When I first quit my job to start Recomazing I had absolutely no idea about the world of capital raising. I found the entire process incredibly overwhelming. Around every corner lingered a new term I had never heard of before...'Term Sheets', 'Pre-Money Value', 'Equity Splits', 'Series A'…it was like learning a new language!
To make matters worse, I found the info online to be conflicting and rarely would I find anything from the entrepreneur's point of view. As a solo founder, I was already working 20 hours a day getting my business off the ground, so the thought of trying to piece together hundreds of separate articles to paint a full picture was utterly exhausting.
Two and half years on and I’m happy to say Recomazing has completed two successful (read gruelling) rounds of funding and I've basically made every mistake you could possibly make. I've pitched 100+ times, received helpful advice from leading investors in the industry, spent countless hours researching online and attended numerous seminars.
This post is an attempt to condense all my learnings in one place so any wide-eyed founder reading this will start from a better point than I did. To be as helpful as possible I will:
- Answer the most common questions I get asked from other startups about how we raised capital for Recomazing.
- List all the tools and services I recommend using to raise capital.
- Provide some helpful templates from the documents I created in our own capital raising process.
Heads up that this is a beast of a post so you may want to go grab yourself a coffee/beer/wine before you settle in...don't say I didn't warn you!
Should I seek investment for my startup?
The first rule of startups is NEVER RAISE CAPITAL! Instead, go back, interrogate your business model and try to work out a way to create a case where you don't need to raise capital. Seriously, if there is ANY way at all you can get your business generating enough revenue to cover your costs that's what you should do. In fact, even if it isn't covering costs but you can make up the difference from your savings/credit card/second job etc then you should do that for as long as possible.
You should strive to get to a position where if investment is needed it is only to SCALE your established business, not CREATE your business (just ask the founders of Atlassian, Australia's most successful startup, who never needed a dollar of investor money until they wanted to scale).
There seems to be an unhealthy obsession with raising capital in startup land. Not every startup needs to raise capital, nor should they. Take it from someone who is stupid enough to have gone through this process multiple times; there is no greater distraction to your business than raising capital!
If, like me, you've reviewed your model but are still convinced you have to raise money to get your startup off the ground, then read on (welcome to the club you poor soul).
How do I get an investor to invest in my startup?
Think of it like it is your own money. If someone comes up to you and says "hey, I’ve got a good idea but I need 100k from you" you're going to have some pretty serious concerns about the risk involved. What would it take to convince you to invest? No doubt, it would require a hell of a lot more than just an idea on a swish looking presentation.
Investors will look to minimise their risk. The less risk, the more likely they will invest. The below represents some of the most common 'scorecard' factors discussed in my pitch meetings.
There are a ton of other factors (for example, one investor asked me if I was married and had kids to understand if there was a risk of my personal life taking preference over my work life), but these were the ones I experienced most.
It is important to understand that each factor represents a spectrum and there are lots of possible variables between both ends of the spectrum. An investor’s job is to weigh up all the variables to assess if your startup shows potential. If you are scoring high on the majority of these variables then you should really be considering if seeking investment is your best financing option (eg a loan may provide better terms). If you are scoring low on the majority of variables then your road to getting investment will likely be a LOT more difficult and you should consider whether you are yet ready for seeking investment.
Most early stage startups will score high on some and low on others. For instance, just because I was a single founder and was temporarily supporting myself with a second business didn't mean I was automatically eliminated as an investment option. However, I did need to make up the ground in other areas to lower the overall risk.
Your job as a founder is to remove the risk for investors through demonstrating TRACTION. Anyone can have an idea, but investors want to see proof points of how you have executed on your idea. By providing proof points you shift the conversation from what you plan to do and instead demonstrate what you have already done.
How long does it take to raise capital for my startup?
Timing will vary depending on how well you are scoring on the above variables and the network you have access to but to be safe you should budget at least 3 - 6 months of time towards the investment process.
