What follows is a very detailed description of how to raise money for your startup. The advice mostly comes from the experiences I’ve had over the last few months trying to raise a seed round for a startup I’m doing. I’ll start by introducing the steps and go into much more detail below.
- Meet investors, hopefully through referrals.
- Get a formal meeting setup and an opportunity to spend 60 minutes on your pitch.
- Get a second meeting to talk to more partners at the firm; also start talking about investment terms.
- Find more investors once you have some interest and high-level terms.
- Close the round by finalizing terms and collecting money.
- Yay you’re funded! Now the real work begins.
And while I’m here, I’d like to clear up a common misconception in the tech world. Raising money is not easy. Yes, there’s a lot of money out there. But it’s completely silly to think that you’ll be able to get some of that money without effort. Investors are smart and care where their money goes. If money comes easily you probably aren’t working with a good or smart investor, unless you’re already a big deal.
1) Meeting the investor: to pitch an investor you need to meet them first. Most of the time you meet them over email — either by cold-emailing them (which basically never works in my experience) or by getting an introduction from a colleague or friend who knows them well. Sometimes, too, you’ll meet them at conferences, tech events, or serendipitously in public. Regardless, your goal in meeting them is to get a commitment to have a formal meeting.
This can all happen in one of two ways. If you’re getting an introduction, you’re already set. The investor will almost always take a meeting with you because someone they trust is referring you. The best way to meet investors is to be referred.
However, if you aren’t getting introduced, you have to rely on your elevator pitch. You need to be able to describe your idea in a sentence or two, and your goal is to grab their attention. You need to convey your idea and intrigue the investor before they stop reading your email or start ignoring you. Start with a few quick sentences about the problem your idea is solving, and from there be prepared to talk about the team, the story that led you to your idea, your plan for executing product-market fit, and your plan to grow. The best advice I have is to be incredibly excited, passionate, and energetic — these are the best qualities an unknown entrepreneur can have.
2) The first formal meeting: now is your chance to really get them excited. You’ll work with the investor’s admin to schedule a meeting, which will likely be 60 minutes long, though sometimes can be shorter. You’ll likely be told who the meeting is with ahead of time, which will probably be with the investor you spoke with, along with another partner or associate or analyst. And the meeting will almost always take place at the firm’s offices. Although coffee shops and restaurants are common, too. The CEO of your little startup will almost always take the first meeting, although all the founders can attend if they aren’t busy writing code.
Learn about the Investors
Start by asking the investors about themselves — learn about their backgrounds (you probably should have done this before the meeting, too), see what types of investments they’ve done, and understand why they’re in the investment profession. Knowing their backgrounds will prepare you to cater your pitch more directly, and will give you more to relate to them with.
Tell the Investors about Your Team
After you know about the investors, tell them about you and your team. Unless you have a product that is already performing extremely well, the investor is going to be more interested in the founding team than the product or idea. Spend 5-10 minutes telling them about the founders’ backgrounds — where you each have worked previously, what you’ve accomplished, your general skills and interests, and why you’re going to be capable of making a successful startup. If you got an introduction tell the investors how you know the person who introduced you. The goal here is to convince the investor that you can start a successful company.
Once you’re done talking about yourself, you’ll want to transition into talking about your startup. This can go one of two ways: either you have a vision, or you have a product. Your pitch will be different in each of these cases — I’ll cover both below. Though keep in mind that there’s really no right way to pitch investors — you need to tell a story that will inspire them in such a way that they’ll give you thousands or millions of dollars.
Pitching a Vision
Pitching a vision is mostly about defining a problem and solution, and showing that there’s a big market of people or companies that would buy or use said solution. Pitching a vision can also be about a belief in the distant future, in which case your vision isn’t about solving a problem but instead about creating a new market entirely, just like the iPad did.
Pitching a vision requires that you have a good background, at least in most cases. Without a product the investor won’t know what you’re capable of unless you’ve accomplished a lot earlier in your career. They won’t invest in someone they don’t have confidence in with just a vision — they need to know you have the skills to execute on that vision.
The benefit to pitching a vision, though, is that you don’t need to have all the answers just yet. You don’t need to know exactly how you’ll grow, or exactly how your product will mature. Of course, you’ll need to have some idea about how you’ll do these things. But especially if you have an incredible background, you can answer tough questions with, “We don’t know yet, but we’ll figure it out as we go.” Many investors won’t invest in you, but the ones who believe in you will.
When pitching a vision don’t let the meeting get caught up in hypothetical issues around product and growth. You probably don’t know the answers to hard questions. Don’t try to answer them unless you have good, well thought answers. Trying to answer them will put you on the defensive with an idea or plan that is already pie-in-the-sky, which will make for a very negative, unproductive meeting. Don’t let the pitch focus on the challenges, let it focus on the opportunity and potential.
Keep in mind, too, that in most cases getting investment with just a vision will yield worse terms. This might be OK, but keep in mind that the investor is taking a bigger risk investing in you without a product, hence the investor will receive more stock for less money.
In summary, consider the following points when you’re pitching a vision.
- Either have a very clear story around a problem, solution, and market size, or
- Have a very big, long-term picture of something new and different.
- Don’t get caught up in debating hypothetical growth or product strategies — have good answers but don’t let the meeting turn into a hypothetical debate.
