Investor red flags, how to fundraise and more | Office Hours

In this insightful session, startup expert Heaton Shaw shares his extensive experience in fundraising, emphasizing the importance of persistence and communication. Shaw advises founders to move on if an investor ghosts them, but to keep potential investors informed of progress. He debunks the notion that a positive investor meeting guarantees funding, noting that investor enthusiasm is part of their job. Shaw also clarifies that fundraising truly begins after receiving a term sheet, as it allows founders to leverage urgency among other investors. He warns against unsophisticated investors, particularly those with non-startup backgrounds or those offering unfavorable terms. Shaw stresses that fundraising is a founder's job, not a distraction, and encourages a focused narrative when discussing past co-founder issues. He concludes by urging founders to appreciate the investor's perspective and to avoid seeking capital as the first step in starting a business.

• Hiten Shaw has 20 years of experience in building startups.
• He has helped raise billions of dollars for a variety of businesses.
• Shaw is sharing his insights on fundraising, a topic he considers his least favorite.

"I've been building startups for 20 years and today we're going to talk about my least favorite topic fundraising."

This quote introduces Hiten Shaw and sets the stage for the discussion on fundraising, highlighting his extensive experience in the startup industry.

• When an investor ghosts you, it's best to move on.
• Keep the investor informed with updates about the company's progress.
• Don't take ghosting personally; it's part of an investor's job due to their busy schedules.

"If an investor ghosts you, they're not likely to get back to you, move on."

This quote advises founders on how to handle situations where an investor stops responding, suggesting that they should not expect further communication.

• It's difficult to know if an investor meeting went well.
• Investors aim to make founders feel good during meetings, which can be misleading.
• A quick response after a meeting is a better indicator of interest.

"Their job, their literal job is to make you feel good on the call."

The quote highlights the investor's role in making founders feel positive during meetings, which can make it challenging to gauge the meeting's success.

• Receiving a term sheet with a short acceptance window is common.
• The short time frame prevents founders from shopping the term sheet to other investors.
• The fundraising process intensifies after receiving a term sheet, as it can be used to leverage interest from other investors.

"The fundraising process actually starts after you get the term sheet."

This quote suggests that the real work in fundraising begins once a term sheet is received, as it is a tool to generate more interest and urgency among other potential investors.

• The sophistication of the investor is a critical red flag.
• Discrepancies between an investor's terms and standard practices can be concerning.
• Familiarity with standard terms and practices is essential to identify suitable investment partners.

"Your job is also to identify the best investment partner for you."

The quote emphasizes the importance of founders' responsibility to find investors who are not only willing to invest but also match well with the company's needs and standards.

• Identifying unsophisticated investors is a major concern.
• Offering a lower valuation than the previous round without strong justification is a red flag.
• Sophisticated investors from reputable firms or experienced tech angels are less likely to present red flags.
• Personal offense should not be taken from investor decisions as investment is a business transaction with many variables.
• Early-stage investments are inherently uncertain, and startups are viewed as bets by investors.
• Biases in valuation expectations may be observed among East Coast and non-US investors, influenced by their investment experiences.
• Founders should assess whether they are comfortable with the terms offered by investors.

"That's an absurd valuation that's extremely low to the founder that they've already invested in to me that's a red flag and I've seen that happen over and over again."

This quote highlights the speaker's view that offering significantly lower valuations than previous rounds is a concerning sign of investor behavior, suggesting a lack of sophistication.

"All that being said if you're investing from any of the big names or like some of the tech Angels out there... you should be fine."

The speaker implies that investments from well-known entities or experienced individuals are generally trustworthy and do not carry the same red flags.

"...especially at the earliest stages it truly is a scenario where no one really knows if your company is going to be successful or not..."

This quote acknowledges the inherent risk and uncertainty in early-stage investing, emphasizing that success is not guaranteed despite current performance.

"...but those are just patterns that they've learned from the investing they've done so it's not a red flag it's just like are you into that are you okay with their terms or not."

The speaker suggests that certain investor behaviors, such as seeking lower valuations, are not necessarily red flags but rather patterns from their investment history, and founders must decide if they are comfortable with these terms.

