Startup Fundraising - Book Summary
Startup Fundraising (Alejandro Cremades)
Summary, Notes & Highlights
This book increased my confidence to approach investors. Finding the perfect match and avoid common fundraising mistakes
A practical investing guide for creators, freelancers, entrepreneurs or anyone who needs $1,000 or $100,000,000 for their passion
1. How to find the perfect Investor for you?
Know who you do (and don’t) want as an investor
Know how to screen an investor
Know how to converse with investors effectively
you really want an investor that you can get along with. You want him or her to be on point when it comes to business, but you'll enjoy the relationship a lot more if the investor is someone you could invite to a ballgame, to a new restaurant, to go running, or to simply hang out with over a craft beer on a Friday evening.
Get to know one another on a personal level. Ask the investor about his or her family, find out about his or her favorite hobbies, and so on.
don't be afraid to say that you don't know. Tell the investor you will do the necessary research and you will follow-up
3 Factors to look for
Domain Experts
Don't just settle for money. Look at what else an investor can add. could be business-related in general, industry-specific expertise, or simply funding and the financial aspects of your venture.
Connected
Great connections are some of the best value that you can ask for as a startup.If the right celebrity is out there touting, advertising, and recommending your product to the right demographic, business can explode.
Financial Strength
When was the last time the prospective investor funded something? How much does the investor have left? How are the investor's other investments performing? How strong is the investor financially?
If the investor isn't doing well financially, that person is going to be under a lot of stress, and that pressure will flow down to you.
when you see a venture capital firm that has not made new investments or followed up on investments in a period of six months, you know they are running out of capital on their fund and they are having troubles in securing the next fund.
3 Factors to avoid
Greed
Lack of Scruples people who have no values. Savvy investors with values should be looking for good qualities in founders, too. A bad decision can follow you forever.
Takeover Don’t be Steve Jobs and get kicked out of your own company
19 Answers every Investors wants and expects
A well-thought-out and researched business idea and plan
Organization
Integrity and character
Answers to obvious questions
That you know what you don't know and don't have, but you have a plan to get it
Market potential
Plans for repayment if seeking a loan
Plans for additional rounds of funding and/or exits
That you have put your heart into the project
That you have and will keep skin in the game
Feedback from others
Proof of demand
That they can get along with you
That you are coachable
Consideration of the safety of their capital and time
A good match
Passion for your product or service
Passion for connecting with and working with them
An opportunity that will take them closer to their goals
2. Investor: Managing Expectations & Things to avoid
Without adequate communication between founders, managers, and investors, there can be no clear way of gauging how well a company is proceeding
State expectations
set of your own expectations. What do you think is achievable within the confines of the investment round you are currently negotiating within? How does this relate to the “big picture” of your business? Most important, what do you think are reasonable goals and time frames that should be given in return for an agreed-upon amount of investment capital?
Listen to investors
investors may have valuable experience to impart in terms of business acumen, start-up experience, or marketplace knowledge.
Even if your investor is not experienced, they may still have specific ideas about what they should expect within a set timeframe.
need to clearly outline what they believe are acceptable requests in return for their investment—that is, product launch, market research, prototype development, advertising, and so forth.
Updating Your Investors
You have to communicate with your investors throughout the negotiation period, but also after securing investment. This ensures that misunderstandings will be avoided.
Avoiding Common Fundraising Mistakes
Failing to Connect
Do not underestimate the value of connections. invest in making connections and building relationships. ability to connect carries over to circulating your investment opportunity, as well as following up.
fundraising process, it is ultimately not only about the capital: It comes down to value. making initial contact or following up, it will be those who personalize their messages who will be successful.
pitching the right opportunity to the right investor and in the right language. Venture capital firms, for example, place a lot of weight on the introduction.
Depending on who is introducing you, they will take your pitch more or less seriously. Normally, introduction from a founder who has given an exit.
people do appreciate entrepreneurs who will make the effort to hunt them down and follow up.
Clarity and Doing What You Say
Mistakes. Avoid this
Not having a clear pitch
Lack of authenticity
Lying
Changing your story
Overpromising
Overselling
Name dropping without having much of a relationship with the individuals
Spamming
White lies, embellishing the truth, hiding the facts, and grossly overexaggerating are all types of lying. They will destroy your reputation, credibility, and opportunity to raise funds. Be realistic.
Self-Sabotage in the Deal-Making Process
Don't cut yourself short and run out of money, but don't take too long shopping around or sealing the deal with interested investors.