- Make the pitch about the the founders’ ability to create something new and big.
Pitching a Product
Pitching a product or prototype is generally much easier than pitching a vision. With a product the investor will know very clearly what exactly you’re doing, how well you’ve executed on the idea, and how the product can grow. However, be prepared to be able to answer hard questions about how much growth potential you have, how you’ll make money, and how the product will develop.
When you have a product spend half of your pitch on the potential of your product, and spend the other half on your demo. After you’ve described yourself, talk at a high level about the product and show how you think it can make an impact in your customers’ lives. Then transition to a demo. Have a good demo prepared, with real (or real-looking) data, and know exactly what you’ll show them and why. Show them amazing things that customers and users have done with your product. Show them that your product has substance. Show them metrics that you have around engagement and traction, even if they aren’t good yet.
You won’t have any issue getting investment if your product already has a lot of traction. Pinterest and Instagram never had any issue getting funding once their products started blowing up. But chances are good that you’re raising money because you need help getting your product to take off. If this is true of your startup — that you don’t have market traction — you need to be able to demonstrate to investors that your product has the capacity to grow. You need to show them that you have a very clear go-to-market strategy, or a strategy for finding and acquiring users and customers. A product without an obvious potential to grow won’t be appealing to a lot of investors.
In summary, consider the following points when you’re pitching a product.
- Your pitch should be part big picture and part demo.
- Be ready to answer hard questions about user behavior and growth.
- Be ready to show metrics, or at least answer questions about them.
- Have a very good strategy for selling and marketing your product.
3) The second meeting: if you get a second meeting you’re probably in good shape — the investor you originally pitched to in the first meeting likes you and/or your idea. The investor now has two goals with the second meeting: get other partners to approve of the deal and talk about terms.
Most firms will require that multiple people approve a deal. Only in some cases with very small seed funds and angels will you be able to accept money after speaking to one person. You’ll likely need to give the same pitch you already gave, or at least an abbreviated version, to a larger audience. You’ll also need to answer even harder questions that the investors have been thinking about since your last meeting. Be as prepared as you were in your first meeting — this meeting is going to be a lot harder.
The second meeting is usually when investment terms are discussed, too. You may not have a term sheet just yet, but you’ll at least be able to debate the high level terms around a deal. If you’re doing a convertible debt round, you’ll talk about the value cap and discount at which debt converts to equity. If you’re doing a VC round, you’ll talk about valuation, percentage ownership, and board dynamics. Of course there are other terms, too, but in general the terms I’ve listed here are the big important ones that are debated first. I’ve written previously about how investment terms work if you’re interested in more detail.
Go into this second meeting with a rough idea around what you want your terms to be. Have a sense of how much of the company you’re willing to give away, how much money you want to raise, and why. The amount of money you want to raise should be a function of what you need to be successful from a team and infrastructure point of view. And raise enough money to give yourself at least 6-12 months of runway — plenty of time to take your startup to the next level. The more runway you get, the more of the company you’ll give away. So find a balance that you’re comfortable with. And keep in mind, too, that sometimes terms are discussed briefly in the first meeting.
4) Find more investors: the chances are very low that the first investor you speak to will give you as much money as you need and good terms to match. This is especially true for seed rounds. The chances are good that you’ll need to find other investors, either to give yourself better debate fodder around terms, or to find a bigger audience to raise more money. If you decide you need to speak to other investors, ask the first investor you spoke with to introduce you to their friends. And go out and do whatever you can to find new investors. Ask the first investor if you can mention their name and their interest to invest when speaking to other investors. Hopefully the answer is yes, in which case other investors will be far more likely to invest in you knowing someone else will invest, too. All of these new investors you find will invest on the same terms — be sure to discuss the terms you’re considering with the other investor.
You can skip this step entirely if you find an investor that you like, gives you enough money, on terms that you’re comfortable with. Usually, though, you’ll need to find more investors.
5) Corral investors and close the round: OK, you’re in good shape. You’re pleased with the investors who are interested in investing and you’re comfortable with the amount of money you’ll raise and the terms on the investment. Incorporate your company if you haven’t already and create a bank account. If your round is being led by a firm or individual, the chances are good that you’ve already sent a term sheet back and forth. If you don’t have a lead investor, have your corporate lawyer create a term sheet for you and send it around to all the investors you want involved. Considering you already spoke to them about terms, there shouldn’t be any surprises and they should be comfortable signing and writing a check.
A common misconception at this point is that the investor will drive this whole process. No way. The CEO’s full time job at this point is to get on the phone and meet with these investors until papers are signed and money is in the bank. You need to make the effort to get the papers signed and the checks written.
6) Round: closed; now the real work begins: congratulations, you suddenly have a lot of money in your newly created bank account. Now the real work and fun begins — you’ll start hiring, building, hiring more, marketing, selling, and doing whatever you need to do to turn your product or vision into a company.
Chances are good that you’ll need to raise more money at a later stage of the company. Staying on good terms with your existing investors is in your best interests. They’ll be the first to invest more money if they continue to like you and if you continue to do well. They’ll also help you to be more successful, both in later fundraising rounds and in daily issues.
Working with an investor is like getting married — don’t marry someone you don’t respect. Don’t take investment from someone you don’t want to work with.