I hear this question all the time:
“How should I go about raising money?”
To start, raising money is actually really hard and there are lots of nuances but maybe a different perspective can help some people trying to raise a round.
Also, the single best way to raise money is by having a product so great that investors flock to you. Read Paul Graham. Sometimes though, it’s just not that easy.
The problem is, almost every person I hear this from has gotten advice that is generic and common sense. The most common answers being:
“Meet with as many investors as you can.”
“Raise as little as you can to get started.”
“Just ask right away if they will invest.”
Also, this assumes that you at least know a few investors or have gotten good at landing meetings with them. If not, read this.
I want to share a different perspective. I do not think this works for everyone nor do I think this is the only or even the best way to raise. I just want to offer up some thoughts that when I speak with founders, most say that they have never thought about it like this.
Let’s focus on 2 simple questions and the psychology behind them:
- How do you ask for money?
- How much are you raising?
One: How do you ask for money?
In my experience, the best way to get what you want is to not ask for it. Desire is the greatest attraction, not desperation. The person who has the ask needs it more than the other person. Turn the table.
Wait, what? That makes no sense… How do you raise money by not asking for it?
It goes back to one of my favorite quotes:
“If you want money, ask for advice. If you want advice, ask for money.”
Let’s break this down. Investors at this stage typically invest because of a few things:
- They know other people investing. (this is the best/most common)
- They love and use the product.
- They love you and your team.
I’m going to solely focus on number one since I’ve found it to be the most impactful.
When just starting down the fundraising trail, I tell all investors I meet with that I am not raising right now but probably will be in a few months. I set a date in my head, I usually think 3 months later. I break them into two groups, angels and seed funds. I tell the angels I am not raising right now while telling the seed funds that I wasn’t thinking about raising institutional money because I was talking to angels but happy to have a conversation.
At the end of each meeting, my only ask is this: Can I keep you in the loop? Almost every single person says yes.
I then add that investor to a weekly email update which I send to this group. My sole goal over the next 3 months is to grow the list of people interested in our company and tell a story that is progressing and getting better every single week. By the end of three months, hopefully you have a long list of interested people and you have proven that you can ship, tell your story and make progress quickly.
During this 3-month period, when talking to seed funds which can write larger checks, discuss that you have a lot of great angels interested and you weren’t thinking about raising institutional money. But, if you find a seed fund you love and they say “Screw waiting to raise and not raising from institutional money, I love you and this product and I want to invest” then you are now off to the races. (aka maybe you’ve found your lead.)
Now you have leverage. Tell them that’s flattering, wasn’t thinking about raising from seed funds, but throw me a term sheet and I’d be happy to consider it as an option. (Want to note that this is a slight negotiation strategy and you should never lie or manipulate but investors always can tell when you need their money and there’s no incentive for them to give it to you now if they know they can give it to you tomorrow, they will just stay interested and never commit. Making them move today is key.)
Get a term sheet.
The next email update is critical. The opening story is that you have a lead investor, things are moving fast, going to open it up to some really “key/strategic” angels, let me know if you know anyone who is interested.
Forward to as many folks that you know with excitement and just say “keeping you in the loop.”
Close. As. Fast. As. You. Can.
If you can’t get a seed fund to lead (the most ideal scenario), go back to all interested angels and find one or two that you trust to commit and then do the same thing with them as the lead.
Remember, the goal here is not to play games with investors, it’s to tell a good enough story so they want to give you money so you don’t have to ask for it.
Two: How much are you raising?
This is the main thing I see first-time founders misunderstand: what makes investors feel safe and confident. The most common phrase uttered is this:
“We are just going to raise a little bit to get off the ground. We don’t need much.”
To understand why this is backwards and actually scarier to investors, you have to think about how seed investing works.
- Your company has enough time to figure out and get to product/market fit.
- Your company doesn’t die and gets to the next phase. (profitable, series A, etc)
It sounds crazy, but I would actually say that raising more money is easier than raising less money. Investors feel safer. Here’s an example of why.
A founder comes to an investor and says we are only raising $150k to get this off the ground. There’s a team of 4 of us, we are all scrappy and don’t need much money to get started.
Here’s the problem with this. It’s hard to find product/market fit. Most often, even good teams don’t find it their first time, and they have to iterate on the product for months, sometimes years. If you only raise a small amount of money then an investor knows that you will have to go raise again in, say, six months. So actually, you need to start thinking about fundraising again the day that this small round closes. This means you are not focusing solely on product and are distracted by fundraising. This is the spiral to the grave that ends in never getting off the ground and spending all of your time distracted by fundraising and not building.
Also, more money is less risky for investors. If I’m the investor, I’d feel like you are a more senior team, know how much time and money it takes to get off the ground, and I feel good knowing that you have 3–4 six month cycles to try and build a successful product before your next phase is needed.
Seed investing is about betting on teams and minimizing risk of failure. At this stage, risk is how much time you have to figure it out.
Raise more, as much as you can to not sell more than 20% of your company, then build and run like hell.
Only raise money if you have a team that can actually ship and build product, and you really want to build a company and play the long game. If not, ignore everything above and don’t raise money on some idea you think will be big. Build it, then raise, and maybe what you just read can help you.
This is post 5 of 30 days of writing. Read more here.
Shane Mac @shanemac