20VC Special How To Fundraise Like a Pro How to Size and Price a Round, How to Create FOMO and Urgency in a Fundraise, How to Structure Angel Allocations, The 7 Deadly Sins of Fundraising Decks, The 3 Signs a Potential Investor is Bad News

Summary Notes


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.

Summary Notes

Introduction to Fundraising Strategies

  • Harry Stebings discusses the importance of fundraising for startup growth.
  • The show aims to break down the fundraising process, including common mistakes and strategies.
  • Harry apologizes for his voice as he is recovering from losing it.
  • Harry encourages listener feedback and mentions the show's advice may have personal bias and alternatives.

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.

Fundraising as a Numbers Game

  • Fundraising is likened to having enough "shots on goal" or opportunities.
  • Mickey Kusi's experience with Vault highlights the need for persistence, with 68 rejections before a successful Series B round.
  • The story of Vault illustrates that sometimes only one "true believer" investor is needed.

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.

Creating an Investor Pipeline

  • Founders should create a target list of investors categorized into three tiers.
  • Tier prioritization should be based on founder references and compatibility with the VC's investment focus.
  • It is important to ensure that the VC's values align with the founder's and that they are not "assholes."
  • Founders should start pitching to lower-tier investors to refine their pitch before approaching top-tier investors.

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.

Avoiding Common Fundraising Mistakes

  • Founders should not approach their top-tier investors first but should instead use initial meetings with lower-tier investors as practice.
  • Analyzing investor feedback during these early meetings can help refine the pitch and create an FAQ page to address common questions.

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

  • Limit team representation to two people in initial investor Zoom calls.
  • Too many participants can hinder core discussion and relationship building.
  • If investors are interested, they will request to meet more team members over time.

"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.

Founder's Introduction

  • Practice a succinct, concise, and structured introduction.
  • Break the introduction into chapters, aiming for 1-3 minutes in total.
  • Highlight problem fit and unique insight into the product or market.
  • Keep the introduction short to maintain attention and quickly move into deeper discussions.

"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.

Engaging with VC Introductions

  • VCs typically give an overview of their work and preferences during introductions.
  • Founders should inquire about VCs' collaboration style, support in difficult times, and investment strategies.
  • These questions can create a more engaging conversation and demonstrate the founder's seriousness.

"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.

Pitch Presentation

  • Avoid merely reading off slides during the pitch.
  • VCs should review the pitch deck before the meeting, allowing for an in-depth discussion.
  • Use the deck as a reference tool rather than the focus of the presentation.

"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.

Pitch Deck Composition

  • Keep the pitch deck concise, with a maximum of ten slides.
  • Use an appendix for additional data or research.
  • First slide should clearly state what the company does in ten words or less.
  • Team slide should feature key members with relevant background and qualifications.
  • Avoid including an advisor slide as it has become less impactful.
  • Accurately size the market, showing a nuanced understanding of the specific segment.
  • Do not include exit slides; focus on building the company rather than on potential exits.
  • Include a slide addressing the company's weaknesses and mitigation strategies.

"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.

Discussing Round Size and Price

  • The size and pricing of the investment round will be topics of discussion.
  • Founders should use this opportunity to demonstrate their understanding and reasoning behind their valuation and funding needs.

"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

  • Founders often structure funding rounds that do not allow VCs to invest due to ownership percentage requirements.
  • VCs that lead rounds generally need to own a minimum of 8%.
  • An example of a prohibitive structure is raising $2 million on a $25 million cap, which does not accommodate VCs, pro-rata rights, and angel investors.
  • A more suitable structure would be raising $5 million on a $25 million cap, allowing for adequate distribution of ownership percentages among VCs, smaller funds, and angels.

"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%.

Significance of Check Size

  • The size of the VC's check should be meaningful to their fund, with less than 1% being not very meaningful, and less than 0.5% being even less so.
  • A smaller check size might result in less time and attention from the VC but can also mean less pressure on the founder.
  • Jason Lemkin highlights the benefits of a smaller check size, suggesting it allows founders more freedom to execute without undue stress.

"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.

Fundraising Amount and Runway

  • It is crucial to avoid ranges when stating the amount being raised due to the significant impact on the company's runway.
  • Founders should use the question of how much they're raising to demonstrate insight into the milestones they plan to hit over the next 18 to 36 months.
  • A minimum of 18 months of runway should be raised, but not more than 36 months, with 24 months being an ideal target.
  • Founders must clearly articulate what they need to prove with the funds and by when.

"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.

Price or Valuation

  • When stating the fundraising amount, it is assumed there will be a 15% to 20% dilution, leading to an immediate valuation assumption by VCs.
  • Founders should avoid anchoring themselves to a price and let the market decide, showing savviness in the fundraising process.
  • The ability to raise the next round is fundamental, and early signs of running a fundraise process well are crucial.

"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.

Selecting Your Lead Investor

  • Choosing a lead investor is a critical decision since they will be partners for an extended period.
  • Founders should meet their lead investor in person before signing a term sheet, as in-person meetings can provide valuable insights.
  • Founders should ask potential lead investors about their definition of success, request references, and conduct offsheet references to understand how they behave in challenging times.
  • Founders should be vulnerable during the process, sharing personal stories and traits to build intimacy and trust.

"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.

Fundraising Process and Term Sheets

  • Creating urgency in the fundraising process is necessary, with a recommended timeline of 14 days for VCs to make a decision.
  • Founders should be cautious of exploding term sheets, which demand immediate signing, and should ensure there is a fair timeline.
  • Having multiple term sheets provides leverage to optimize terms, but founders should not over-optimize if the right partner offers slightly less favorable terms.
  • Communication is key when considering multiple term sheets, and founders should keep all parties updated.

"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

  • It is crucial to keep investors updated, especially when making them wait for a decision.
  • Communicate any delays clearly and provide a specific time for when you will get back to them.
  • Maintaining good communication is essential; a lack of communication is unacceptable.

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.

Rejecting VCs Gracefully

  • When founders decide not to proceed with certain VCs, it is important to turn them down politely and respectfully.
  • These investors may be potential funders for future rounds or bridge rounds.
  • Maintaining good relationships with all investors is beneficial for possible future collaborations.

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.

Red Flags in Lead Investor Behavior

  • Founders should be wary of VCs who charge to pitch to them, as this is considered unacceptable behavior in the industry.
  • Avoid investors who propose investment tranches, as this can hinder the business's ability to effectively allocate resources and build a strong team.
  • Be cautious of investors who haggle over small salary differences, as it could indicate potential difficulties in working with them in the future.

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.

Constructing the Investment Round

  • Work closely with your lead VC to allocate the remaining investment round.
  • Utilize the lead VC's network of angels and leverage their warm introductions.
  • Assemble an angel cap table like a sports team, with each member bringing specialized, world-class skills in specific areas.

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.

Angel Allocations

  • Avoid distributing too many small allocations to angels; instead, ensure the check size is significant enough for them to be invested in the company's success.
  • It's important to close the funding round in a timely manner and not prolong it by continuously seeking just one more investor.

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.

Preparing for the Next Round

  • Investors prefer to see progress over time rather than isolated achievements.
  • Align with new leads on potential future lead investors and set clear milestones for the next round.
  • Regularly update these potential leads with monthly updates and quarterly catch-ups to build a relationship outside of the sales process.

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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