Hi everyone. The vlog today is a little different, since I asked my friend and colleague Andrew Lee to sit down with me and talk through some of the advice we give very frequently to our founders. This isn't intended to be a comprehensive guide, but most everything we discuss here is stuff that comes up as a part of our experience working with hundreds of startups at Initialized.
The advice that I'm going to give is just a truism that you already know, but it reminds me of the good Buddhist mantra:
When the student is ready, the teacher will appear.
Hi, my name is Andrew Lee. I'm a partner at Initialized Capital. I'm going to talk to you about follow on fundraising. That means you've already raised, for example a seed round and you're going to raise your next round. Let me go ahead and dive into some of the things that we've seen that are very helpful to those who are working on their next follow on funding round.
Fundraising is not success
The biggest thing that I think is important with folks who are raising their series A, is that they think that it's the end all, be all to their start up. Raising funding is only weakly correlated to your success. It is only a method to get more resources to get you to the goal. The only reason why you're fundraising, again, is not to check off the box, not to say that you've raised this round, not to get yourself in Tech Crunch or Business Insider or any of those other places. The only reason why you're fundraising is because you want to make your business move faster. The first thing is, let's say that your company is about to get to its next step.
You're ready to go ahead, you've figured out product market fit, you have sales, you're getting to quite a bit of revenue but you need to put fuel on the fire, as they say.
We want to get all of our companies the best possible deal, not just in terms of valuation but in terms of working with the right partner, getting the right amount and something that fits them.
Raise when you reach the next milestone
So we're gonna go through a couple of things that are pretty important. So the first is, how do you get in front of a potential investor? You generally know this, but you want to go through people who are warm introductions to people that you admire and you respect and more importantly, also people who are admired and respected by the investor.
That means, cold emails are a surefire way to get yourself a no. So we at Initialized in particular, we tell a lot of folks, hey, talk to our portfolio founders. We trust them a lot, we've obviously given them money. The same thing should be the way you talk to potential investors.
Storytelling for your Series A
Now, let's say that you have that introduction to an investor. You shouldn't go in unprepared. How do you prepare yourself in order to be able to have the best fundraise? Now, you would expect me to typically say, a typical investor would probably say, oh, have a deck, have a memo, have this data ready to go, have your revenue model. That's not the most important thing.
I think the most important thing for you as a founder is to actually be able to tell a story. I think there's four things that people really forget.
#1 — Brevity is the soul of wit
Number one, brevity is the soul of wit. In particular, you won't have a lot of time to tell your story, so know how to tell your story concisely and more importantly, in a pithy manner.
Being able to say your life story very quickly and to show that you are the person on this hero's journey to fulfill the goal of your start up is number one.
#2 — Secrets create friends
Number two, secrets create friends. Now, this is sort of crazy to say and no one is really gonna tell you this, but almost every investor is looking for you to tell them something that they don't know. Something that you have gained through the journey of your start up that nobody else quite understands, and that's actually the element of true friendship, right? You yourself can probably remember the times when, if everybody has access to some bit of information on the schoolyard, then nobody really has access, right?
Secrets create friends, and more importantly that's the element for you to create a strong social connection with that particular investor.
#3 — Transport investors into the future
The third thing here, dovetailing on that is that they want to know that they'll be transported into the future. Instead of telling them a secret from the past, you want to tell them the secret about the future and transforming the future's really important because many times you see founders just talking descriptively about what they've done but in no way does this tell the investor how they want to basically change the world or have a story about the future.
#4 — You're the right hero for this journey
And the very last thing is then, you want to be able to tell the investor a story about why you, as a person and a protagonist in the story are the correct hero. That you want to be that person who is the hero on the journey. You want to make the investor think, "hey, this hero, I want to follow her. "I want to follow her into the depths of hell "because she knows something that no one else knows."
It's odd because you would expect that it's only about revenue models and Excel spreadsheets but it's actually very much about the story that you tell other people.
Trials and tribulations of your journey: The Gotcha Game
So let's say that you're pretty good at the story, right? You've nailed the story, you have a good sense as to your place in the universe as well as you have strong universal resonance with your start up. Much like Odysseus, you're gonna find yourself with many, many trips and travails and many ways to basically cut you off from your path. In particular, those things are what we call the gotcha game. All they want to do is find something, a little thing, or a big thing, they want to find that thing to basically kick you out the door. To basically throw you off your course.
