On May 21, 2020, venture capitalist and Hustle Fund GP Eric Bahn hosted a webinar on Raising Money in Today's World.
In this hour-long session, he explains...
- Different sources of funding
- What are angel investors and how to get in touch with them
- How to adjust your cold emails during this time of crisis
- What VCs are looking for when they make an investment
- Why VCs might wait for your valuation to drop before investing (and what to do about that)
Raising money can be scary. It feels like this sometimes:
Just because the world is going a little bit crazy doesn't mean that fundraising comes to a screeching halt.
In fact, raising money might be the most important thing you can do to keep your business afloat.
Fundraising today isn't the same as fundraising a few months ago. The world has changed since Covid-19, and our fundraising tactics must change with it.
Effect of Covid-19 on Investors
- Angels are worried about volatility; their available capital might have gotten smaller.
- Seed VCs are having a hard time fundraising. Smaller funds are more likely to downsize, due to reliance of the HNW (High Net Worth) or FO (Family Offices) market, which are seeing smaller available capital now
- The Falling Knife effect: Valuations are dropping in seed deals, and investors are holding back checks to call the bottom.
What You Can Do
Don’t fundraise. Cut your burn. Get to profitability. Create awesome going-concerns without financing.
Find non-dilutive sources of capital. PPP (Public-Private Partnership), grants, revenue-based financing
Raise money. This is the worst option. But sometimes unavoidable.
How to Raise Money
Prioritise angels over VCs.
- Angels write checks off their own checks. They are the sole decision maker, no committee or stakeholders to update regularly
Prepare for a brute-force strategy to accomplish early fundraises.
- In the past, you might have needed 100 pitches to get $100k. Now, you might need 200 pitches to get you $100k. It’ll be a bigger and slower strategy.
- When you’re pitching for introductions to more angels, don’t just send a blurb and say “can you help to share this with your friends?” Instead, send: “Hey, do you mind sending our materials to just one person in your network who would be a great fit?”
- One person is a lot easier to digest and act upon.
- The flywheel effect: Get your investor in, lock them down, and ask them to introduce you to 1 more person, maybe more than 1 for VCs. This can help you cycle up the investor list really quickly.
Raise via SAFEs and tranche your fundraise into bite-sized segments.
Raising via SAFEs on Y-Combinator:
- SAFEs is like an IOU for equity, stating out terms where the money that is being invested will be generated into equity when you do your first priced round.
- Download and sign the document on Y-Combinator's website, and get money wired from investors
Tranche your fundraise:
- Break the fundraise up into a few tranches so you can build momentum.
- Instead of raising a total of $900k at a go, break it into $300k at $2M valuation cap, then raising to $300k at $3M valuation cap, $300k at $5M valuation cap.
- It’s a good way to dollar-cost average your way into understanding how comfortable the market is in investing in your business.
- Tranches elongates fundraise, but be comfortable with that. It is one of the better ways to fundraise, especially in the early stages.
Read Alex Danco’s essay on antifragility
- Antifragility: different business models where in regular times they’re perceived as weak, but in moments of extreme economic or external shock, shine as really successful models for thriving during those periods and beyond.
Tip: If you can tie your business to an antifragile feature, it’s an important case to make. Let your investors know that they’re not throwing money into a business that will fail because of the crisis.
Prepare air-tight decks, blurbs (that can be easily forwarded), emails, and CRM. Be prepared to raise all money via Zoom.
- Have really good organisation, and get a system going. Do this system through spreadsheets rather than just having it in your head.
- Video calls are going to get increasingly common, especially with social distancing being a long term effect.
- Warm referrals are ideal, though there are awesome incubators without much network still.
- Flex traction if you can
- Address Covid-19 as a potential concern
- Name-dropping might be cheesy but it creates a sense of FOMO
- Give the investors an out while projecting confidence ("OK to find some time? Totally fine if not.")
- Share an additional doc for more context so they can have more background before deciding to speak with you
- Keep following up until you hear a no or yes!
*The content below is taken directly from a live event we hosted with Eric on May 21, 2020. We’ve paraphrased a lot of it to make it more readable for you.
Where can people find angel investors?
