Capital

SHOULD I HAVE AN EXIT SLIDE IN MY PITCH DECK?

Exit slides in pitch decks are fraught with danger. Twice this week, I was asked about whether I include one in my pitch deck. 

The answer is ‘No’. 

The punchline of this post is that founders don’t know how or if they will exit their venture. That’s because there are too many known and unknown variables that could result in success or implosion. 

Seasoned investors know that. 

So do serial entrepreneurs. 

But at some point in the last decade, it became a thing to include an exit slide in pitch decks. 

You don’t know, and you just wasted time

Exit slides usually offer two or three options that the founders hope will result in a liquidity event. They are included in pitch decks under the misguided idea that they communicate a full understanding of a business model or lifecycle to investors.

The reality is that the simple inclusion of this slide speaks volumes about the founder. And not in a good way. 

While it might not be a founders intent, an exit slide can suggest one of three things.

First, you appear naive. 

There are many milestones to achieve before an exit can be contemplated. The suggestion that you’re thinking about exit options also suggests that you are not applying the right effort to higher priorities like distribution, product, hiring and cash flow. 

I also think about it this way; if one slide of a 10-slide pitch deck (or 30 seconds of a five-minute pitch) is dedicated to an exit slide, you’ve just diluted the narrative and make ‘the ask’ less engaging. 

Second, you look like a mercenary.

One of the first things investors seek to understand about founders is whether they are ‘missionary’ or ‘mercenary’. 

Missionary founders, as the name suggests, are those who are mission-focused, obsessed about creating value by serving their users and customers, and creating a paradigm shift. Missionary founders are there for the long haul and often have the scars to prove it. 

And in a nutshell, mercenary founders have a more singular focus on making money. The behaviours that mercenary founders deploy to achieve their intent often end up damaging the company.

Third, you are listening to the wrong advice.

As I’ve written about before, startup ecosystems are full of well-intentioned advice that lacks lived experience. If advisors are strongly suggesting to include an exit slide, check how this has helped them in the past. As an entrepreneur. 

Listen to those with lived experience and if there advise is contrary to mine, I’d love to hear from them!

Never waste the first impression 

It’s possible that pitch recipients won’t make the connection between an exit slide and a founder being naive or a mercenary. 

But why take the chance? 

A pitch is the first impression. In those early few minutes, founders need to deliver a super compelling story. If potential investors, partners and hires see value in your business model, they will find a way to connect. If they detect naivety or hubris, that call won’t come. 

Know the exit potential 

Most entrepreneurs and founders-turned-investors I know are optimists. We look forward to realising value from our efforts. We are continually thinking about how to deliver on our missions by creating value for customers, partners and those who invest in us. This also means we spend time contemplating who might acquire our businesses or what businesses we might acquire to further our mission. 

Every founder should be ready to have a conversation with investors about potential exit options. It’s just not necessary as part of a first impression. 

If as a founder, the exit potential is not clear, consider discussing it with co-founders and mentors. It can be a useful exercise in dreaming forward. It can also reveal ideas for new strategic partnerships. 

One last thing...

Time is everything, especially when pitching a new business model. 

Be clear on what a red flag can be before you pitch, and an exit slide is unquestionably one of them. 

Invest time in dreaming about the future and prepare answers to what an exit could look like. These are important things to do. They just don’t need to be part of your first impression. 

And if you get asked about your exit strategy when pitching, consider it and respond with, ‘Our focus is achieving product/market fit. We’ll think more about exit options when the time is right’.

by PhilHSC

RESPECTING EARLY INVESTORS

Early investors bear enormous risks, and as ventures grow, their contribution is often forgotten. 

This is a topic that came up in some conversations this week. I’m not going to add to the opinions of high profile investors and the mechanisms designed to help early investors retain participation rights through financing rounds. Instead, I’m going to share my philosophy for how I think founders should maintain respect for all investors, and particularly the few who back founders early in their journey. 

If there is one take away from this post, it’s that entrepreneurship is a craft. It takes multiple efforts to build great companies. And because of this multiplicity, founders are very likely to engage with the same investors time and time again. 

In this context, respect is much like trust, it is based on consistency over time. Optimise for trust and respect, then no matter the venture’s outcome and there will be room to re-engage in the future. 

Choose to de-prioritise these relationships, and your chances of future engagement are close to, if not, zero.

