How To Get Fund Smart
Concluding our two-part series on all about funding. Vaibhav Domkundwar, CEO and founder, Better Capital, shares his experience and insights on funding start-ups.
What are your customers saying?
What are your customers and users saying? I’m sorry, but no one trusts your Play Store reviews any more. A few bad apples have created a deep distrust in the reviews posted for your app on Play Store. That’s B2C. For B2B, G2.com still works really well, and it’s a great place for B2B founders to capture customer references and testimonials. Fairly early into fundraising, investors will talk to your customers and users directly to understand why they are using your product, do they like it, will they pay for it, and will they care if the product goes away. That last part is the key-est. You want to create enough customer references and testimonials and a ready-to-take-investor-reference-calls list of customers in your data room. Literally, do not go into a fundraising process without nailing this down. It’s one of the best indicators of why your company needs to exist.
What’s your system for VC intros?
What’s your system for VC intros? Cold emails work – but like 0.01% of the time. For the rest 99.99%, you need a plan, a system. For a successful fundraising process, you want to get the warmest introductions to VCs as you can – it implicitly endorses you and your company and helps you start on a strong footing. If you went to the pedigree colleges, then you’d have friends or alums at most firms, and that is a good start. If you were smart to create an advisory board early on, then those advisors have social capital that can help you get really strong intros. If you are well networked in the founder ecosystem (one of our companies has nailed this), then those who are in love with you and your vision will go out of the way to make VC intros. Those work really well. If you are none-of-the-above, then you want to socialize your vision and your keen view of it by *writing* about it so well that you gain respect and get inbounds from VCs as Finshots founders do, Locale.ai founders do and Tanutejas did with me. I followed his updates early in 2018 and reached out on a Saturday afternoon. Don’t think of this ‘system for VC intros’ when you are in need of the intro. Think early and build it really well.
Meet a few VCs.
Then meet everyone. There is no silver bullet for a successful fundraising process. But there are things you can do to make it stronger and more effective. One way to ensure that you don’t randomly go and meet everyone you can and become the company that everyone is talking to and no one is moving on. While you can still never control the NOs and YESes – one process that works well is to start by meeting two to four VCs that are stage-matched and with warm intros to let the rubber hit the road — so, assuming you’ve prepped well, you will get a sense of how you are doing in an actual meeting. You will also get a lot of feedback and objections that you can work on and add to your memo. Once you feel there are no major red flags that you didn’t think about, and you’ve gathered the “we are ready enough” feedback, then you can go ahead and meet everyone that you’d like to meet. This staged approach works wonders and puts you in greater control.
How to think about funding?
This is strictly for Pre-seed, Seed, and Series A only. I’ve seen founders at the same stage seeking widely different amounts of capital, and I’ve always wondered why – so I ask all of them “how did you arrive at this amount” and the answers are educating. An obvious one is “here’s the amount of money we need to do this and reach there”. That’s fair, but the reality rarely turns out that way – either you scale numbers quickly, in which case you need to use up the funds faster and raise faster, OR your PMF takes longer, and you replan your runway. So, you need a better way to explain why you are raising a certain amount and why you deserve the valuation you are requested. And in my experience, it is usually a combination of your big idea + team + state of PMF + work done so far + segment dynamics & tailwinds + competition + more. So, you need to have a framework for your ask – amount as well as valuation – and stick to it after you validate it with your close connects. Set your price yourself. And explain the why.
The Dilemma – $500K *vs* $2M
Should I raise a $500K pre-seed round from pre-seed funds and angels? Or should I raise a $2M seed round from larger venture funds? A common question across multiple investments in the last 6 months. I prefer to believe that there is no one right answer, and we’ve invested in both configurations with equal comfort. A smaller $500K round may allow founders to build at their pace, find early PMF, prove hypotheses and then choose a larger venture fund that can invest (potentially a larger check) based on more data than an optionality check. A $2M round allows founders to do all of the above too, but some wonder if the pressure is higher to move faster if an optionality check results in signalling if a larger fund doesn’t participate in the next round. But I’ve seen founders navigate all of these, too. And on optionality and signalling, one VC friend said it best – “If we invest early and then decide not to follow-on, then the company has bigger problems to address than signalling”. It may sound brutal, but it is true. So, both round constructs are just fine and founders can work around any small downsides of either and construct fairly easily. If you are in this lucky situation, I hope this helps.