Where do I find investors to invest in my startup?
There are a number of key players you need to be aware of:
- Friends and family (often referred to as the three F's when you throw in 'Fools...but I've never been a fan of that sentiment).
- Angel investors
- Venture Capitalists
- Corporate Venture teams
- Crowd Funding
Here is an infographic I originally found on the OurCrowd site that I have always found very helpful to explain the common stages in simple terms:
An overview of Angels, Accelerators, VC firms & investment options in Australia
What is an Angel Investor?
Angel investors invest in early stage or start-up companies in exchange for an equity ownership interest.
Our handy little Recobot (our favourite Recomazing team member) has compiled a list of Angel Investors that have been recommended in online forums or in person to our team. Complete with descriptions and links to their site (whilst we've seen collected thousands of recommendations from startups sharing their favourite resources on Recomazing, the category of 'Capital Raising' rarely gets much love as there's a lower percentage of people with these 'recos'. If you have had a good experience with an angel group we'd love for you to leave your reco to help fellow startups connect with good investors - we've gotta look out for each other!)
What is an Accelerator?
Fixed-term, cohort-based programs, that include mentorship and educational components and culminate in a public pitch event or demo day. You typically receive a modest amount of funding in return for giving away equity (the range of both varies).
If you are a startup who recommends your accelerator experience we'd love for you to leave your reco to help other entrepreneurs find the best options.
What is an Incubator?Startup incubation programs are often sponsored by private companies or municipal entities and public institutions, such as universities. Their goal is to help create and grow young businesses by providing them with necessary support and financial and technical services.
If you are a startup who recommends your incubator experience please leave your reco to help other entrpreneurs find the best options.
What is a Venture Capitalist?
A Venture Capitalist manages the money of investors who seek private equity stakes in startup and small- to medium-sized enterprises with strong growth potential. These investments are generally characterised as high-risk/high-return opportunities.
If you are a startup who recommends your VC we'd love for you to leave your reco to help other entrepreneurs find great options.
As an additional resource, you can get an idea of the most active VCs in the infographic below from our friends at Artesian (and, to a degree, your chances of being invested in). Keep in mind, however, some of these funds are new to market so it isn't a fair playing field.
And if you are after a longer directory style list, the good folk at Airtree Ventures started a bit of an experiment with a public gsheet doc that has the initial details of a stack of angels and investment options. You can view it here.
What is Crowdfunding?
Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture.
What is Corporate Venturing?
Corporate venturing is where a large corporate firm takes an equity stake in startup, to which it may also provide management and marketing expertise. For example, you will notice the Artesian infographic above includes Telstra and NAB Ventures.
Corporates are starting to get a lot more involved in the area of startup investment. Mainly due to the fact that they would prefer to identify and partner with potentially disruptive tech, rather than run the risk of losing market share to them.
This means we've started seeing a lot more 'brand driven' pitch competitions and hackathons. Whilst more support is always a good thing for our ecosystem my advice here is to always read the fine print and balance against your business priorities.
- Does the reward outweigh the risk of potentially not winning?
- Are you really that well positioned to win?
- If you think they are a good partner why haven’t you just picked up the phone and outreached to them previously?
Here's a checklist for you when considering a pitch:
- What is the size of the reward vs time you will need to spend on the pitch process?
- Is the reward definite or ‘potential’?
- Do they have proof points of working with any startups previously? If not, this is a red flag and could mean they are not actually set up to work with startups eg most large brands work off a 90 day payment term which would potentially crush a startup.
- Have they assigned responsibility to an internal employee to actually run the internal stakeholder management between departments?
- Are they blocking you from working with their competitors? If there is a definite block, then what definites are they bringing to the table? I recently heard a talk from the smart team over at Reinventure (Westpac's strategic venture partner) who mentioned they educate their corporate partners to not stop a startup from working with competitors. Otherwise they run the risk of limiting the startups potential. I loved hearing this and hopefully it is a sentiment more widely adopted by other Corporate Venture teams.