- Public databases; AngelList, Crunchbase, to get a sense of who’s investing in what
- NFX Signal to track angels and other VCs
- Other friends who have also raised money
Use the Flywheel effect - get them to introduce you to just one other person in their network!
Any recommendations on how entrepreneurs can get connected to the network?
Use Twitter! VCs and investors love Twitter. You don’t need to be too transactional and gamey.
Build up reputation first. Discuss topics and debate with thought leaders and investors in the space that you admire. Then reach out and say, “Hey, I want to set up some time for some intros, share with you what I’m doing and get some feedback.” and take it from there. Start slow in the beginning and build momentum.
Zoom coffee works too!
Another idea would be family - though that can be pretty nerve wracking, and sometimes a bad idea.
What are your thoughts on accelerators?
They're a great way to get network. Some accelerators have a specific niche, so you might want to look for those to get the most out of it.
Accelerator terms are pretty stark, with 60-70% equity on your business. It’s important to understand the value and desired outcome for what you would get in participating with an accelerator rather than jumping onto it.
How do you feel about outreach from team members that aren’t CEOs or Founders?
I don’t generally like that. It’s like sales. You’d rather speak with CEOs or Founders as they’re the decision makers.
Any CRM recommendations?
We use Pipedrive. Salesforce, Hubspot, and Airtable are great too.
Is it worthwhile to drop valuation to post knife drop level?
I’ll answer this in two perspectives.
As a VC: Yes! Drop that valuation, I'd want to get more ownership for less money.
As a founder: That could be the right strategy but if your business is defensible given its foundation, progress, momentum or traction, price yourself fairly. Don’t oversell for the short term.
It’s a long term game before you reach liquidity. If you trade off too quickly by overselling yourself on the cap table, you’re not leaving yourself with many options later on when you want to fundraise.
Think 10 years ahead: What kind of room do you need to have available so that you can achieve that kind of milestone?
Should we fundraise in tranches on a few valuations?
Yes you should. If you start low, isolate it to a relatively low tranche - for example, $100k at a $1-2M valuation. When you’ve fulfilled that and hopefully attracted strategic angels, raise the next tranche. This can be larger - like $250k at $3-5M valuation. It’s totally fine to raise the valuation cap.
How would you respond to an investor who isn’t happy with investing a lot more than an initial investor?
A good response would be: When the initial investor invested, there were a lot of risks, and change. By the time we raised, we needed to think about the progress & traction of our business, which did change month on month. There is also greater competition among investors who want to get in now. We strongly believe that we have fairly priced our valuation cap at that moment, given demands. You invested at the seed stage and we believe that the pipe has grown substantially.
Tip: Always fight for the most competitive valuation to reflect the state of the business.
If we decide to hold off raising money right now, can we introduce ourselves to VCs to build relationships?
For sure! Do make it clear that it’s for an introduction and not for fundraise though.
A fundraise strategy; take the meeting, but don’t hard sell. The call to action from the meeting would be a, “Hey, is it cool if I add you to my investor newsletter?”
Put together a newsletter that updates the progress of your business and share it every month. Drip information on your market understanding and the lens you have as a founder. It then becomes a passive monthly fundraising ping!
When you are raising money later on, you can let them know that you’re putting together an insider round after some great growth.
What are some creative ways founders bootstrapped before going into external funding?
I used to run an EdTech that did enterprise sales. I thought about fundraising, but the market wasn't good. We decided to ask for money upfront and give them an annual discount in exchange to help get our product going.
We ended up raising a lot of money before we launched the product. If you can find ways to raise upfront, it would make a lot of sense.
Otherwise, think about cutting costs. What can you cut and contract out?
How much equity should one expect to give up in pre-seed funding?
For all the money raised during the seed stage, do not sell more than 25% of your cap table. If you exceed that, you’re not leaving enough room for your later investors at Series A and beyond.
Watch the full webinar here.
About The Author
Chloe Tan is a Portfolio Associate Intern at Hustle Fund. Born and raised in Singapore, she got her Diploma in Media and Communications, which then led her to previous stints at a creative agency, Airbnb and YouTrip. She's awesome and here's her Twitter.