Fundraising for early stage entrepreneurs 101
Wednesday November 19, 2014,
6 min Read
About a year ago, we at SocialCops set out to raise our first seed round. We were three months into working on SocialCops full time, had got our first revenue deals; had some clarity on the direction we’d like the company to take and wanted to convert our pilot to a business.
We were novices – 21 year olds from a university in Singapore -- trying to figure out a way to use data to solve real life problems in India. Honestly, while I was working in Goldman Sachs on trading derivatives, I had no idea how to raise capital for a startup! Yes, you heard right – consulting & investment banking is not going to help you learn how to startup. The only thing that will teach you how to startup is working at a startup or building a startup!
In May 2014, we raised a round of funding from 500 Startups, Rajan Anandan (MD, Google India) and Manoj Menon (MD, Frost & Sullivan APAC). During the process, my Co-founder, Varun and I had the fortune of being helped along by some wonderful people who doubled up as advisors. We also owe a lot of what we know to Paul Graham, Techcrunch and Startup School videos.
Through this post, I’m just going to try to lay out some of the resources that we used to help us through the process!
PART 1: Getting the Basics in Place
- Build a “fundable” business
I’ve received mails from people asking me to connect them to VCs to fund their “ideas.” Honestly, unless you’re Steve Jobs or Jack Dorsey – chances are that VCs are not going to fund your business. So what you should do is go out there and build a fundable business.
A fundable business probably has a few key components:
- A stable full-time, diverse team (Even if it’s two people and a drone)
- A product (Even if it’s scratchy & needs perfection)
- A compelling problem statement (You’re here to solve a problem; you’re not here to market a solution!)
- Customers or Users (It is possible to sell people your vision, and crack deals with photoshop mockups. Try it. If you haven’t read ‘The Lean Startup’, stop reading this article and read it now)
- Growth & Pipeline (What are the next steps? Why are you raising money? To build a team? What will the team be doing? Do you have a plan? Your plan will change – but mostly people love knowing that you have a plan in the first place)
- Find some successful entrepreneurs who can help you figure your way around
Try reaching out to entrepreneurs in your circle – an entrepreneur who has raised one round of funding would be the most helpful person you can find in the journey. Friend’s brothers, seniors from college, mentors at startup weekends – there are always ways to find help. Don’t ask them for anything specific – just have people around whom you can use as your bounce pad!
And, honestly, find the email address of the founders of your favorite startup – and drop them a well written email. Or tweet to them! You’d be surprised to know how many of them respond!
3. Knowing the Jargon: Termsheets, Valuations, Priced Rounds & Convertible Notes
Are you worried by people throwing around words like Valuation & Convertibles? Don’t worry – if you were a first-time entrepreneur who knew exactly what Class A & Class B Shares were and could tell me how a convertible works exactly – I’d be worried.
These are the books and resources you should definitely read before you go out to raise funds:
A) Paul Graham’s Essays
Honestly, if you’ve not been reading Paul Graham’s essays yet – it might be time to start. If you’re planning to get into a fundraise, these are the Paul Graham’s essays you should definitely read:
- The New Fundraising Landscape
- How to Raise Money
- A Fundraising Survival Guide
- High Resolution Fundraising
B) Convertibles [Yes, you should definitely know what these are]
The newest form of financing in the Valley is Convertible Notes. Converts are incredibly founder friendly and help close rounds quickly by putting off the valuation discussion to your Series A round when more traditional valuation theories can be applied. Thus, it creates a win-win for investors as well as founders.
When we started fundraising in India, we were told that Convertible Notes would never work in India as the best investors only invest in priced rounds. Not true. We raised our seed round at SocialCops via a convertible note with a Maximum Valuation Cap & a reasonable discount and we were not asked any questions for structuring it as a note!
You should read the following articles to understand most of what you need to know about Convertibles:
- Everything You Ever Wanted To Know About Convertible Note Seed Financings (But Were Afraid To Ask)
- Convertible Note Seed Financings: Econ 101 for Founders
And most importantly, if you’re a reader – you should get your hands on this book by Brad Feld which is the “Bible” of fundraising for entrepreneurs. This should teach you all you need to know about fundraising.
Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist
- Building your Case
If you’ve already got (1), (2) & (3) in place, probably (4) is going to be the simplest to get in place. These are the few things that you’re probably going to need during a laborious fundraising process:
A) Short blurb email
Write out a quick mail template explaining what you do. Ideally this should contain the following:
-One-two lines explaining what you do
-A line including your metrics (Clients or Users; Total User Base, Month on Month Growth)
-Link to your website
- If you have an app/product – link to the beta or the product
-Press (Try getting some quality press prior to your fundraise – always helps!)
- How much money you’re trying to raise (and if you already have commitments for some of these)
-A link to a longer one-pager to find out more information about the business
Check this out to figure out your best pitch: http://venturehacks.com/articles/elevator-pitch
B) Pitch Slides
More often than not, I’ve seen people presenting slides with bullet points & headings. ‘Team’, ‘Vision’, ‘Product’
Come on! You’re building a startup that’s going to change the world – and defying all the norms that exist! Who said you need to stick to a format when you build your pitch deck? Check out the pitch decks of some kickass companies here: Pitchenvy & Best Pitch Decks
This is by no means the most exhaustive or comprehensive list of resources and neither am I a pro at fundraising. These are just some pointers that we picked up along the way which worked for us. But every company is different and every team has a unique story to tell. Read everything you can and if you’ve got all the above steps sorted out – you’re good to go to start out on your fundraising process!
Stay tuned for my next posts on ‘Part II: How to Approach Investors’ & ‘Part III: From Investor Meeting to Investment’.