So which one is right for my startup?
You should review the investment options, see which ones seem the best fit for your startup and your stage, make a target list and approach them separately.
How do I get in touch with investors?
I found that this varies quite significantly but most will tell you on their website what they expect, with direction to either:
- Reach out directly via phone/email
- Fill out an application on their site
- Show some hustle and get referred to them via someone
If you can, I would recommend #3 even if they don't direct you to do that. A warm referral beats a cold intro every day of the week! The investor will be more open to hearing your pitch if you come with a warm intro.
Always write a suggested intro email for whoever is referring you. It makes everyone's lives easier and no-one should be able to sell it better than you. I have always had a good success rate when I literally write the email for the referrer so all they have to do is pass it on.
If you want to dig into the detail of how to structure your emails then you should check out:
A big shout out to fellow Aussie founder Will Davies from Car Next Door for adding this 'reco' on Recomazing! Will has raised millions in funding and grown a very enviable business so when I saw his reco to this free PDF I jumped straight on it. It’s a goldmine of knowledge that every founder should read.
Here's some additional tools I recommend for getting in contact with investors...
Before you start identifying which investors are right for you, you'll need a place to store all the info. Put down that excel sheet and download Streak. Streak is a FREE CRM tool that lives right within your Gmail account. The templates are perfect for keeping track of your investor details and comms. Thanks to Ruben from Dropbox for the reco!
LinkedIn is the ultimate tool for professional stalking. Find someone that knows your lead and get an intro. If you don’t know them stalk them. Look at what events they are going to, go to the next one. Comment on their posts and build your online reputation. Make sure you get your profile looking schmick before you outreach. Thanks to Fiona at Heads over Heels for the reco!
A lot of the top investors regularly speak at meet ups and seminars so it really isn't hard to introduce yourself. Download meetups and type in 'startups' - there's a stack of events to attend. Remember, an investor's job is to find startups worth investing in so don't feel bad about sharing your elevator pitch. Thanks to Tim from Atlassian for the reco!
I met my first investor by bailing him up after he spoke on an angel investment panel at a Meetup seminar. He has been our fairy god father ever since (Hi David!)…so get out there to some meetups and hustle.
What should I say when first reaching out?
I always found it helpful to have 3 key items sorted before reaching out to investors:
- Your one sentence pitch.
- Your elevator pitch.
- Your pitch presentation.
1. Your one sentence pitch
This is your ‘soundbite’ that should immediately convey the essence of your startup and commonly (but not necessarily) references a well known business model (eg Recomazing is the 'Trip Advisor' for the best tools & services to run a business.)
I actually hate using this soundbite as I view Recomazing as so much more than a review site with a real sense of community, collaboration and curation...but that's not the point of the soundbite. I came to realise that the point of the one sentence soundbite is to give your investor an immediate grasp of your model (and the strenghs/weaknesses you may be incurring). It's an entry point to then talk about the rest.
The truth is a lot of startups just apply a well known model to a different industry. It's the reason you hear so many startups refer to themselves as the "Uber for XYZ". It keeps things simple.
To give you an idea of what I mean have a look at the below from our friends at Buzzfeed
2. Your elevator pitch
This needs to be a bit longer than your soundbyte and provides a bit more insight into your secret sauce eg.
Recomazing helps entrepreneurs discover the best tools and services to grow their business.
We believe in the 3 C's:
- Community: Our members help each other by contributing to the shared knowledge bank of trusted recommendations.
- Collaboration: We partner with leading business communities to foster greater collaboration between members (eg coworking spaces, accelerators, online networks etc).
- Curation: We source expertise from leading tech entrepreneurs who want to 'give back' and help our members grow (eg Atlassian, Dropbox, AirTasker etc).
3. Your pitch deck
Typically, investors will request your pitch be 10-12 slides with time for Q&A at the end. I always found there were similar questions at the end so I prepared those slides in advance and put them in the appendix in case they were asked.