One of the simple things is, do spelling mistakes annoy you? Do buzzwords annoy you? Find out what those things are. Now, in general I think they're general cognitive biases that people say "hey, spelling mistakes aren't that big of a deal". To be fair, I agree. I don't really care about spelling mistakes, but there's a ton of investors who really care about spelling mistakes because if you can't pay attention to that detail in the very short amount of time that you're talking to somebody, then they will think that you won't care about the details of your business.
Important: Speak the language of the investor. Know what they care about.
The other thing that's important is you have to speak the language of the investor. That doesn't mean that if you're talking to a Chinese investor, you should speak to them in Chinese. The problem there is that most people are not speaking the correct language.
You need to know what are the the metrics that they care about. If it's enterprise, for example, they'll definitely care about lifetime value, cost of acquisition. If they're consumer, any investor worth their salt should care about cohort analysis and long term retention.
That's the type of language that we're talking about. Whether it's in your materials, in the deck that you have, in the data room that you have, the way you structure some of your memos, or the way that you speak in a business language, that's very important to understand "What is the language that person speaks?"
Make it a conversation, not a speech
Now you'll want to go ahead and prepare say 20 minutes of material for an hour meeting but some people think that it's just a speech. You're basically orating, as if you were Homer. That's definitely not the way to go.
Think of yourself in the Odyssey, instead of being the person who's just orating to the audience, you're actually speaking with the chorus. The chorus is the investor. You're having a dialogue between each other and only until you can have that dialogue do you know that you're actually having, you're speaking the language to each other.
Basically, if you can't connect with the investor, you're pretty much dead in the water. You know for a fact that you're not speaking their language. You have an understanding of the metrics, you're about to go and meet the investor, and you're gonna go in.
Practice? We're in here talking about practice.
Well the number one thing you want to do, is you want to practice. You want to practice, I can't say this enough, well we'll have Allen Iverson say it.
I mean, listen, we're talking about practice.
Just practice, that's what we're talking about. Just practice.
Who should you practice in front of?
Now, there's three individuals that I think you should practice in front of.
- One, you should practice in front of your existing investors.
- Two, you should practice in front of portfolio founders or founders that are connected to the investor. In particular, if they've been invested in by the investor, that's the best type of founder that you should talk to. When you talk with other founders who have actually recently pitched to the investor, that's one of the best ways to know that you're hitting the right thing or you're getting the right types of feedback.
- Three, there are some investors who may not be high on your list and you think that maybe you should only start out with the folks that are very, very high on your list. You should opportunistically maybe talk to some of those other folks and get a sense as to whether they have some very simple gotchas and if you can catch those gotchas, and you can answer them, and lo and behold, maybe they even give you a term sheet, they'll actually push the whole process along.
Know when to stop pitching
Now, some folks think "Well, you know, if I just pitch enough times and I meet 100 investors, that's the best thing, and I'm just gonna do this for however long. I'm just hell or high water, I'm gonna do this."
Much like Odysseus, you should not take an Odyssey that will take you more time than necessary. If you arrive too late, you might find out that this investor no longer cares about you or, in the case of Odysseus, he lost his wife, she actually eventually got married to another guy and he had to go save her from a monster sea dragon. Not to say that that's gonna happen to you, but you know, worse things can happen.
So, the key here is you need to know when you need to stop fundraising. This is a counterintuitive point. A lot of folks think, "oh I'm just gonna fundraise forever."
No, no, you need to stop fundraising. You need to choose a time that makes sense for you and your business. Now you have to go and close that investor.
FOMO closes deals: Think traction and social proof
There's a lot of material online that tells you all the different tactics to be able to do that.
I'm just gonna tell you the two things that I think are important to know from first principles and that is that investors are motivated by, really two things. One is traction and two is social proof.
Traction is how good your company's doing. That includes getting a term sheet, and then two is the world of social proof which is that if another investor who they respect and admire chooses to give you a term sheet, they'll go ahead and really want to give you a term sheet because we're social animals.
The one parting thought I want to leave with you is this. It's that a lot of people think that there are rules to fundraising and being obsessed with tactics, and rules and gimmicky things is not actually the way to go and get a successful fundraise.
In your journey, you want to tell the investor "I'm Odysseus, I'm going on a journey, you should join me." Now, they can be part of your tribe already and understand the language that you speak, or they're not part of your tribe and your job is to tell them, "you should join my tribe." That's it. Once you do that, I think that you'll be able to go and complete your hero's journey.
So best of luck on your quest and we're happy to hear from you.