The early days

Early stage investors are the ones who believe in you as the founder. They back you when a pitch deck and traction from a product held together by duct tape is all you have. 

They are family, friends and early-stage investors and they put post-tax money at risk by backing your venture. In other words, they had to earn two dollars for the one they are investing in you. 

They make a conscious decision to commit that capital but to say that ‘they know what they are getting themselves into’ is generally a huge cop-out. You can say that about seasoned early stage angel or venture capital investors but not about friends and family. 

In any case, before their capital is committed to the venture, founders can be assured of two, self-reinforcing factors.

First, entering into an investor/investee relationship changes the dynamic between those two parties forever. If a startup investment provides a return or at least returns capital, that is a win. However, the more likely outcome is that every dollar will be lost. Founders need to be OK with this possibility and how it will affect those relationships. 

There are two things I hate in this world. The first are bullies. The second is having to tell investors that I have lost their money. As I’ve written about before (here and here), if that time comes, the only thing that stands between you and any future relationship is the respect that has been built up over time.

The second factor is the fact that the understanding of what risk actually means will vary significantly between early-stage investors. 

No one wants to lose money on their investments, but seasoned investors are more aware of the real risk of losing every dollar and the potential reputation damage that comes with early-stage investments. 

Family and friends hope you will pull it off. 

They think you’ll be the one or they may not fully appreciate just how much risk is involved in building something from the back of an envelope.  

These two factors can be managed through repeated and candid conversations. However, there is a third one that is often only recognised with hindsight. 

It’s that these early-stage investors are the same people who are often forgotten as new investors with deeper pockets enter the cap table. 

Being too transactional 

What I’m about to say doesn’t apply to all founders, but many will be able to relate. I believe in always being in motion on business development to identify and secure new partnerships, customers, hires and investors. 

When it comes to finding new investors, it can become more of a numbers game than one of acknowledging people and the risk they are taking. That’s because founders wade through a sea of ‘No’ before they arrive at the few who are willing to engage. And as fundraising fatigue and the desperation to keep their company breathing builds, the numbers, investment terms and closing the requisite number of investors becomes the main game. 

There is an unintended consequence of this focus on the current financing round which often affects earlier stage investors. In a nutshell, the risk(s) that they took, in the beginning, get traded-off against the ‘value’ that founders believe incoming investors will bring to the company. 

This can play out in many ways but here are the classic hits:

The Rush

Founders provide minimal communications about their venture’s progress and then deluge investors with details of an imminent financing round. The amount of context and questions that need to be asked and answered puts all parties under pressure, including existing terms like pro-rata rights, and when push comes to shove the venture’s survival is in the hands of the founder(s) and incoming investors. As a result, early-stage investors have little choice but to agree to new terms. The unintended consequences of which can be profound.

The Pivot

Like the Rush (above), founders share their thinking and plans to pivot the business model with those who they believe to be their most influential investors. Other investors discover later, often much to their surprise.

The Note

Founders introduce an unfamiliar financial instrument to people with limited startup investment experience and try to convince them of the instrument's merit because the founder isn’t willing to nominate a value for their company. This can happen at the beginning of the venture or at some point in the ventures history.

Whether it be a convertible note or a SAFE (simple agreement for future equity) note, the founder is likely to claim that this is the best option due to a lack of clarity on the companies current valuation. While these notes do have a role to play, many founders don’t fully understand the intricacies and implications that can disadvantage incoming investors, future investors and the venture itself.

The classic issue with notes, particularly convertible notes, and inexperienced investors is that they often end up with less equity than they expected after the conversion event.

Why?

Because the founder either claims they cannot provide financial advice and that the investor should seek independent financial advice (which is true) or, using the previous reason, avoid discussions about specific scenarios with the prospective investor for fear of them not being comfortable with assumptions or their resulting potential stake in the company. Either way, this can leave a bad taste in the investor's mouth.

Respecting early investors

Aside from risk, some inevitabilities come with being an early stage investor. Some of these issues can be forecast, while others fall out of regular conversations. The impact of dilution is one example which can be forecast. Even though the share price will change at each round (hopefully upwards), less experienced early-stage investors will be more concerned with dilution.

The point is that education goes a long way to short-circuiting the potential anxieties that come with uncertainty. 

In this context, education comes in the form of conversations that help investors understand the current state and how the strategy is unfolding. 