Here's a little infographic to demonstrate the basics on what to include. After your first pitch you should get a sense of how to adapt it and where you need to potentially add more detail but this is a great base to start from.
Some people like putting the slide on the team earlier. If you have a strong team and not much traction, that’s probably a good idea.
As we discussed earlier, your most important slide is about traction, so if you have a lot of it feel free to add a separate slide. It’s the proof that you can execute and that you don’t just have a ‘good idea’.
Do I need an investor to sign an NDA before meeting them?
No. In fact just asking that question will tell them you haven’t done your homework on the topic.
Firstly, they see hundreds of pitches a year and can’t put themselves in danger of a potential conflict of interest. But most importantly, no matter how world changing you think your idea is, investors rarely invest in ideas. Remember, they invest in your ability to execute your idea.
Despite your initial inclinations, you should actually be sharing your idea with as many potential customers as possible to validate the problem you are solving, don’t keep it to yourself!
What questions will investors ask in my pitch?
This will depend on how awesome your pitch is but expect to address some of the 'risk factors' mentioned earlier.
Don't assume the investors know everything your industry. If you are solving a problem in an industry you've worked in for most of your life then you need to work out the crucial information to include (typically the detail around the painpoint of customers currently) and what to avoid.
As an example, my background is in marketing and in a pitch I was likening our business model to that of Facebook. The investor told me that we weren't like Facebook because we had account management teams whereas Facebook have 'zero account staff'. I politely let him know that this wasn't the case and that Facebook (and all major social networks) have account/sales teams dedicated to working with big brands and their agencies.
After that meeting I realised that I couldn't make an assumption about an investor's knowledge of my industry (no matter how obvious it seemed to be).
Read the signs.
If you are constantly getting asked questions to clarify your slides it's a sign your pitch isn't clear and needs updating. If you find you are getting asked more detailed questions than what is expected from your 10 slides, that's typically a good sign.
If you leave a pitch feeling like the investors just aren't understanding how awesome your idea is then try to avoid shifting blame to them, instead you need to ask yourself why they aren't getting it:
- Are your slides clear enough?
- Are you not encapsulating the vision well enough?
- Are you getting stuck in the detail instead of focusing on the core premise?
- Are you getting asked questions you aren't able to answer sufficiently?
Here's a great tool I wish I had before starting my raising process. It's a Pitchbot that asks you common questions from pitch meetings - give it a crack!
What questions should I ask investors?
Don't ever leave the meeting without getting as much value as you can. Make sure you ask your audience these questions:
- "What do you think my biggest barriers to success are?"
- "If I could do one thing to make you interested in investing in my startup what would it be?"
- "Can you please provide me with some feedback on where I can improve my pitch?"
Seek out criticism from your audience. The worst thing you can do is leave a meeting not being clear on why they weren't interested in investing. Make them voice it, then work hard to overcome the challenges they mentioned. When you do, reach back out to them and let them know!
What happens after I pitch to investors?
Keep them up to date on your traction. If you can send them a weekly to monthly email with real progress you'll likely pique their interest.
How does the equity split process work?
Here's an infographic I found really helpful when trying to wrap my heard around the investment process.
How do I value my startup?
I found this incredibly challenging as it is more of an art than a science for an early stage startup with little to no revenue. There is no simple formula.
Basically, one of two things is going to happen:
1. The investor sets the value
In some ways this makes everything a hell of a lot easier because at least you get an idea of where they think the starting point is. However, I always found it strange that every investor would push me to tell them what I thought the value was. Given they were the experts I initially expected that, after I pitched, they would tell me.
Even if they do ask you to tell them your proposed valuation first, I would recommend asking them at the end of the meeting whether they agree so you can start to get a sense of whether you are on the right track.
2. You set the value
There's no straight forward answer here but you should at least:
- Search other startups like you and see if you can find the value they raised at.