Investors are like sheep. They go where everyone else is going—they see it as validation from the market.
average time to raise a seed series as of mid-2015 was 12.5 weeks.Series A rounds, TechCrunch reported an average timeline of 9.6 weeks,
You should know what terms you can and can't work with in advance. Don't get greedy and try to squeeze out more after you've made an agreement.
3. Red flags For startups
Avoid these when looking for Investors
Time wasters
Lack of experience
Asking for far too much
Offering too little
Too pushy
4. Red Flags for Investors
Too Many Members of the Founding Team too much equity in the hands of too many. early shareholders can be problematic.
Overhead Is Too High
Buzzwords Forget the jargon when speaking with investors. Deliver substance.
Founders Have Other Jobs
Founders Have No Other Source of Income Don't expect investors to be throwing millions on the table for you to go off and buy a bigger house, get a new car, party half the week away, and generally upgrade your lifestyle. This is money to use to carefully and prudently grow the business.
Weak Marketing Plans
Blind Optimism positive, but acknowledge the real challenges that exist too.
Claims of Having No Competition
No Technical Founders that means there will likely be significant cost in paying for technical development and maintenance
Asking for Too Much or Too Little Capital Don't be too shy. Don't forget that you can raise additional capital in further rounds
Poor Use of Previous Funds you've got to have something to show for it
Entrepreneurs Have No Financial Skin in the Game looking for investors who will not just bring money, but will also put in some work. You want them to bring some effort, their contacts, their expertise, and a lot of money to the deal. From the other side of the table, it makes investors feel a lot better if founders are putting some money in, too.
Lack of Momentum But make sure you are tracking and reporting traction and momentum
5. Questions You Should aks Investors
How many deals have they funded recently?
When was the last time they funded an enterprise?
What is their close rate?
What additional expertise can this investor bring to the table?
Who can this investor introduce and connect me to?
How solvent and flush is this investor?
Is this investor looking to create shared success, or just take all they can?
Do we share the same values and level of integrity?
Are they asking for a large stock option pool? (This could suggest intentions to replace you.)
6. 21 Investor Questions - Prepare Your Answers
Don't expect only these questions. Be prepared not only to answer the questions, but to master answering them. Creating a write-up can be a smart decision.
Most investors will ask you the same questions. I would encourage you to maintain a list of frequently asked questions and have your responses in a form you can quickly access. This way you will be prepared for future meetings and calls.
What is the difference between you and your primary competitors?
When will you break even?
How much is revenue forecast to be this year, and next year?
How will you use the money?
What risk factors does your business face?
What round of funding is this for your startup?
What terms are you seeking?
Who is the management team, and what is their experience?
What is your burn rate?
Why did you start it?
How long have you been working on this startup?
How does the business model work?
Do you have wider expansion plans; where and when?
Do you hold any patents or proprietary technology?
What makes you think you can excel in this space?
Who are your other investors?
How are existing investors involved?
Are existing investors involved in this funding round?
What's the exit strategy?
When do you expect an exit?
How much money has been raised so far?
7. How to become The Pitch Master
even the best business plans can be virtually useless when it comes to raising capital.business plan may play a part in up to 10 percent of the funding process
Often, spending too much time creating a “perfect” business plan costs entrepreneurs and their ventures the first mover advantage, and lots of precious time that could have been spent making sales. marketing tool or pitching tool that will actually help you raise money.
Get Your Message Straight
make sure your message is clear as a bell, and you need to ensure that you have a unified team capable of communicating it
your spoken words, your slogans, your taglines, your backstory, and your branding—they all matter. marketing to attract customers, but also in getting funded,
💡 crystal-clear picture of exactly who it is you want to connect with, what you want to portray to them. Consistent messaging pulls investors
Example
you may be a real estate technology company. Odds are that you will want to focus on identifying mostly as either a real estate company that happens to have a great tech edge, or a tech company that has an edge in the real estate world. You need to choose and stick with one
Google is not a search engine. This has been made even clearer with the move to become Alphabet. If Google (or Alphabet) were just a search engine, it would be a monopoly, ripped apart by regulators in days.
Google search engine is just a tiny project that the company happens to engage in.
8. Effective Pitch Strategy
The Effective Elevator Pitch
An elevator pitch is simply a quick introduction to your business
It sparks interest and response
It's clear
It's authoritative
It is about them (your customers), not you
6 Tips for Mastering Elevator Pitch
Role-play your pitch with team members, friends, and family
Record yourself and tweak it
Go listen to other pitches and note what works or doesn't work
Check out elevator pitch competitions (some offer up to $10,000 prizes)
Document it in your mobile phone, so you won't be at a loss for words
Practice, practice, practice until it becomes natural
Make sure the whole team is armed with it. This is your key to unlock the gates to capital
can be used in person in actual elevators, online, over the phone, by text message, and in email
Example
“I run a crowdfunding portal that gives investors early access to the hottest, prescreened tech startups, and the ability to invest in them in 10 minutes or less from any Wi-Fi connected device, anywhere in the world.”