At the other end of the spectrum is no communication or a readily identifiable petering out of communications from the founders. This is a red flag for investors. And because this is a well-established signal that a venture may be in trouble, investors will start forming opinions in a vacuum which is often counterproductive. Especially if this issue could be solved with routine communications. 

Avoid red flags with four tactics 

I employ four tactics to establish and maintain respect with all, but in particular, early-stage investors:

1. Express the company’s intent - In addition to sharing the opportunity and how you plan to capture it, share how the founders (and other existing shareholders, if any) plan to engage with new investors. This might include the high-level terms (e.g. a standard shareholders agreement), the different share classes (if more than Common Shares), the pro-rata rights available to shareholders and how much capital the venture expects to raise in the next 2-3 years if everything goes to plan

2. Regular status updates via email - This is a simple monthly email update that includes six items:

1. 1. Business Update - Cash at bank, Monthly burn rate, runway (based on current burn rate) and headcount
   2. Our Mission - Your venture is a small part of your investors' life, broken record style reminders are important
   3. Key Growth Metrics - List the key growth metrics that are being tracked (including last month’s result and a rolling three-month average to help add trend-based context to the data)
   4. Progress - This section talks to advancements made in customer and partner acquisition, hiring and the development of key relationships
   5. Challenges - These are the current roadblocks. This makes for especially good reading if investors can see that the founders are leveraging existing investors and advisory board members to solve issues.
   6. Next Month’s Focus

3. Strategy updates and scenario planning - These are a formal presentation and Q&A sessions done in person or via Zoom with all investors. Think of them as an ‘all hands’ meeting with investors. A pre-read is issued before the meeting and questions about the material are also requested ahead of the meeting.

This provides the team time to formulate responses. Not only does this model help to effectively respond to questions, but it also helps the team galvanise their thinking on particular issues. Pro Tip: Record the session using Zoom for those who cannot make it can listen at their leisure.  

4. Ad-hoc check-in calls - I really enjoy time speaking one on one with investors. It's an opportunity to learn more about each other. I make sure I call investors once a quarter. The timing will seam ad-hoc to them, but it’s carefully scheduled in my diary.   

One last thing…

Respecting early investors is about developing a relationship to ensure intent and incentives remain aligned. I do not mean for founders to dedicate significant portions of their time to investor relations. I am advocating for setting up routines and rituals needed to keep investors informed. 

Entrepreneurship is a craft. You will engage with the same early stage investors time and time again if you create respectful relationships that endure. The best way to achieve that is to give early-stage investors time and air cover to understand the benefits and implications for their ownership of the company.

They expect it and will thank you for it.

by PhilHSC

HOW TO PREPARE FOR INVESTOR MEETINGS

Preparing for investor meetings is all about communications. Most entrepreneurs think this means writing a pitch deck and practising its delivery. They are 50% correct. The other 50% involves planning to ensure the time with investors is extremely valuable. For the investor, you and your team.

In this post, I am going to share my method for preparing for investor meetings. However, before I do, I think it’s important for founders to stay focused on one part of our job that doesn’t get anywhere near enough air time. Most commentary about the primary role of a founder talks to the importance of hiring and keeping the business funded, either through revenue or financing.

The role that gets lost in startup hype (and I suspect de-prioritised by founders who are busy fire-fighting) is team communication.

For the most part, this is because founders assume that sitting next to each other or being constantly available on Slack means that their team (and board) are clear on what founders are thinking. What compounds this poor assumption is a founder’s belief that their cofounders should intuitively know what to say or how to act just because they have a solid relationship.

In the context of capital raising, the CEO is probably doing the groundwork to identify and set up meetings with investors. Then once an investor meeting is confirmed, the CEO rallies their co-founders around the pitch deck and they briefly discuss who will say what during the meeting.

You might consider this a 'good case' scenario for the founding team.

It's what I used to do.

However, this approach creates only a fraction of the value that could come from 30-45 minutes of planning.

The one expectation I have going into investor meetings

I will walk out with value.

That is the one expectation I have for every one of my investor meetings. I plan and enter each investor meeting with this mindset because I value time above anything else. My time is finite and valuable. So is the time of investors and so is the time of your team.

Walking out with value means one of two things. Either you walk out with a commitment to proceed to the next investment stage (e.g. a next meeting request, due diligence, term sheet negotiation or deal close). Alternatively, you walk out with new insight and knowledge. Ideally, you walk out with both.

