Texts with Founders: Fundraising Prep (Part 2)
Funding viability and building an investor pipeline.
This is the 22nd weekly post from Texts with Founders — tested tactics for early-stage startups.
News and Updates
ODF19 received higher feedback than any cohort we've ever run. If you're exploring starting a company, consider applying for ODF20, which kicks off on 1/26. We've helped over 1,000 companies get started and raise over $2B. Learn more at beondeck.com.
Jacob Rice is a former senior software engineer from Airbnb. He did ODF19 and wrote about his experience on his Substack.
New podcast episode:
3 Core Elements of Fundraising Prep
[This is part 2 in a 3-part series]
There are three core elements to prepare for your fundraise:
External Materials ← previous post
Internal Materials/CRM (← today's post) + Fundraise Plan (coming soon)
Tactical Fundraising Knowledge
Getting these elements in place before investor meetings will put you in a better position to close your round successfully.
Part 2: Internal Materials + CRM
When founders have trouble fundraising, it's often because they should have put more effort into reaching funding viability and/or preparing for their fundraise.
Funding viability comes down to doing the things that make your company investable. Sometimes, startups require only an experienced team with a memo pursuing a solid idea in a killer market to be fundable.
More often than not, investors will want to see some form of traction or momentum in your business before getting excited enough to invest. This is especially true for founders with less prior experience or when the startup is in a market that investors might believe will be hard to sell into.
Funding viability is outside the scope of today's post, but if you'd like to read more, check out TWF4: Customers understand before investors do. One sign that you're reaching a point of funding viability is if people ask unprompted if they can invest in your startup.
Preparing for your fundraise is what this post is all about. A common mistake is going into fundraising underprepared. Sometimes, it's because founders have unrealistic expectations about how hard the raise will be. Other times, it might be because an investor exhibits interest (see TWF1: Handling Investor Inbound) which causes you to start your raise prematurely.
Regardless of the reason, going into a fundraise underprepared can cause the process to stall out or, even if ultimately successful, take much longer than necessary.
Preparation can be boiled down to two distinct areas:
Building a pipeline of investors
Determining a plan for how to structure your fundraise
Building an Investor Pipeline
There's plenty of discussion about whether or not warm introductions are appropriate for the tech industry. While those might be meaningful discussions for the industry, they are entirely pointless if you're fundraising today. The fact is that currently, 9 times out of 10, you'll benefit from getting a warm introduction to an investor.
The best type of introduction is from a founder that an investor has previously backed. The worst introduction is from an investor passing on investing in your round, even though it should be in their sweet spot. If you want to learn how to get introductions, check out TWF13: Intros and Forwardable Emails.
If you've worked in the startup industry long enough, you'll likely have met investors, but perhaps only a few of them. The best way to meet investors is through other founders (this is partially why communities like ODF and YC are so valuable).
As you get closer to funding viability, you can contact the founders you know for feedback on your raise. They'll often volunteer introductions if they like what you're working on. Instead of taking people up on these offers as they happen, hold off on all intros and add them to your Fundraise CRM. Next week, we'll talk about starting your raise with angels. In short, many sophisticated angels know other angels and VCs. Getting them involved early can quickly grow your investor pipeline.
Founders often overcomplicate the hell out of their CRM. You want the minimum amount of data necessary to keep track of investor intros and conversations.
Here are some suggested columns:
Affiliation (fund or company)
Connect (who can connect you to the investor)
Relationship Status (you can go crazy here with various statuses — keep it relatively simple)
Investor Type (Lead VC, Angel, Participating VC)
Connections (Other people who know the investor)
You mainly want to be sure you have a strong pipeline of investors to meet so you don't get 10 meetings into your raise and realize you have no one else to speak with. Having a list can keep you honest. You likely only want to start a fundraise once you have a pipeline of at least 30-40 investors who could be a potential fit (meaning no series A funds on your list if you're raising a pre-seed).
Next week, we'll cover planning a fundraise — determining how much to raise, building momentum early on, and much more.
That’s all for this week — thanks for reading.
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20 Ideas Halfway Through ODF19 - On co-founders, fundraising, being disrupted, and more.
The Student (Dis)Advantage - Overcoming the credibility gap
Company Values - Use them to attract and repel
Support - Create the headspace to help others
VCs that Ghost - Dealing with investors that drag out the process
Intros and Forwardable Emails - Make it easy for connectors to facilitate introductions
App Launch: Valuation Calculator - Counterintuitive fundraising strategies
Tranche Fundraising - Give early investors a "buy-it-now" price
MFNs - Are they a lousy deal or free money?
Weekly Investor Updates - Keep investors close and yourself on track
Check Size Doesn’t Matter - Forget minimum amounts and optimize for quality people
Raise the round behind you - Avoid a drawn-out process and optimize for the best investors.
Conditional Commitments - Why they aren't commitments and what to do about them.
Handling Inbound From Investors - Avoid distractions and keep potential investors warm.
How “Good Guy” Phrases Torpedo a Pitch - And how to win over customers and investors
Avoid Hiring Too Early - Navigate external pressure focused on vanity metrics
Customers understand before investors do - And some investors will never understand
The Benefits and Downsides of Responsiveness - Where it can help and where it can backfire.
Avoiding Gossip - Nimbly navigate an awkward scenario.
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“I met so many fascinating people in different stages of their entrepreneurial journey, some still full-time employed, some secretly working on their next thing, some exploring new ideas, and some already with shipped products and revenue.”