How to raise funding on AngelList when you are the underdog
TechCrunch Europe published my post about using AngelList to raise funds for your startup. Since then I have made some updates to the post and there you go:
REVEALED: 35 WAYS TO PLEASE YOUR ANGELS
(Seriously I should be writing quizzes for Cosmo)
This post was originally meant to be called “How to raise seed funding on AngelList when you are the underdog” but then I figured out that I keep clicking @hblodget’s stories and lifted his used-car-salesman gonzo style. I’m sure someone can write a nicer blog post about this. I just want to focus on the basics.
You see people raising millions for what appears to be stupid shit. But if you dig deeper you find out that the founders sold a company to Cisco for ½ billion (and so their cheese sandwich restaurant got funded) or built several huge companies (and their photosharing app with no users or purpose got $41m) or pretty much built Facebook (and investors pile up on their social network who can only have 150 friends like it cures cancer) or had multiple rounds of funding already and a completely finished product with tons of users and healthy revenues.
So yes it might sound crazy but when you have the full data it’s not that crazy after all.
But what if you are the underdog? How can you get the first infusion of cash for your startup? What if you do not have yet achieved great momentum but still want to try to raise external funding? What if you are in Europe and not the SF Bay Area?
Here’s my notes and advice on funding. I have raised VC funding 3 times (Internet security, mobile security and online games).
Stuff to do before you actually start raising money
- Create your personal profile on AngelList.
- Look at successful startups, follow them for a couple of weeks, see how they are doing it?
- Speak with your network of potential investors before you start fundraising and product development (here’s why from Mark Suster:http://blogs.reuters.com/small-business/2010/11/18/invest-in-lines-not-dots/ and Scott Sage:http://scottsage.tumblr.com/post/6773134413/how-to-raise-vc they give great advice).
- Basically if every investor in the world gives you terrible feedback on the market before you write code it might be helpful in discovering a flaw in your reasoning.
- VCs meet startups every day and might have seen a competitor or could hook you up with a co-founder looking at the same space.
- If you do not have a network of VCs, subscribe to http://startupdigest.com/ and also trawl http://plancast.com/
- I am assuming you have a team. If not find a technical co-founder. Nobody will invest in you. Best results is a team of 2 or 3.
- Mine the hell out of your Linkedin connections to get in touch with people who can help you.
- Find a great lawyer. Ask for intros and free advice. Don’t pay them unless you close funding. If the law firm insists to send you an invoice (but you don’t have to pay it) just walk away. Plenty of good ones around.
- Find hacker hubs. TechHub in London is an example. Lots of events going on.
- As you go along you should have your network set up, all investors should be aware of what you are doing.
- Keep it simple as people need to label you to remember what you are doing (“mobile security” “airbnb for dogs” etc).
- If you are still in product development make a video of your product to show how it might work.
- You have an idea but no money to develop? Call all Computer Science professors at all universities in your area. Find students who want to co-found a business or will code for shares in their spare time.
- Incorporate feedback. A lot of VCs are dumb. But hey a lot of VCs/Angels are really really smart. And they look at startups for a living so give them credit and try to address their concerns.
- You either find people that fund PowerPoint, or find people that work for free. The latter is more probable.
- Do not “pay-to-pitch”. Ever. Never accept an offer where you pay a fee in exchange for introductions and advice on how to pitch (unless it’s like a nominal fee for $50, in which case try to void it as well by claiming to be an orphan with a very sick mother or something along those lines). Keiretsu Forum is an example of what to avoid. Unless you are raising $10m+ you cannot generate enough fees for any serious corporate banker to look at you. And for the sake of this discussion you are too early anyway.
- Only when you have done a lot of this, list your startup on AngelList.
2. Once you start fundraising:
- All email has to be replied immediately. Like, now. Like, real now. Even if it’s 1am and you just got in bed after a very long day.
- If a meteorite hits your house and kills your cat, people will understand if you take up to 24 hours to reply.
- If it takes more time to reply, better be a fucking tsunami, Godzilla, or both.
- You should always run on inbox zero. If you fail that before you launch, certainly with more money and pressure it’s not going to get better.
- Install Rapportive. How people can be efficient by using anything than Gmail that I cannot understand.
- Since you might want to compress your funding as much as possible, this might mean emailing 100+ people to let them know you are fundraising and ask for a conference call or a meeting. As the saying goes, there are two types of gunslingers, the quick and the dead. Same goes for email.
- Find small angels who are willing to commit some capital to you can add them to the investor roster. Being first is being lonely so fill the roster fast.
- Have one item of good news per week. Interesting stuff. Nobody cares that you had “great progress” if it’s not tangible. On Friday morning all your startup followers on AngelList get a recap email with your weekly updates.
- Having impressive advisors helps, make sure you add them one at a time for maximum effect. Also, make sure that they are not your mom. Do not pay them cash, and have a 3-year vesting period so if they do not work after few months you can ditch them with minimum loss. Don’t screw them either.
- Negotiate a larger round and find a lead investor. Once you secure their money you are free to go and raise the rest of the round but you don’t have to deal with millions of tiny corrections to your funding documents.
- Professional investors either commit or they don’t. There is no between, only wishful thinking. If they do not commit in 48 hours do not waste time. Many VCs don’t know how to say no.
- Be thankful to those who say no. Do not argue with them. They just did a huge favor by saving lots of time. Move on. They invest in people not products. Draw your own conclusions.
- Don’t ask for referral or introductions. They said no. Move on, the girl said no. Once you figure out that raising funding is like dating things tend to get easier. Assuming you are skilled at picking up a great date.
- “Weekend” angels on the other hand might want to see a lot of documentation and handholding before they say yes. Sometimes they just waste your time. Guess what? If you still need the money then suck it up.
- Bay Area startups have access to 10x the capital compared to UK ones. Deal with it.
- Kayak, Airbnb and Skype. Go to San Francisco for a month and try to raise money there. Let your UK contacts know that you are leaving.
- Never put forward ultimatums that you cannot enforce. “Give us the money by Monday” etc. You don’t want to be the one whose bluff gets called out.
Most importantly: one bargains with equals or near equals!
In every negotiation, you need to know when to leave. If an investor adds bullshit terms to a deal after a term sheet is signed, walk away. And leave negative feedback on http://www.thefunded.com/ (maybe checking there before signing would be a good step).
You do not want to be in a situation where you are forced to raise money from an investor that you do not like just because you failed to have alternative offers.
Getting offered a term sheet by a VC is a great step, but you want them to do a due diligence before that. Otherwise they might have a change of heart and you cannot shop your deal around (and generally be considered “damaged goods” by other investors).
Hope this helps. Ping me at @rodolfor for feedback and comments