But here’s the thing; You can’t expect to walk out of an investor meeting with value without first creating value for the investor.

When I think about creating value for investors, I think about how investors play the information arbitrage game. They are continuously gathering information about industries, business models and how founders are thinking about solving big problems to help make decisions about which ventures to back. The more knowledge and experience they have partnering with and learning from founders, the more likely they are to make well-informed investment decisions.

The bottom line is that those founders who walk out of investor meetings without investment momentum and with no new knowledge or insights have failed to plan.

My template to plan and prepare for investor meetings

There are three steps to this approach. The time investment is 30-45 minutes (excluding time to draft pitch decks and the meeting time with the investor). I also want to stress that this approach is just as crucial for solo entrepreneurs pitching for investment as it is for those of us with teams.

It’s the discipline that matters. The more I do it, the more efficient I become.

Step 1: Research

This step intends to bring co-founders and board members to a common understanding about the investor you plan to meet. This research is delivered via email with as much time as possible before the pre-meeting call (step 2).

Here are the subheadings for the email:

Context (answer these questions)

• Whom are we meeting?
• What is their title and where are they (and their firm) based?
• How are we meeting (in-person or via Zoom)?
• How did the introduction arise?

About the investor

• Copy the blurb from their website that characterises their focus and mandate. Include the investors’ website URL
• List the companies in their portfolio that are in your industry (this provides clues on the stage and types of businesses they invest in)

Meeting Intent

• Describe why the meeting is taking place. There is typically more than one reason to engage with an investor (e.g. secure investment and get access to relationships and portfolio companies)
• List the key questions you want to ask (be specific, and have at least three questions read to ask)

Roles (to discuss on pre-call)

• Outline who is going to say what and who will ask each question
• The first pass of who will be saying what should be drafted by the CEO and then discussed during Step 2 (the pre-meeting call)

Step 2: Pre-Meeting Call

After I send the research email to the team, a 15-minute call is scheduled to discuss the plan and especially who will be saying what during the investor meeting.

Step 3: Followup

Following up is non-negotiable. After every meeting, send a ‘thank you for your time’ email. Moreover, there is always an action that accompanies this email. If the investor expressed interest, then you follow up with more detailed documentation and a suggested next meeting time. If your venture is too early, then you add them to a quarterly investor only mailing list.

Don’t pay lip service to this offer. As I wrote about recently, developing relationships takes time and not following up is a missed opportunity.

Gaining value from ‘thanks, but no thanks.’

Every founder will receive many more NO’s than they will YES’s. And while it is important to plan for when the answer is ‘YES’, as I wrote about last week, I always have two questions ready to ensure we walk out of the room with value even when the answer is ‘thanks, but no thanks’.

The first question: Have you come across any ventures who are trying to capture a similar opportunity to us?

This question demonstrates curiosity, and the answer can result in additional market intelligence.

The second question is: How would you encourage us to think differently about the problem we are trying to solve?

This question demonstrates adaptability, and the answer can help shape strategy.

One last thing …

Planning prevents poor performance. I learned the value of this as a soldier, and I apply it to much of what I do as a founder.

I think about meetings with investors as potently valuable learning opportunities. Value gets generated when you show up and come well-prepared to communicate ideas and your momentum in the context of the investors are of interest.

A small amount of planning not only helps you bring the full weight of your company to the conversation, but it also helps to keep your team and board informed and engaged which they will appreciate.

by PhilHSC

PLANNING FOR WHEN THE ANSWER IS ‘YES’

The punchline is to plan the four actions you need to take when the answer is ‘YES’. Consider this training to reduce surprise and potential confusion that can come from an unexpected ‘YES’.

Planning for rejection, risk and worst-case scenarios is second nature to entrepreneurs. From the moment the first version of a business model is hatched, we are in de-risking mode. Ten steps back for each step forward. It’s a familiar tune. I love this grind and how it forces adaptation and learning.

I also love being told ‘YES’.

Doesn’t everybody?

There’s nothing better when the grind pays off. Closing a partnership deal, finalising funding rounds, securing that key hire or having a product launch work better than expected makes it all worthwhile.

Founders feel relief and the team embraces the shot of confidence.

What happens next can make a business. Or dramatically stall its momentum.

