Raising seed money for the first-time entrepreneur
I have had a number of conversations recently around the perceived need to raise money when you’re a startup.
To first-time founders, raising money is exciting. It’s the kind of things that you see when you read tech blogs such as TechCrunch, and if you read these for long enough, you start assuming that this is the only way to go.
Raising money is cool.
Once you get your round of funding, you feel ready to take on the whole world, you feel like you are invincible, and after a nice party, you set out to spend it.
But there is a dark side to raising money, a side which all aspiring entrepreneurs should know about.
Raising money is hard. If you are a first-time founder with no track record, then it’s harder. If you live outside the Silicon Valley, it is harder still. As an entrepreneur, raising money is an activity that will consume a significant portion of your time.
How to raise a seed investment
Let’s list-down what you will have to successfully accomplish in order to raise money. I focus here on first-time founders looking to raise a seed-round or angel round.
Networking. Network your way through to investors. Ask your startup friends to introduce you to some investors. Go to some networking events to meet them, walk up to them and give them your elevator pitch. With a bit of luck, they will give you their card and after exchanging a number of emails, you will be requested for a meeting at their earliest convenience, likely in a few weeks time.
Pitch deck and business plan. The more money you need, the more prepared you will need to be, and the more documents and
To do list
pitches you will have to make. Create a pitch deck and a business plan, and revise it following feedback from investors. This will need to be perfect to maximise your chances. Get it proof-read by other founders/mentors.
Pitching. You will to explain to investors why you are going to be a £1 Billion startup and why they would be crazy not to bet on you. Then they will get back to you, and you may need to go for more pitches.
Terms-sheet. If you are lucky enough to get a terms-sheet, you will still have to somehow play investors against each-other to get the best deal, and remember that it could all collapse at the last moment.
Due diligence. You’ve accepted a terms-sheet, so now the investors will do some due diligence on you. After signing an NDA, They will look at your books, your codebase, your customers (and maybe talk to them), talk to / interview your staff, look at all the existing contracts that you have etc. This will take weeks and will be very time consuming and stressful. If they find anything that they dislike or that you did not disclose earlier, they may decide to pull out.
Time-frame and focus. All in all, by this point, you will probably have spent between 3 and 6 months of your life doing barely anything else but raising money, time that you could have invested in serving your customers better and actually making money. What’s more, if you were unsuccessful in raising money, you will have nothing to show for.
You’ve done it! You’ve raised money — congratulations. From now on, you will have to manage a board of directors. This means that you will have to prepare all your financials and update everyone on progress, strategy and tactics at regular intervals, likely monthly although some do it quarterly. This is very good practice, but it also is a lot of work. You will also have to keep all your existing investors in regular contact.
The ticking time-bomb. When raising seed money, you will be expected to accelerate and be in a position to raise your nest round (series A) within 18 months. If things go slower than expected, raising the series A could become really difficult, and failing to raise the round could mean running out of money.
When investments go bad. Sometimes, relationship with investors may deteriorate due to lack of visible results, or disagreements on direction. This can get very messy if you need to pivot and investors, who invested based on a particular execution plan disagree. If you cannot break the deadlock, this could quite literally be the death of your startup as you stay in limbo for months, unable to make progress.
Advice on raising money
If you do decide to raise money anyway, here is some advice:
Blow them away. In this day and age, startup investors are spoilt for choice and the competition amongst startups is fierce. Your story needs to be exciting, users (and ideally money) must be rolling in, or at the very least, you must have some impressive piece of technology. If you are not in this position, you are most probably wasting your time. When I say wasting your time, I quite literally mean wasting months of your time trying to raise capital when you should have been heads down trying to find product/market fit.
Have an A team. As a startup, I like to say that you can only afford the best, Anything less will drag your startup down, and investors will feel it
Prepare. Ask other startup founders or business people for some time and pitch to them to gather their feedback on your performance.
Learn from rejection. After a pitch, always ask for feedback. If an investor decides to pass on you, ask them why and see what you can learn from their rejections — be humble, but don’t lose your confidence. They may have seen something that you did not, but they may also have missed something that you saw. I once met an investor who refused to invest in Google’s series A.
Be honest. Tell them honestly why you need the money and what you will do with it. If you try to lie, it is unlikely you will get funded, and even if you do, it could later spectacularly backfire on you. So be honest, be passionate and you will be OK!
Create a deadline. When raising money, time plays against you and in the favour of the investor. After all, you are the one about to run ouf cash, so it is in the investor’s interest to take their time. To counter this, it is important to set and investment deadline, such as 30 days, and explain to the investors that if they want to be part of the deal, you need to exchange contracts by that date. This will increase the pressure on the investor to make the deal happen.
What is the alternative to raising money for equity?
In many situations, raising money is not necessary. If instead of spending the time on raising money you invest it on growing your business, chances are that investors will be the ones knocking on your door!
Focus on profitability. If profitability is your focus you will be able to keep costs low and focus on monetising your startup. This is the best possible outcome as you will not be desperate to raise money, and if you do raise money later, you will have a much stronger hand to play.
Raise debt. A typical form of financing for businesses is debt. Ideally you would go to the bank and ask for a loan, which you can repay later. This allows you to save equity for later rounds. But raising debt is difficult as the banks will want to see some strong financials before lending anything, and a young startup is rarely able to demonstrate this. Furthermore, raising debt means that you will have to start paying it back very soon, instead of reinvesting in growing the business. Nevertheless, if the banks won’t lend you the money and you think this is the best way to finance your startup, you may be able to borrow from someone else such as friends and family.
Venture debt. This allows is a type of debt financing provided to venture-backed companies by specialised banks or non-bank lenders to fund working capital or capital expenses, such as purchasing equipment. Venture-debt is only available to you once you have successfully raised a round.
Crowd-funding. You always have the option of using crowd-funding platforms such as Kickstarter to launch your startup. In Kickstarter, backers pay in advance to buy your product yet to be developed. They will take no equity, which is nice! This can be massively successful but raising a successful campaign is not easy and will require a lot of preparation. If you decide to give this a go, make sure to read on the topic. Bold, by Peter Diamandis and Steven Kotler have a nice chapter on the topic. On the other-hand, platforms like Crowdcube will allow you to raise money from the crowd against equity, which may be more appropriate if your proposition is less focused on end-users. However, the legal framework around crowd-investing can make it more difficult to raise a series A from institutional investors later on, so be careful.
Self-funding. If you have the means, this may just be the best option. It allows you to move quickly and focus on the business itself. Alternatively, if you lack the funds, you may want to contract part-time and work on your startup part-time. This is not ideal in terms of focus, but it will allow you to retain control of the business. And if your startup takes off without raising money, or by raising little money, then the day you exit the business, you will keep a much bigger share of the proceeds.
I have presented you here with an alternative view to raising money, and the pitfalls of the task.
Note that I am by no means saying that you should never raise money, but if you do decide to raise money, it should be for the right reasons, and you should understand the dangers.
When building Comufy, my previous business, we spent 6 months, early in the business, trying (and failing) to raise money. This was a large distraction for us, and instead of building our business and pitching customers, we were busy building slide decks and pitching investors. When we decided to stop looking and focus on the business, we landed some key customers, which would eventually help us raise Angel money a year later. I wish that we had focused on the customers from start instead of focusing on raising money. This is only my personal experience, and your circumstances may differ, but if you are thinking of raising angel/seed money, make sure that you know why and understand the alternatives. Raising money may be harder that you hoped for.