9 Tips on Fundraising or How to Make Investors Say, “I Love It, Please Take My Money”
Meet Stuart Ludlow, technical co-founder of RFP365, software platform that manages the entire request-for-proposal (RFP) lifecycle. Stuart knows a quite a bit about raising money for startups. And he's still smiling.
My business partner Dave Hulsen, and I dreaded raising funding. Everyone we knew told us horror stories. We heard stories about months of grueling work, excessive travel and endless frustration. But we knew, eventually, we needed to raise money to get where we needed.
RFP365 just closed a one million dollar seed round. Here are a few lessons learned.
#1. Don’t let “No” be a dead end.
Through a friend's connection, I met with a local VC who was NOT interested in investing in us, but liked us and was very receptive to our aspirations. So I pushed him to introduce me to any individual investors of their fund who could potentially be interested.
It paid off.
That VC, the one who wouldn’t invest, introduced me to the man who would become our lead investor.
#2. Debt financing: regional investors just aren’t ready.
At first, we were only interested in debt financing through a convertible note. However, the legal advice we received steered us toward a pure equity deal. We learned Kansas City and regional investors are NOT receptive to debt financing.
In that way, the Kansas City investor community is years behind the curve, compared with the coasts.
#3. Success is in the details.
We initially lacked several metrics I knew we would be asked by investors. So, we decided to aggregate every metric possible. My goal was to know, collect and study as much about our company as we could.
From our customer acquisition cost to our estimated EBITDA and industry margins, we mapped out everything an investor might want to see.
We took a typical due diligence list (given to us by Rick Vaughn at ECJC
) and made sure we had every box checked. We gathered every legal document created, had our contractors sign off on IP waivers, implemented an accounting system, got proper insurance and set up on Salesforce.
Our lead investor never asked to see every piece of this wide breadth of preparation. But the time spent, the systems put in place and knowledge gained from moving from Excel to actual legitimate processes were invaluable.
The process of raising money made us a better company.
#4. “Pitching” to investors is over-rated.
At first, if you simply had money, I wanted to talk to you. Then, I really only wanted to meet with people who would sit with me and talk. I don't mean talk for 10 minutes. I mean talk over lunch or a beer or half an hour at their office. I was bad at giving a 5 minute presentation and answering questions.
The traditional pitch presentation sucks and never favors the entrepreneur.
#5. Reflect. Don’t just respond.
Investors will ask you how much 'other' money you have raised. Many investors need you to have some other amount of money raised, even a small amount like $75K, to get you to their next round of discussion. After hearing this several times, and not having ‘other’ money, we decided to have a happy hour at our office with 20 small investors.
That night, we ended the evening with $100K pledged from interested investors. This drastically changed future conversations, and we should have been done it much earlier.
(My advice for a seed round: raise more money than you think you need, and don't get too caught up in the valuation).
The experience taught us to take time to step out of the day to day business thinking. To reflect and evaluate, and to paint the grand vision of the company.
#6 Location isn’t everything.
People will tell you, you can’t raise money in Kansas City.
If you only have an idea and a basic prototype, forget raising money in KC. Traction is important.
Local institutional investors are region agnostic. They look all over the world for opportunities, and don't care where they are located.
Angel networks are regional focused, but only invest between $50K and $250K.
Individual investors tend to stay close to home.
Typically, if you are looking for $1M, you need to gather a couple small local investors, a medium regional angel network and possibly an institutional investor outside of town.
We got lucky. We got a local individual lead investor, a local institutional investor and several smaller local individuals.
#7 Divide & Conquer.
If you have a co-founder, one person should take the lead on fundraising, while the other keeps the business running. While I was talking to investors, Dave was behind the scenes, working hard to tighten up the company, and keep the engine running.
#8 Know it’s going to be hard. Really hard.
Entrepreneurship isn’t for the faint of heart, and neither is fundraising. Prepare yourself, and your loved ones, for the fact that the road is going to get tougher, and you are about to go through severe emotional swings.
#9 Timing is important.
When talking to venture capitalists, several things have to fall in place in order for a deal to be developed. The one that may be overlooked the most frequently is timing.
You will often hear a VC say, "We have an X million dollar fund and are looking at companies in Y phase, often in the Z space."
A percent of a VC fund will be held back for future funding of their portfolio investments. While VCs go through the process of raising money for another round, they will definitely be courting startups to gauge future interest, even if they are unable to invest at that moment.
This exact scenario happened to us. We were in talks with a VC firm who we knew well. They liked us, our product, the industry and the deal. However, they couldn't close their next fund in time and therefore we couldn't close a deal. All the pieces fit, except for timing. We didn't learn about the timing until very late and had we know, we could have saved a lot of time.
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