Fundraising 101, Part 2: How to Raise
If you meet the timing and scalability requirements (see Part 1), you’ve done 80% of the work necessary to raise a round.
As a reminder:
Raise only after you have a product in the market that customers love (ideally, they’re paying you for it).
Raise from angel investors only if your business can produce a 100x return to the investors within 10 years.
From there, the key is to convince investors of two things:
You have product/market fit, or a path to getting there.
If you’re right about #1, you could eventually be a $1B+ company.
Remember, this is art and not science. Here are the steps.
Start with a story.
The best companies change the world in some way that creates a new opportunity. Uber got everyone to start ordering cars from their smartphones. Slack got everyone to instant message their co-workers instead of emailing them. Udemy got millions of people to pay $10-25 for a bundle of videos that we now call “online courses”!
If investors believe it’s POSSIBLE that you could make such a change, they will give you money. Focus on explaining why such a change is possible, and craft your pitch to show them (1) your assumptions about the future, and (2) why those trends will make this change happen.
Why is now the time when people will switch off email to messaging? What does the investor need to believe in order to get on board?
It’s OK if the investor has to believe something that’s not 100% certain. Remember, they know that 24 out of 25 of their companies will fail. So if you are, for example, hoping that VR headsets will become a major gaming platform, that’s OK. Is it 90% certain? No, but is it 10% possible? Yes.
Find the right investors.
Once you identify the underlying assumptions of your business opportunity, you have to find investors who believe you. Investors are now super public about their beliefs—sharing them on Twitter, conducting interviews, and writing blog posts. Follow these sources and really do your research. Do you know who Chris Sacca, Jason Calacanis and Li Jin are? If you don’t, you’re further away from raising capital then you think. You should know the names of at least 50 of the top 250 investors, and know what they care about.
Find the investors who are most likely to believe your underlying assumptions will come true. Who’s investing in Virtual Reality and thinks that it will be a big gaming platform? That’s your ideal investor. Are there other investors who have invested in new-platform gaming companies in the past, even if you can’t tell whether they’re into VR? Those can also be good opportunities. Someone who invests in Crypto and Marketplaces is probably not going to be interested.
At my new company, we had a 90% hit rate between first call and an investor saying yes. 90%! Why? I did my homework. (Obviously, as first-time entrepreneurs, you’ll likely get a lower hit rate—BUT you can still stack the deck in your favor by being smart about it. Even experienced entrepreneurs often get <50% hits). We only reached out to investors we knew were interested in our space, and so it was relatively easy to close them.
Get the right introduction.
How someone hears about you matters. Although investors are increasingly willing to take cold emails if the pitch is crafted right, for 50%+, you probably need an introduction. Spend the months leading up to a fundraise getting to know the players in your space—entrepreneurs who have built companies like yours in the past or executives who are “angel whisperers” in the area you are interested in.
This can be shockingly hard sometimes. At Udemy, it took us nearly a year to find people who believed in us—we tried to kiss a lot of uninterested frogs. Eventually, when we found the right people, they introduced us to investors.
Surprisingly, it doesn’t end there. Usually you need this introducer to actually go one step further and get on the phone with that investor and vouch for you. That’s the key—the more people who are vouching for your execution, the better.
If you are a first-time entrepreneur, I recommend trying to build relationships with people early and often, so they can see you execute over time. Talk to them before you have a product, and then after you launch, and then after you sign your first customer. Then, ask for an intro to investors.
Use an incubator.
The final thing I’ll say is this: if it’s your first time starting a company, I highly recommend going to an incubator and getting help from them. You may give up 3-10% of your company, but you’ll get much-needed attention and advice from people who have helped hundreds of people raise money.
If you are having trouble getting into Y Combinator, look for other industry-specific or smaller funds like TechStars, 500 Startups, or Pear’s Accelerator.
More resources:
One post can’t possibly cover everything. There are some amazing resources out there on fundraising. Pitching Hacks and YC’s How to Raise a Seed Round go in much more detail.