If a ’YES’ answer is the suck, then go where the suck is

Opher, my good friend and co-founder at AirShr always used to remind me to ‘go where the suck is’. The essence of this statement is to serve people who like what you do. And we followed that advice but we did so carefully.

In early-stage companies, founders invest a lot of time validating who makes up their actual target customers. In fact, most will tell you that moving from a ‘persona on paper’, or who you think your target customers are, to understanding who they really are is much harder than it sounds. But, you have to start somewhere.

When people start expressing interest by wanting to test and buy what you’re selling, there is a natural inclination to listen more to those people.

And herein lies the cautionary tale: Homogeneous customer groups are not (usually) representative of your total addressable market.

Kickstarter and LinkedIn

There are two interesting examples to illustrate this point.

First, consider Kickstarter, the world's largest funding platform for creative projects. While Kickstarter has helped facilitate pledges of more than 4B USD to projects on its platform (of which there have been more than 150,000 successfully funded projects), it is difficult to name 10 household brands that have achieved significant scale from starting on that platform. And while many companies have successfully adopted Kickstarter as their business model (by launching all of their products via Kickstarter), it is hard to scale beyond an early adopter market.

LinkedIn is the second example. As Reid Hoffman described in his Masters of Scale podcast, the early days of LinkedIn attracted a self-organising group called LinkedIn Open Networkers (or LION’s as they became known). This large and at the time growing group believed that they should be able to connect with anyone on the platform. They also believed that everyone would want to connect with them.

That was obviously not true and the LinkedIn team prevented that from happening. The point is that at the time the signal was so strong that LinkedIn could have gone where the suck was but it would have alienated other users and that would have stalled growth. A potentially terminal move.

So the moral of both of these stories and why you should plan for when the answer is ‘YES’, is that if you don’t, you could find yourself course correcting your company to a false plateau. In other words, and in the absence of other recent wins, founders pursue this win as their new strategy.

Being more circumspect about the ‘YES’

More experienced founders might chalk a ‘YES’ up to a small win and continue with the strategy that was already in place. The thing is that when you look at the strategy of most small startups (less than say 2-3 years old), there isn’t really a strategy to refer to.

And as much as first-time founders won’t want to admit it, ambition and milestones are important, but that’s not a strategy.

So whether you have a clear strategy or you’re still working on it, here’s what I do, and I hope it helps. This applies to pitching for investment, negotiating partnership agreements, hiring new talent, engaging with government or elevating public profile (and there are others):

Step 1

Whiteboard the known and (have a guess) at the unknown reasons why the other party would say ‘YES. I do this with my co-founders and board members

Step 2

Detail the items that you think need to be delivered under each scenario. For example, a prospective investor says ‘YES’.  If they are now a candidate for ‘lead investor’, what type of information would they need to see in order for them to take on that role and help you close the round. Another example is when an important potential strategic partner says ‘YES’. What information should you have ready in order to accelerate that agreement from a deal into the first value-creating phase?

Step 3

Estimate how long each deliverable will take to create. This includes what tradeoffs you will need to make because you still have the same number of available resources.

Step 4

Communicate each scenario and their deliverables to your team. This is an essential step. There are enough unknowns in your business, your team doesn’t need any more unnecessary surprises as I wrote about here.   

One last thing…

This might fly in the face of ‘faking it till you make it’ and ‘don’t build it until you know someone wants it’ but reframe it like this.

You don’t want to be left looking naive, shocked and bashful when a prospective investor or partner says ‘YES’. And you don’t want to appear rash and impulsive to your team or investors by changing tack whenever a user or customer group says ‘YES’.

Plan out the ‘YES’ scenarios and what would need to be made or delivered under each scenario.

Consider this training to reduce surprise that comes from the unexpected ‘YES’. This doesn’t mean you will lose the relief and euphoria that comes with landing that much-needed decision. It means you will be able to respond with a clear head and create the groundwork for more of the same.

by PhilHSC

KNOWING WHEN TO CLOSE A VENTURE

Two interconnected questions torment founders. Speaking from experience, the first is am I building a great business? The second is ‘how do I know when it’s time to close a business’?

I have been asked the second question a number of times this year. The angst that usually prompts this question is palpable, as is the fatigue and emotion of the founder.

I know that feeling.

The reality is that if you choose company building as your craft, you will face into this issue multiple times in your career.

In the spirit of dialling down the taboo around this issue, here is the framework I use to answer this question. It begins with understanding that this decision is often complicated but not complex.