- Do your financial forecast and be clear on your potential five year return.
- Work backwards from the amount of funds you are asking for to work out what equity you are comfortable in giving away and what you think is fair for the investor. Remember to budget for keeping some equity for additional staff and any future capital raises. Don't be too greedy, as with the infographic above, it's better to own a smaller portion of a highly valuable company, rather than 100% of nothing.
- Remember the score card investors use to assess risk. The higher your score the higher the valuation you can afford to give yourself.
- Create competition between investors by talking to a few at the same time.
- Resist giving yourself an over inflated valuation. You don't want to an impossible target to reach when you are raising for your second round.
What does pre-money valuation and post-money valuation mean?
- Pre-money is simply the value of the company at the start of the investment round, before any additional funds have been added.
- Post-money is the value of the startup after the infusion of funds.
As an example: Pied Piper is valued at $500,000 pre-money and receives an additional $500,000 of funding during the round. So now the post-money valuation of Pied Piper is $1,000,000 ($500k +$500k).
What is a term sheet?
A term sheet is a bullet-point document outlining the material terms and conditions of the investment. After a term sheet has been "executed", it guides legal counsel in the preparation of a proposed "final agreement".
The reason for the term sheet is that you get the major items out of the way upfront before you go through the costly and time consuming process of getting a final contract drawn up.
You can view the open source seed financial docs released by Avcal here to get an idea of the terms you can expect to see in a term sheet. A number of major VC firms listed above have pledged to use these templates.
Update: Airtree released their 'plain english' version here
Our friends and valued partners at Muru-D (hey guys!) just implemented SAFE (Simple Agreement for Future Equity) docs after they were created by the world's leading accelerator, Y Combinator. It's a great move for our ecosystem. To see how the terms differ you can view the details of a SAFE doc here.
Should I be creating a term sheet or should I issue my investor with one?
If you are getting private invesment from individuals you should have a term sheet ready, otherwise your investor will most likely issue you with a term sheet. It will then be your job to negotiate the terms. Keep an eye on anything that deviates from the standard terms in the examples above. Don’t be afraid to ask questions, a good investor should be considerate to the fact you are new to this.
Here’s all the other tools I recommend for the cap raising process
Personally I love the Google Drive integrates into all my other apps but any cloud based storage will do. Create a simple and shared folder structure to house all your necessary docs. Thanks to Alexander at Paypal/Braintree for the reco!
Unsplash helps you to add free pics to your pitch decks to pretty them up, with no IP issues. Thanks to Anna from Spaceship for the reco!
Put those pretty pics to good work without any design skills using Canva. Your deck does not need a designer, we never paid anyone for our deck. Canva also have 'Canva for Work' now so you can create your presentation and source pics all within their platform. Thanks to Doug from Instaclustr for the reco!
Get insights from the Y Combinator Blog, the #1 accelerator in the world.
Follow your target investors and their companies to keep up with the landscape on Twitter. Thanks to Zach from Spark Bureau for the reco!
My experience with Monash Private Capital for our seed round was great. They truly believe in investing in people, where as a lot will say they do.
Our Innovation Fund is the VC fund that led our second round. I speak to a lot of founders who aren’t happy to recommend their investment team but I can gladly say that’s not the case with us. We love working with the OIF team, they’ve always helped in any way they can.
We needed to get our legals sorted and Allens Accelerate were patient with our questions and managing the process for us. Thanks to Fiona from Telstra Ventures for the reco!
RECOMAZING MEMBER BENEFIT
We love how helpful our fellow community members are, so I've cooked up a special treat for you. I’ve created a Google drive folder structure template and I've populated it with the docs I created to raise over $1m (including my financial forecast spreadsheets and additional research). To get access to it, just email me at email@example.com from the same email you used to join Recomazing. I'll then send it out to you.
I'd love to know whether you found this article helpful. Was there anything missing that you still want to know? Tell us what you need help with and we'll either write or source the expertise for you...