or service?
Could you find people to use your product or service?
Could you convince those people to pay for your product or service?
Could you consistently deliver the product or service?
Does your LTV (lifetime value) exceed your CAC (customer acquisition cost)?
Could you technically build the product or service?
Could you scale the product or service?
Kuder noted that Techstars, and other investors, look at your company’s “traction” when considering whether to invest. Traction can be viewed as the answer to the question, “how much work have you done as a founder to start knocking off the core assumptions?” As such, traction (at least at the early stage) is not viewed solely by metrics such as revenue, users, etc.
Be Prepared (five steps)
Step 1: Prepare a Great Pitch
The first two components to preparation: (1) a great pitch and (2) a great pitch deck. Note, Kuder did not say a good pitch or a good deck - he said great. Looking at the data of startups seeking funding, you must be great to win; you don’t have a choice.
A great pitch is a combination of a great story and data to back the story. In essence, it is a narrative supported by data. Shoot for real, tangible user data, rather than anecdotes. You’re making an argument, and your data is evidence to support your argument.
Step 2: Prepare a Great Pitch Deck
A great pitch deck wows the reader. It is straightforward, concise, and must answer investors’ questions. Kuder noted that design does matter as it may be deemed to be a reflection of the founders, and on the company’s products or services.
Step 3: Prepare a Financial Model (or pay someone to)
Next, you want to have a great financial model. A financial model is seen as an “online simulation of your business.” No, this will not be very accurate. But it still provides investors with an understanding of your business model, with numbers (estimates) to back up your statements.
Step 4: Prepare an Investor Pipeline Document
Addressed below.
Step 5: Prepare a Great Captial Raising Strategy
Remember, there are 3 potential outcomes to a raise:
You fail because you failed to hit the milestones.
You get to cash flow positive (default alive). This is amazing. It means your company does not need to raise another round.
You’re growing fast and need more money to scale.
Steps to an effective capital raising strategy
Use your financial model to calculate your minimum necessary raise. If you don’t have a financial model, use your run rate document. If you don’t have that, add up your expenses and subtract revenue (if any), that’s your burn rate. (Side note: if you don’t have either of these, make one of them).
Option 1 - Raise enough for 18 months [not discussed by Kuder]
Monthly Burn x 18 months = Minimum Raise
Minimum Raise x 20% (cushion) = Ideal Raise
Option 2 - Raise enough for your next milestone
Look at your costs and revenues (discounted) to find out how much money you’re going to need to get to your next milestone. Think of your next round (pre-seed, seed, series A) and the milestones that you need to hit to get there. If the goal is to get to $10,000 MRR, then how do you get there? (e.g., spending on advertising, hiring sales reps). Work backward to figure out your minimum and ideal.
Helpful tip: Most early rounds are between $250k and $750k
Find comps.
See what other startups similar to yours have done. Get on the phone with those founders (yes, the calling feature on phones still works).
Test Demand.
Kuder describes having informal conversations with investors to test the demand of your raise and ask for feedback. This is a great way to establish a rapport, which you could eventually leverage during.
Build an Investor Pipeline (five steps)
Start building your network now. You want to begin to develop relationships well before you raise so that when it comes time to raise, you already have relationships to build upon.
Step 1: Build out investor pipeline document.
The investor pipeline document is simply a compilation of relevant investors for your company in a central location. Although tedious, it’s essential.
Start a Google Sheet
Add the following categories at the top of each column:
Investor
Fund/Affiliation
Fund Size
Check Size
Theme
Lead/No Lead
Contact info
Related Investments
Notes
Location
Who can intro?
Status
Congratulations - You now have the bones of your investor pipeline document.
Step 2: Research relevant investors for your document (your company)
Besides trying to find some pre-made lists online, there’s no hack for compiling RELEVANT investors for your company. If you noticed, “relevant” was emphasized many times. Below are some tips/steps you can follow to build your pipeline list. Overall, something to remember is to leverage your network.
Tips:
Start with people you know.
Then list your dream investors. → Who are the people who you would absolutely love to invest in?
See who they invest with.
Next, find companies like yours, not direct competitors.
Find their investors.
Expand your web.
Your GOAL becomes a list of relevant people:
Right stage? (e.g., pre-seed/seed)
Right sector? (e.g., fintech)
Right check size? (e.g., 25-50k, maybe a couple of smaller checks, 1 or 2 bigger checks, from angels or micro funds 25M or less)
Right geography? NY.
Right connection?
Tools:
Slack channels
Alumni networks
Step 3: Compile those investors in your pipeline document.
Do not reach out to any investors yet (unless to establish a rapport).
Step 4: Leverage your network.
Now that you have a list of 50-100 potential relevant investors, it’s time to use that network that everyone has been talking about since high school. Although cold emails work, the best connection is a warm introduction by a mutual friend. Kuder provides the following spectrum of best intros to worst intros:
Best —> Worst
Best - Mutal BFFs
Mentors/investors/founders
Center - Cold email
Total strangers
Worst - An investor who passed on you
Step 5: Input the investors in a CRM
It’s tough to keep track of communications using google sheets alone. Luckily, there are a ton of tools out there to leverage. Once you have your list of relevant investors, drop them into a CRM. Run your investment process just like you’d run your sales process. Move investors from the top of the funnel (lead) to the bottom of the funnel (money in the bank).
Find a CRM that you like.
Add the following categories to your CRM:
Lead
Meeting Set
Pitched
Passed
Soft circled
Term Sheet
Signed
Money in the bank
Be ruthless in keeping the CRM up to date.
Execute (get that money)
By this point, you are ready to start executing.
Tips:
Your goal with each round is to create “gravity.”
Pull the trigger and - GO.
Create FOMO.
99% effort= 0% results. Raising capital is a 100% full effort game.
You must commit to the process, whether it’s 1 month or 6 months.
You’ll be exhausted. It’s ok. Keep going!
Close the Round (end strong)
Get them over the line. Once over the line, you have to make the ask. At the end of the day, investors love to sit back and wait. Be direct, “I’d love to have you involved in this round. Can I count on you to write a check for $X into this round?” Make it uncomfortable. Your baby’s life, after all, depends on this.
Set the terms. Normally you work with the largest check writer to negotiate. If you’re doing a 250k round, know how much they’re in, largest check writer, terms, note, or safe.
Herd the cats.
Sign the docs.
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