Complexity & Complication

These two words are often used interchangeably, making the decision more psychologically taxing.

The punchline is that unlike starting a business, deciding to close a business is a complicated problem to solve, not a complex one.

This distinction is important because it helps the founder to realise that whilst this decision is laced with a cocktail of emotions, it is a problem that can be solved.

I like how Rick Nason explains it. Complicated problems can be hard to solve, but they are addressable with rules and recipes or with systems and processes. However, the solutions to complicated problems don’t work as well with complex problems.

Complex problems involve too many unknowns and too many interrelated factors to reduce to rules and processes. He goes onto explain that a technological disruption like blockchain is a complex problem. A competitor with an innovative business model — an Uber or an Airbnb — is a complex problem. There’s no algorithm that will tell you how to respond. And that’s why experimentation is used to pave ways through complexity to build a business.

Framing the decision to close

Armed with the knowledge that the decision to close a venture is a solvable (i.e complicated) problem, I use four principles to frame the decision.

1. It’s an internal decision

The decision to close a business is one for the Directors of the company. In most startups, the role of Director is synonymous with founders who will often also be significant shareholders. While this interplay between investors, founders and Directors can make for multiple and sometimes confronting conversations, the rule stands that Directors must act in the best interest of shareholders.

This means two things.

First, as compelling as they might be, external voices don’t make the call to close a venture. The views of customers, users, suppliers, the media and the community built around the company are inputs. This is easier said than done given the investment made to bring them along for the journey.

Second, and in the case of smaller startups where Directors and shareholders are one and the same but with unequal ownership, majority shareholders can exercise rights which can be at odds with minority shareholders. Playing by the rules established in the beginning is important.

2. People aren’t using your product or they are criticising it are not reasons to stop

For the record, these are not reasons to close a venture.

All businesses face headwinds. Iterating, learning and coping criticism is par for the course.

Healthy perspective and capital are needed for entrepreneurs to deliver on ambitious visions.

Break down these two ingredients, fatigue compromises perspective. If you are extremely tired and all you can do is think about your business, take longer than a weekend to get some rest and be with people who make you laugh.

On capital, an entrepreneur's speciality is securing resources and capital to make things happen. The question is: Has everything (and by everything I mean legal and won’t break the business) been done to secure capital to extend your time in market?

If No, then keep trying.

If Yes, entering the conversation to close the business may be needed.

3. How out of ideas are we and are they working?

I don’t often see the first incarnation of a product work well straight out of the gate. In fact, we spend a lot of time iterating and experimenting. This is fine until what you’ve built doesn’t resonate with the intended target audience and you run out of ideas (and/or money) to continue iterating.

What I think happens more often is that the founders and their teams realise, while there is still money in the bank, that their product isn’t working as expected. By definition, they have a little bit of gas left in the tank to course correct or pivot. This sounds good until they realise that their well of ideas is dry. I’ve been here before and it turned out to be a consequence of fatigue compromising perspective. In this case, bring in, if you haven’t already, mentors and investors to help ideate. It can make all the difference.

Three eventualities can arise from this situation. First, investing the remaining capital and resource into the new ideas and it works (no need to close). Second, no ideas result from ideation and the company has residual capital left over. Third, investing remaining capital and resource into new ideas that don’t work. In the latter scenarios, discussing how to close the business and return residual capital could be the next step.

4. Is your heart in it?

This is the issue people talk about least. At some point, founders can hit a threshold where a change in circumstance adjusts their perspective on the problem they set out to solve.

It can be a gradual buildup of signals they receive which leads them to this threshold. Or, they might wake up one morning and know that they’ve had enough. Importantly, the company could be performing poorly or doing quite well.

Either way, this threshold is best recognised by asking one question: Is your heart still in it?

The answer is binary. Good news if the answer is ‘Yes’.

If the answer is ‘No’ and you’re relatively well rested, the two next immediate thoughts are likely to be, ‘what will [Insert Name A, B, C ...] think?’ And ‘how will I tell them?’

Not being part of your business might be a good thing, it may complicate the business or it might mean the business needs to close. No matter how this plays out, always adhere to the founders’ cardinal rule. No surprises.

One last thing ...

In a post that I wrote called ‘The Rules To Follow When Winding Up A Venture’, I talk about how making decisions comes with the territory of being an entrepreneur.

