Mentoring Entrepreneurs: My Mindset When Raising Capital

The topic of raising capital has come up a lot in my mentoring sessions. While I am certainly not an expert on raising capital, I have raised 8 different rounds of capital across my 3 companies. So I thought that it would be helpful if I share my mindset. Any VC or Founder friends reading this, please feel free to leave comments. As with everything, below is my evolving understanding of this topic.

Note, there are lots of books written on the topic of capital raising. I am specifically going to focus on my mindset as an entrepreneur with this post.

Know the Landscape

First, it is important that an entrepreneur understands the investor landscape. Here is a simple breakdown:

• Friends & Family:
  • Who: As the name indicates, Friends & Family investors are people who know you very well and love you. They have a high amount of trust in you. They don’t always understand your business, but they do believe in you.
  • Investment Criteria: They love you. They trust you. While they don’t really want to lose money, they give you the huge benefit of the doubt. So they typically just want to see you’re passionate about something. They will invest in an idea.
  • Typical check size: $10k – $20k
  • Use of Funds: This is typically your first money. You need to use this capital to build first version of your product and get some early customers. Be very careful taking this money. Because your family members do not like losing money.
• Angel:
  • Who: High net worth individual who often runs his/her own business, but likes to invest in startups as a diversification strategy. Some do it as a fun hobby. You can find a lot of them at Angel.co.
  • Investment Criteria/Stage: Real product that is working. Customers (2- 5 customers if B2B) using a product that actually works. Note, I don’t know the metrics for a B2C product as that is not my background.
  • Typical check size: $25k – $50k
  • Use of Funds: Build out the product more and get to $25k+ of MRR (for B2B)
• Seed:
  • Who: These are designated funds who invest at early stages. Typical fund size is $10m to $50m. Some get as big as $100m. You can also find them on Angel.co or Twitter. They love to tweet a lot about their investments. Also a simple google search will yield Seed investment funds.
  • Investment Criteria/Stage: These investors want to see real customer traction. Without a track record of prior startup success, you probably need $20k+ in MRR before they will get serious. They may take meetings earlier, but will likely drag their heels until you get into $20k+ MRR. They are going to be very focused on Churn rates, M/M growth rates. Customer interviews. Market size. And need to believe in the founding team. But mostly, they are looking for real customer traction and big markets.
  • Typical check size: $250k – $1m. They like to co-invest with other Seed investors. They will make intros to other funds if they are interested in writing a term sheet. Often they like the validation of other funds joining a round.
  • Use of Funds: Build out the product more. Build a repeatable sales model. Get to $250k+ of MRR (for B2B)
• Post-Seed: This is a new niche of Seed investors for companies with good promise, but need capital before being the size required for Series A. Often these are structured as Convertible Notes as they are a bridge to the Series A.
• Series A:
  • Who:  Typically larger funds. Often a part of a mega fund that can fund you through later stages
  • Investment Criteria/Stage: Series A funds are now looking for $3m – $5m in ARR. With really good churn rates. A repeatable sales model. A big market. Reasonable CAC and a great team.
  • Typical check size: $5 – $20m
  • Use of Funds: Scale, scale, scale. You have proven product-market fit, now you need to get to $10m+ ARR quickly.
• Series B & Later: These rounds are all about scaling and growing (often internationally). If you get here, you will get plenty of advice and you are probably already good at raising capital. So I will focus this blog post on early stages.

My Mindset

Now I want to talk about my mindset when I am raising. I think that this tweet from an exceptional Seed/Series A investor is very illustrative.

**Note, I think there is a typo. I think that he means “500-1,000”, not “50-1,000”.

This ratio has been my experience as well. Given the reality of this low probability process….

I look at raising capital the same as I view early customer sales

• • Segment investors like you segment customers. Just because an investor matches your stage, doesn’t mean they are a good fit for you. Find out who invests in your type of company – industry, business model type, etc. Just like you focus on a customer segment for your company sales, do the same with investors. Be efficient with your time. Don’t take meetings with investors who are unlikely to fit.
  • Build a pipeline. As Jason notes above, you are going to have to speak to a lot of potential investors before you get a term sheet. There is a funnel to capital raising just like your sales funnel. Plan on a lot of “No’s” before get any traction.
  • Iterate on your pitch like you iterate on your product. Assume your first few meetings will go poorly. Assume that you will not get funding from the first few investors that you meet. Use those meetings to learn. Ask for feedback.

• • • I want to highlight the “Ask for feedback” point even further. It is really important that you ask for specific feedback. Don’t be afraid to get really specific. Good questions include, “do you have any concerns?” “Do you have questions about topics that I didn’t cover in enough detail?” And most importantly, ask for the order! By that I mean, specifically ask, “Are you interested in investing in my company and want to take the next steps?” If they say, yes, then great, but still ask for feedback on any concerns or flags. Even if they are interested, there are likely concerns. So you should find them out before the next meeting. If they say no, then that’s ok too. Just ask, “why not?” “What concerned you?” Use those meetings to learn. Don’t try to get a term sheet from your first meetings. Adjust your investor pitch based on feedback.
  • Do your homework. Just like a sales meeting, research the fund and investor before. It matters.
  • Project Irrational Confidence. First time founders often make investors out to be mystical creatures. The reality is, they are business people like anyone else. They are buying a product (your stock) with limited budgets and need to show results. Just like your customers. Getting a meeting with them is no different than any other business meeting. Just relax and have a conversation. Project confidence. Own the room. Control the meeting. Investors respect confident Founders who believe that they are going to change the world. Investors do NOT respect humility. Believe you are going to do the impossible.
  • Know the Ask. Know how much you need to get to the next round’s benchmarks…then double that amount. Then add more. Assume that your projections are wrong even though they seem reasonable to you. You are guessing without historical data. So protect yourself in case the projections are wrong.
  • Show the investor what their money will get. Early stage investors like to fund two things: development hires and/or Sales growth. Show them a roadmap that will happen with development hires. Or, if ready, show the investor how you will fund sales & marketing growth. Show them something that is working with sales & marketing at small volumes, but needs capital to scale.

As I said above, there are many books written on the topic of raising capital. But I believe the mindset of the entrepreneur is critical to a successful capital raising process. I hope that you find these suggestions helpful. Let me know if you have other questions. Now, go get yours!