In this episode of "20 Growth," host Harry Stebings offers a comprehensive guide to successful fundraising for startups, discussing common pitfalls, structuring the process, and choosing investors. Stebings emphasizes the importance of a targeted approach, recommending founders categorize potential investors into tiers and start pitches with lower-priority contacts to refine their delivery. He advises on crafting a compelling pitch, the significance of a concise and insightful deck, and the strategic planning of fundraising amounts and valuations. Stebings also touches on the nuances of selecting a lead investor, the value of genuine relationships, and the critical nature of investor updates for future rounds. Essential tips include avoiding over-optimization for terms, maintaining clear communication, and ensuring respectful rejections to preserve future opportunities. Throughout, Stebings interweaves practical advice with real-world examples, such as Mickey Kusi's experience with Vault and insights from industry experts like Jason Lemkin and Brian Singerman.
A founder recently said to me, I love 20 growth, but funding is key to a lot of startup growth and you've never broken down the secrets, strategies and tips for success in a fundraise.
This quote introduces the topic of the episode, emphasizing the critical role of funding in startup growth and the need to explore the intricacies of successful fundraising.
So one disclaimer on the show today, some of the advice is based on personal preference of how I like a fundraise to be done, but for some elements there is nuance and alternatives to some of the advice.
Harry provides a disclaimer that his advice on fundraising is based on personal preference, acknowledging that there are nuances and alternative approaches to fundraising.
For 99% of fundraisers, it is a game of shots on goal. You need to have enough investors in the pipeline. It is a sheer numbers game.
Harry compares fundraising to a numbers game where having a substantial pipeline of potential investors is crucial for success.
Vault sold in 2021 for a reported $7 billion to DoorDash, making a monster return for those investors. But 68 meetings before that. Yes for the series B also goes to show you sometimes just need one true believer.
This quote recounts Vault's fundraising journey, emphasizing the importance of perseverance and the impact of securing a committed investor.
Put these investors in three buckets in a Google sheet or other database repository, and then do three tiers priority. Tier two and tier three priority should only have five, and then 15 each for tier two and tier three.
Harry advises founders to organize potential investors into a structured database with prioritized tiers, suggesting specific numbers for each tier.
I would say that founder references speak volumes and also lead to warm intros.
Harry emphasizes the value of founder references and warm introductions in the investor selection process.
Rule number one, never work with assholes. And so the value alignment there is really important.
This quote highlights the importance of value alignment between founders and investors, with a candid rule to avoid working with difficult individuals.
Number one, they go to their priority names first. Do not do this.
Harry identifies a common mistake where founders approach their most desired investors first, which can lead to suboptimal pitches due to inexperience.
Use it as a testing ground for how you present your company. If they have common questions that keep coming up. Amazing. You can now use that to create an FAQ page that's in the deck and that will prevent you from having to answer the most obvious questions in other meetings.
Harry suggests using initial pitches as a learning opportunity to improve the presentation and proactively address common questions through an FAQ section in the pitch deck.## Zoom Call Dynamics
"If you're doing a Zoom call and it's a first meeting, do not have more than two people on the call from your team."
This quote emphasizes the importance of keeping the team small in initial meetings to foster a focused conversation and build relationships effectively.
"As the founder practice your intro. So few do this. You really need to make it succinct, concise and break it into chapters if you can."
The quote underlines the necessity for founders to rehearse a brief and impactful introduction that effectively communicates their background and the foundation of their company.
"Ask them about a company that struggled and how they work with the founder to help."
This quote suggests that founders should probe into how VCs support their companies, revealing the VC's commitment and approach to partnership.
"I hate pitches where it's a slide by slide read off."
Harry Stebings expresses his dislike for presentations that rely heavily on reading from slides, advocating for a more interactive and substantive discussion.
"Keep the deck less than ten slides."
Harry Stebings advises keeping the pitch deck short to avoid overwhelming investors with information and to focus on the essentials.
"Where do people go wrong on the team slide? They put twelve faces on it with the people's names."
This quote criticizes common mistakes on team slides, advocating for a more informative approach that highlights the team's relevant experience and fit for the problem being solved.
"So do not do this. It is a much better way to start with that as the starting size and then show the slither of wallet spend that hairdressers spend on software and then show an even smaller slither that they spend on crms."
Harry Stebings discusses the importance of accurate market sizing, suggesting a methodical breakdown of the market to demonstrate deep understanding and realistic potential.
"Why you should not invest this is a slide that you should have in the deck."
The quote recommends including a slide that outlines the company's weaknesses and corresponding solutions, fostering trust and showcasing self-awareness and strategic planning.
"Use this as a chance to show your caliber as a founder."
This quote encourages founders to use discussions about funding specifics to display their competence and justify their company's valuation.## Structuring the Round
"So VCs that lead, and you would want to lead, they need to own at least 8%, very, very minimum."
This quote emphasizes the importance of structuring a funding round to meet the minimum ownership requirements of leading VCs, which is typically at least 8%.
"For example, if the check size they are investing is less than 1% of their fund, it's not that meaningful."
This quote discusses the importance of the check size in relation to the VC's fund, indicating that a check size under 1% may not warrant significant attention from the investor.
"I really don't like ranges. There is a massive difference between a 3 million raise and a 5 million raise."
This quote highlights the importance of specificity in fundraising goals, as a range can greatly affect the company's financial runway and future planning.
"The majority of the time it is best to say, hey, we're raising 2 million and we'll let the market decide on the price."
This quote advises founders to avoid setting a fixed price for their fundraising round, suggesting that it's better to allow market dynamics to determine the valuation, demonstrating a strategic approach to fundraising.
"The biggest problem of the last two years was people chose their lead. Having met them once and not knowing them, they will be a partner to you for ten years."
This quote stresses the importance of thoroughly knowing your lead investor before committing, as the relationship is long-term and significant.
"Investors often need a reason to move and so it's good to put a timeline on the race."
This quote suggests setting a deadline for the fundraising process to motivate investors to act promptly and to filter out those who are not serious about investing.## Communicating Delays to Investors
A communicated delay is totally fine. No, communication is not.
This quote emphasizes the importance of keeping investors informed about any delays in decision-making. It highlights that while delays are acceptable, failing to communicate them is not.
These investors could likely fund your next round. They could fund a bridge round and you never know when you might need them and so always turn them down super well.
The quote underscores the importance of rejecting VCs gracefully because they might be instrumental in future funding opportunities.
If any VC ever makes you pay to pitch them, this is unacceptable egregious behavior. [...] Do not accept this either. [...] So say no to investment tranches.
The quote lists specific practices to avoid when dealing with potential lead investors, such as paying to pitch, accepting investment tranches, and investors who excessively haggle over salaries.
They will have angels they work closely with and think highly of. You should use them here to help map out those people and then make those intros for you with those warm introductions, which makes a massive difference.
The quote advises leveraging the lead VC's connections to build a strong and specialized angel investor team.
Give less people more allocation. It's really important that the check size that you give them matters to them, so it's proportional.
This quote suggests that founders should offer larger allocations to fewer angels to ensure their investment is meaningful to them.
Investors invest in lines, not dots. [...] This allows both sides to really get to know each other authentically and not in a sales process.
The quote highlights the importance of showing continuous progress to investors and building authentic relationships with potential leads for future funding rounds.
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