Pitch deck
One is the version you will send out with all pertinent information, including everything you need to have people understand your story and where you are heading. The second version of the pitch deck will be used during presentations and contain illustrative graphics that will add to your presentation.
Three minutes, 44 seconds is the average time a venture capitalist spends looking at a pitch deck, according to TechCrunch. 1 A DocuSend and Harvard Business professor study shows that the average deck is 19 pages long.
no more than 10 slides, not using anything smaller than a 30-point font, and keeping presentation time to 20 minutes.
putting a range between $3 million and $5 million.
if you place $5 million in your pitch deck and that firm has a mandate to not invest over $3 million, you will most likely have them pass. By including the range from $3 million to $5 million on the raise amount you are also including such firms.
Harvard Business study proclaims there is no correlation between getting funded and the volume of decks sent out. Rather, it is a matter of getting your pitch deck into the right investors' hands.
10 things every Pitch Deck needs
Company purpose
Problem
Solution
Why now
Market size
Product
Team
Business model
Competition
Financials
Pitch Deck Design
Don't be afraid to be different, but don't make yourself look outdated, either. amazing visuals are great for building emotion—just don't sacrifice clarity. ensure that it is easy for investors to take action.
running a direct link should take investors right to a button where they can invest on the spot. If giving a live presentation, you might even go as far as layering the slides with augmented reality so they can scan the screen and get right to that page from their mobile devices.
social handles and URLs so that they can instantly follow you, and share you and your presentation with other investors.
9. How to attract Media, Journalist, Investors
Partnerships and Business Development Deals
Month over Month growth. VC’s want to see you got the grit and there is demand for your product or service
Product Lunches and Events
Social Media /Blogging - build a online presence that you own and control. long term marketing benefits
10. 7 Hacks for Effective Journalist Outreach
Focus on inbound-outbound warm blogger outreach
Try HARO (help a reporter out; www.helpareporter.com)
Use Publiseek
Tap local press connections
Choose a press release service that includes blasts to journalists
Follow reporters on Twitter and engage with their tweets so they start recognizing who you are
Create own Content. Become the go-to resource in your industry or niche. By Blogging, posting sharable content. Consider publishing new infographics, then emailing key bloggers to encourage them to share them.
11. Term Sheets, terms of investment
The term sheet is the document that lays out the terms of the investment and collateral. It details what you as the startup are giving, and what you are getting in return. Then it lays out the guidelines of how both parties will act to protect the investment.
Common items in a term sheet include:
Who is issuing the note or stock
Type of collateral being offered
The valuation
Amount being offered
Shares and price
What happens on liquidation or IPO
Voting rights
Board seats
Conversion options
Antidilution provisions
Investors rights to information
Founders obligations
Who will pay legal expenses
Nondisclosure requirements
Rights to future investment
Signatures
Smart strategies
Think about what is most important in advance. What do you want the outcome to be? Do you really want this investor on board, or are you just happy raising money from anyone, provided it is on your terms? How much does timing and speed matter?
💡 Don’t dilution more than 20% per round of financing. at a seed stage and you feel it is okay to give up a good amount of equity. equity will not come back to you
Red Flag Terms to Watch Out For
Harsh debt financing and convertible note terms that could bankrupt you
Asking for too large a controlling stake, which may suggest you'll be replaced
Terms that can limit further fundraising
Investors that simply want a short and hot exit, and don't have realistic expectations of timelines
Investors may aim to exhaust a founder who's eager to wrap things Hang in there and be patient
💡 be prepared to walk away if you see that the investor is overtly using tactics to wear you down during the process
Convertible notes
A simple only 2 document debt instrument that also gives the investor stock options. The flexibility of convertible notes offers security from the downside, and more potential upside if the startup performs as expected.
investment, and the promissory note explaining the conversion and the amount that the investor is investing.
the fastest and cheapest way to fundraise. While equity rounds can be north of $20,000, convertible notes should not cost you more than $7,000
maturity date
make sure that the maturity date is a date that you feel confident about.
date by which you agree to repay unless you have not done a qualified round of financing in which the convertible notes are converted into equity.