If you make company building your craft, closing a venture won’t happen once. It’s also important to understand that your ability to start future businesses that require investment and teams to grow largely depends on how your reputation survives the closure of businesses.

When the time comes to call it a day, be radically candid having done everything to make the model work without breaking your family or the law.

Be remembered as that founder.

Live to fight another day. Because as I’ve heard time and time again, being an entrepreneur is a numbers game and all you need to do is get it right once.

by PhilHSC

HOW DO I RAISE MONEY FOR MY STARTUP?

Raising capital is part process, part endurance event. Like every event that requires sustained performance, preparation is key and like every process it can be optimised. But before you start thinking about capital raising as a linear experience, remember we’re talking about startups where ‘linear’ is fictitious and one-step-forward-five-steps-backward is normal.

This post is the follow-on to 11 Things You Don’t Know About Raising Capital The First Time Around.

Here are the five steps I use to approach raising capital. It’s born from experience and driven by the single most important element in company building and the currency that is always in short supply and constantly running out – time.

1. Design The Path To Yes Or No

The rate at which you can achieve a ‘Yes’ or a ‘No’ from prospective investors is the product of a well-designed process to reveal their interest. In a world where timing is everything, the best early stage investors make investment decisions quickly because they understand the opportunity cost of your time and their own. However when there is a mix of investors, all at different levels of sophistication and all with varying priorities, it’s up to founders to design a path that enables each prospective investor to make an informed decision as quickly as possible.

Think of the path as a series of events. The faster these events play out, the faster investor interest can be gauged which drives the pursuit of funding alternatives and/or (ideally) the closing of a financing round.

I break these events into two groups and track progress in a Google Sheet so that co-founders can understand progress, on-demand.

Pre-Term Sheet Events

These events include introductory and early due diligence conversations with prospective investors up to the point at which term sheets are signed. This is the phase where social currency is established (i.e. where a collective of prospective investors begin to ‘buy-in’ to the business model which propels other investors to also engage) and conversely where the majority of “No” responses are received.

Although the size and stage of investment influences the number of conversations required, this is the guide I use for seed stage investments:

• Introduction + Pitch — First Meeting
• Follow-up 1 (within 3 days of first meeting): A phone call to gauge interest, offer to provide additional insight and politely ask when you could expect a response. If interest is high, offer to send term sheet. If interest is low, see below — If the answer is “No”, get there quickly.
• Follow-up 2: Timing for this meeting is dependent on the outcome of the second meeting. If no response is received from the first follow-up attempt, try making contact six days after the first meeting.
• Follow-up 3: If no response is received from the second follow-up attempt, try making contact 10 days after the first meeting. There can be a number of reasons why a prospective investor may not respond by this point. If no response is received from the third attempt, try making contact one final time at 20 days after the first meeting.

Obviously, following up can also be done by email but a phone call often yields a more direct response. Remember, timing is everything. Email is easily lost and can be used as a convenient excuse for not responding.

Post-Term Sheet Events

These events are largely process-oriented. Incoming investors have signed a term-sheet and undertake any remaining due diligence. From this point forward, a lawyer well-versed in start-up financing (let me know if you need a referral) helps guide founders through well established processes to formalise agreement between existing and incoming investors.

The rate at which these events are finalised is based on the preparedness of the lawyer and readiness of investors to review and electronically sign legal documents.

If the answer is “No”, get there quickly.

Remember that most people’s default is avoiding confrontation or awkwardness when it comes to declining an opportunity to invest. This can be one of the biggest (and most frustrating) time sucks as you try to assess who is likely to join the investor team. So remind each prospective investor it’s OK to say ‘No’ and that it avoids wasting their time (and yours) and advances the round by helping to focus on other prospective investors.

The obvious caution here is presenting the ‘No’ option in context. I recommend using something like this during the second or third meeting: “We’d love you to join [venture] as an investor. We really appreciate the consideration you’re giving this opportunity and we’re happy to answer all questions and supply additional materials to assist with your decision. However, if you’re leaning towards not investing it would be great to discuss this as well.”

If ‘No’ is the ultimate answer, positioning the discussion in this way will precipitate the right conversation. And remember, ‘No’ only ever means ‘No’ at that point in time. The world changes too quickly to accept ‘No’ as a terminal response.