• Fundraising is an essential part of a founder's job, not a distraction.
• Preparedness for numerous meetings is crucial, as fundraising is a demanding process.
• Founders should focus on their fundraising tasks daily, regardless of immediate effectiveness.
• Enjoyment can come from the opportunity to talk about the company and improve the pitch to investors.
• The myth of needing 100+ meetings is actually a reality, though luck can also play a role.
• Founders should not fundraise out of necessity but because it strategically benefits the business.
• Founders should reassess the need for fundraising if the company is not in immediate need of capital.
• Persistence in finding the right investor is important, and a high number of meetings can be acceptable.

"Fundraising is your job. It is not a distraction; it's your job."

This quote emphasizes that fundraising is a fundamental responsibility for founders and should be treated as a primary focus rather than a secondary task.

"I'm literally waking up doing the thing my primary job is fundraising emails calls uh Demos in person whatever I have to do."

The speaker describes the all-encompassing nature of fundraising, indicating that it occupies the entirety of their working day and is the top priority.

"Every meeting every call all the Cadence and kind of the things you're doing there they're all opportunities for you to learn just like when you're building a product and iterating it."

The speaker encourages a perspective shift, suggesting that each fundraising interaction is a learning opportunity, similar to product development.

"If you're even willing to call it quits right now my assumption is you don't need the money."

This quote implies that a willingness to stop fundraising suggests there may not be an urgent need for capital, prompting a reevaluation of the fundraising effort's necessity.

"Don't do it out of a need do it because it makes sense for your business and then once you kind of calculate that and think through it don't think of it as a distraction."

The speaker advises that fundraising should be a strategic choice for the business rather than a reaction to financial need, and once this decision is made, it should not be considered a distraction.

• Fundraising success is often tied to the strength of the company's narrative.
• A compelling pitch and narrative are critical when a company faces challenges.
• The narrative should be cohesive, truthful, and omit unnecessary negative details.
• The narrative should focus on the current state and future of the company, not dwell on past issues.
• The narrative should reassure potential investors that past issues have been resolved and the company is on a solid path forward.

"I think they need to work on their pitch and narrative more than they need to do anything else."

• This quote emphasizes the importance of refining the pitch and narrative for successful fundraising.

• Addressing a co-founder's departure and its impact on the company and investors is a delicate matter.
• The narrative should include how the situation was managed and how the company has moved on.
• It is important to be honest about the situation without focusing on the negative aspects.
• The narrative should highlight the resolution of issues and the company's growth trajectory since the incident.

"Hey, I had a co-founder I started this business with and to part ways this is how we had to do it."

• This quote suggests a way to frame the co-founder's departure as a necessary step in the company's evolution.

• A "party line" is a consistent narrative that is shared with everyone, leaving no room for alternative versions of the story.
• The party line should be as close to the truth as possible while avoiding the sharing of irrelevant or damaging details.
• It should focus on the positive aspects of the company's current situation and future plans.

"I'm trying to get a cohesive narrative that I believe in that is as close to the truth as possible but not sharing the dirt that no one needs to hear."

• This quote highlights the goal of creating a narrative that is honest yet strategically omits unnecessary negative information.

• The narrative should demonstrate the company's progress and growth.
• It is important to showcase how the team has evolved, including new co-founders and a technical lead, to instill confidence in the company's leadership.
• The narrative should pivot the focus from past to future, emphasizing the company's direction and potential.

"I was able to take what we had, bring on two co-founders, bring on a technical lead, and we work with a bunch of contractors now. That's the current state of the team."

• This quote conveys how the speaker has successfully restructured the team and is focusing on the company's present and future state.

• It is important to clarify the equity situation and any ongoing involvement of the former co-founder.
• The narrative should reassure investors that the former co-founder's remaining equity is minimal and does not pose a risk to the company's future.
• Any potential concerns about the former co-founder's impact on the company should be addressed and dispelled.

"He owns less than x percentage of the business. I've revamped the team, brought on more co-founders, here's how that looks, and this person's no longer involved but they have a little bit of equity because it helped me start the company."