3 main ingredients
interest that the entrepreneur is giving to the investor. interest to be accrued on a yearly basis on the investment amount that the investor puts into the company. The interest will continue to be applied until the company does another equity round, when the debt will convert into equity with the amount plus the interest received.
discount on the valuation. This means that if your next qualified round is at X amount of premoney valuation, the investor will be converting his or her debt at a discount from the valuation that has been established in the next round by the lead investor.
valuation cap. regardless of the amount that is established on the valuation in the next round, the investor will never convert north of whatever valuation cap is agreed. This is a safety measure in the event that the valuation goes through the roof. It is a good way to protect your early investors and to reward them for taking the risk of investing in you at a very early stage.
🎯 The last thing you want to happen is to be in default and to have to shut down your business because investors are demanding their money back.
Board Seats
The founders and investors may have ownership, but the board of directors really has control.
sizable amount of money into a young company, you'd like to have a say in major decisions,
You don't want board meetings to become a nightmare. You want to be sure the board you have isn't a turnoff to future investors. So fill the seats on your board with care.
12. What Venture Capital people do I need to know about?
Junior analysts
Most junior people want to be analysts. These people are either MBA students in an internship or people that just graduated from school.
The main role of analysts is to go to conferences and to scout deals that might be within the investment strategy of the fund that the VC
Associate
An associate could be either junior or senior. Associates tend to be people with a financial background and with powerful skills in building relationships.
Associates do not make decisions in a firm but they can definitely warm up an introduction with individuals involved in the decision making.
Principals
They are senior people who can make decisions when it comes to investments but they do not have full power in the execution of the overall strategy of the firm
Partners
most senior people within a VC firm are above principals, and are called partners. Partners could be general partners or managing partners
has only a say in investment decisions or also has a voice in operational decision making.
accountable for raising capital for the funds with which the firm will be investing.
venture partners are not involved in the day-to-day operations or investment decisions of the firm.
Entrepreneur in Residence (EIR).
relationship with the VC and perhaps have given the VC an exit,
Limited Partners (LPs)
LPs are the institutional or individual investors who have invested capital in the funds
13. Investment Rounds explained
Friends and Family
get your startup off the ground, and that is done by asking friends and family to invest in your business idea.
Micro Seed Round
however, is that it usually involves investment from angel investors, seed venture capitalists, accelerators, incubators or crowdfunding networks across a limited time frame, rather than investment from family and friends.
The purpose of this round is to provide just enough capital to allow startup founders to work full time on their project over a limited period, usually around three months.
Seed Round
“seed” your startup so that it can begin to grow.
any investment in a startup prior to a Series A round can actually be considered a seed round.
Series A Round
This is often the first major form of investment a startup will secure. As the name implies, this investment round is often followed by others, and so, just like preliminary rounds, it is not usually considered as the last investment round a startup will require,
Series B, C, D Investment Rounds
Strictly speaking, other than an IPO, most subsequent forms of investment will be alphabetized. Each series will have a specific goal, but that will be defined by you, the startup founder, and existing investors based on what your company needs.
Series B investment, for example, is usually entered into once your product/service is launched and more capital is needed to expand profits and market share.
14. Where do I get Money? Source of Capital
Bootstrapping
Credit Cards
Business Loan
Friends and Family
Crowdfunding
Angle groups
Angel investors are increasingly combining to form and join angel groups.
Family Offices
Venture capital
Venture debt
Venture debt is effectively borrowing to raise working capital and growth capital. This is a valuable source of funding that doesn't mean giving up more ownership or diluting equity.
Angel Investor & Super Angels
Angel investments are high risk, which is why this strategy normally doesn't represent over 10 percent of the investment portfolio of any given individual.
What angel investors look for is a great team with a good market that could potentially return 10 times their initial investment in a period of five years. The exits, or liquidity events, are for the most part via an initial public offering or an acquisition.
15. Doing Your Homework — Due Diligence Checklist
💡 Due Diligence means doing your homework and acquisitions of required knowledge before entering into any agreement or contract with another compan
The time to polish your due diligence package is now, not after you begin generating interest.
Due diligence process is really all about clarity in these four areas
People
The product
Market
The deal
Startup Due Diligence Checklist
Key team member bios and resumes
Market size
SWOT analysis
Patents
Technology used
Financial statements (three years)
Information on who is providing accounting services
Valuation
Capitalization table
Exit strategy
Company articles of incorporation and certificate of good standing
Organization charts
List of places the company does business in
Credit reports
Background checks
Inventory and assets list
Financial forecasts
Cash flow projections
Details of current funding, financing, leases, credit, and investors
Bank statements
Trademarks and copyrights
Employee and contractor agreements
Insurance documents
License and permit documentation
Tax returns and receipts
Marketing plan
Brand style guide
List of professional and legal consultants used
Offering documents