2. Be Investment Ready

This means presenting a compelling narrative about the experience you are creating and it’s underlying business model. And to be taken seriously this narrative must include traction. In support of this deck, a prospective investor should be able to access a product demo, a term sheet and the existing shareholder agreement (if a company has already been incorporated) – on request.

Expect that your deck will evolve the more you pitch but don’t make the mistake of thinking it’s OK to cobble together product demos, a term sheet (or shareholder agreement) as investors begin to express interest. Be organised to respond to investor interest, it will help accelerate the closing of your round. Alternatively be aware that if you’re not investment ready, there’s next to no chance of raising capital.

Should I write an investment memorandum? comes up from time to time. Generally, at seed stage the answer is no because it’s considered a nice-to-have or overkill. An IM is typically a 30+ page document that goes into extensive detail about a venture. We wrote one for AirShr because we wanted an added layer of depth to our narrative. Our investors have appreciated it.

3. Identify And Engage Prospective Investors

When the right investors are matched with the right investment opportunity, a deal can be reached and a financing round closed in a matter of days. In most cases however, the process of identifying prospective investors starts with desk research.

So, open a Google Sheet.

Add ‘Name’ in cell A1.

Add ‘Value They Can Bring’ in cell B1. This is the expertise and relationships (beyond capital) that an investor can bring to your venture — be as specific as you can.

Add ‘Early-Stage Investment Experience?’ in cell C1. There is a subtlety to this column that all founders should be aware of. It’s rare to find someone with early stage investment experience who, at one time or another, hasn’t lost money or had a poor experience investing in a new company. I think it’s useful to assume everyone with early stage investment experience has been burned at some point. Approaching prospective investors with this mental model has helped me ask probing questions like “Given your experience as an investor, what factors matter the most to you when deciding to invest?” and “What three pieces of advice could you offer to us, as a new venture, to make the next 18 months as successful as possible?”. The answers to these questions usually leverage their experiences (good and bad) at other ventures. The insight is typically very useful and asking these questions demonstrates an appetite for learning, an essential capability of great founders.

Add ‘Relationship’ in cell D1. This is the name of the person who can make the warm introduction to the prospective investor.

Now, spend a day with your co-founder(s) working through LinkedIn contacts (both 1st and 2nd connections), address books and emails communications. Add people to the Google Sheet who make sense to contact as prospective investors based on the strategic value they could bring (column B) and their investment experience (column C).

Context drives engagement

The wise man who once said “context is everything”, was right. Anchoring a meeting request with a prospective investor to an area of mutual interest or a mutual acquaintance (or better yet an introduction made by the mutual acquaintance) is the most productive way to creating that all important first meeting. This, combined with short and punchy detail about the value proposition, the fact you’re seeking investment of $X and a link to a product page or pitch deck, helps the recipient make a quick determination about how to respond. After all, you need to assume they know nothing about you or your product and only have 30 seconds of concentration (at best) to apply to the email when they read it.

It’s also OK to politely follow-up once each week for three consecutive weeks if you don’t hear back. The best early stage investors usually respond quickly to progress (or decline continuing) the conversation.

4. Hustle To Close

Notwithstanding the need to carefully review and execute legal documents after signed term sheets are received, establish a process and timeline to close the round with your lawyer and communicate this to each investor.

The hustle demonstrated when shepherding prospective investors from first meeting to signing a term sheet must continue to close the round. And like the speed and focus with which the company will grow, it’s up to the founders the drive this.

5. Move To One Team

On closing a financing round it’s likely that incoming investors haven’t met ‘the rest of the family’. Although time zones and schedules might not align, it’s important to formally welcome and introduce new investors to existing investors and leaders at the venture. Ideally, this is done in person but it can also be done via conference call or email if a face-to-face event isn’t practical.

This is the first step to unlocking the potent combination that comes with mixing strategic investors with entrepreneurs. And this initial communication (and regular ongoing engagement via events, monthly or quarterly email updates) sets the tone for how the team, as one force, will help grow the company.

This might seem obvious but in the cut and thrust of every day, these investments in building a team of supporters who have a vested interest can be overlooked. The events and communications that draw the best feedback from investors aren’t lavish but ones filled with insight, radical candour and, if needed, specific requests of support to investors.

Remember, if you’ve selected the right investors they will be 100% committed to your success and will be open to providing support however they can. That’s why they backed your vision and your team in the first place.

by PhilHSC

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by PhilHSC