• This quote explains the former co-founder's limited equity stake and reassures that the company has moved on with a restructured team.

• The party line should be reiterated whenever questions about past issues arise.
• Consistency in the narrative helps prevent speculation and maintains a unified front.
• The party line serves as a defense mechanism to protect the company's reputation and investor confidence.

"If anyone brings it up, that's where your party line comes in, you just say the same thing again."

• This quote advises to consistently use the party line as a response to inquiries about past issues, ensuring a coherent and controlled message.

• Personal experiences in business can be deeply impactful, but it's important to not dwell on them after they're over.
• One should focus on the positives, such as being able to hire founders, manage contractors, and make progress in the business.
• It's crucial to maintain a professional narrative when discussing past experiences, avoiding unnecessary personal details.

"Once it's over nobody cares, even you shouldn't care, and you haven't, you've demonstrated you could hire founders right to join this crazy thing with you, you could hire a team or like a person at least, you could manage contractors and you can make progress in the business."

• This quote emphasizes the importance of moving on from past experiences and focusing on the accomplishments and progress made in the business.

• Conversations with investors may involve discussions about share allocation.
• It's better to have discussions about share reallocation than to delve into personal issues or question the honesty of individuals involved.

"I think some investors might be like okay can we get some of his shares back, more of his shares back."

• This quote suggests that discussions with investors might focus on practical business matters such as share distribution, rather than personal history.

• Having a consistent narrative is beneficial for explaining past events without getting too personal.
• A well-crafted narrative helps in focusing on the transition and future of the company.
• It's important to avoid deep personal details that are irrelevant to the business's progress.

"So I think that it's great to have that party line to actually get me to start talking about it. And it's something that I can bring up and it's consistent."

• This quote highlights the value of a consistent narrative that allows for a clear explanation of events without delving into personal matters.

• The speaker takes pleasure in giving contextual advice and seeing founders understand and apply it effectively.
• Critical thinking and the ability to act on advice are highly valued traits in founders.

"I was very impressed with how quick he picked up on the nuances of my advice and what he can do with it because that's my job to make it easy for someone to pick up."

• This quote reflects the speaker's satisfaction in providing advice that is quickly understood and acted upon by the recipient.

• There isn't a single "biggest" fundraising mistake; instead, it's about understanding the investor mindset.
• The opportunity lies in contextualizing the audience and appreciating what investors deal with to better achieve fundraising goals.

"The biggest opportunity with fundraising is to really contextualize your audience and understand the investor mindset and perspective much more than you do today."

• This quote suggests that a deep understanding of investors is crucial for successful fundraising rather than focusing on specific mistakes.

• It's easier to get meetings as a second or third-time founder, but the fundraising process remains largely the same.
• Past success can facilitate introductions to investors, but the core challenges of fundraising do not change.

"It's much easier to get meetings if you're a semi-successful or successful past founder even if you're not."

• This quote indicates that previous entrepreneurial success can open doors for meetings with investors, but it doesn't necessarily simplify the fundraising process.

• A major red flag for investors is when founders do not appear to get along.
• Investors assess the dynamic between founders as it's crucial for the team that will build the business.
• Founders should work on their relationship to avoid giving off negative signals to potential investors.

"The biggest red flag is when you're an investor, and you notice that it's not likely that the founders actually get along."

• This quote highlights the importance of a positive co-founder relationship in the eyes of investors, as it is indicative of the team's ability to work together effectively.

• The speaker advises against focusing on raising capital when starting out with a startup idea.
• Building something without raising any capital should be the priority for young entrepreneurs.

"If you were 18 with an idea for a startup, how would you go about raising capital? I would not raise capital."

• This quote advises young entrepreneurs to focus on building their startup without immediately seeking capital, suggesting that raising funds should not be the initial focus.

• The speaker enjoys engaging with founders and helping them with their challenges.
• Listeners are encouraged to submit their challenges for potential discussion in future podcasts.

"It's always fun because I love hearing from founders and what they're challenged with and helping them out with it."

• This quote conveys the speaker's enthusiasm for assisting founders with their business challenges and the satisfaction derived from such interactions.