How to Secure Your First Round of Funding
A Guide to Raising a Pre-Seed for Your Startup
With the decline in early-stage venture capital funding, it is increasingly more difficult for founders without an extensive angel investor network to kickstart their businesses.
After closing our first round for Humble Dot at just over $500k, I jotted down some insights I learned from the process for my own records. Realizing the talent that can benefit from this information, I decided to compile some guidelines. It took us about 2 months from start to finish; we planned for 6, hopefully, you can do it in 1.
I am going to assume that you have the necessary skills to build or help build whatever company it is that you want to build, and the only missing piece is money.
I also going to assume that you are working with a cofounder. Many investors will flat-out refuse to invest in single-founder entities. Running an early-stage company is both intellectually and emotionally draining.
Splitting the load in at least half is one of the best things you can do for yourself. Early-stage investors invest in people NOT ideas (more on this later).
Fundraising is a crapshoot, your pitch might deeply resonate with some, and others may find it incredibly dry. Be prepared to potentially withstand months of rejection.
Plan out how much you will need to raise, then multiply that estimate by 2.
Commit. Put in your 2 weeks' notice at your current employer, create a Delaware C-Corp, and open a business bank account. You'll usually have to create a Delaware C-Corp because most investors have certain tax implications that are required for their fund.
Conveniently, Stripe's Atlas program does everything you need for a flat fee. We used Atlas to incorporate our business and I highly recommend it. We have invites, feel free to message me on Twitter for them.
Educate yourself on a SAFE (Simple Agreement for Future Equity) and all of the jargon that goes with it. Specifically, look into how SAFEs work and how and when they convert into equity.
Many investors will also introduce side letters to SAFEs, you should be able to understand what they mean and how they will impact your deal.
Preparedness serves two purposes. It signals that you are taking this step seriously and you plan on working on it with or without funding. More importantly, you are removing all barriers for a VC to actually wire you money.
Imagine a scenario where you have a VC ready to sign papers and wire you money, but you have to wait 5–10 business days to get your incorporation papers to go through, then an additional 3–5 business days to open a bank account, or even worse, you sign their side-letters without actually knowing the implications of how they'll impact your ownership as your business grows.
Compile a list of qualified investors. Shai Goldman's list of early-stage VC funds is a great place to start. Searching for pre-seed funds in your area will also turn up results that are more likely to invest. Do your research here, don't pitch a fund that wants nothing to do with the type of business that you want to build.
After compiling your list, email them all at once and schedule meetings back to back if possible. Do not plan on getting any other work done, your sole objective is to raise money.
Having meetings scheduled as close as possible gives them both a sense of urgency to make a decision quicker, and a signal that you aren't desperate (even though you may be). This will also give you a lot more leverage should you began negotiating.
Your email should reveal just enough about what you are building to entice investors into a meeting. Pique their interest, but don’t overwhelm them with a lengthy email.
Pitch yourselves first, then pitch your idea. Investors want to hear your story this early in the game: they want to know your history, your cofounder’s history, how you met, how you decided to start working on your idea, how the idea came about, how you gained the expertise to build what you want to build, etc.
Humans love stories, we attach ourselves to them especially if they resonate with our own experiences.
The purpose of your story should do two things:
- Identify who you are as cofounders and that you are able to run a company together without dysfunction.
- You have the ability to build what you want to build, and, if your idea doesn’t work out, the ability to build something else.
Before each meeting, research whom you will be talking to and cater your pitch to her. After each meeting, evaluate how the pitch can be improved and iterate on it so that each pitch feels tighter than the last.
You should be able to learn something every time. Pitching at this stage is a skill, you must hone it. It might even be a good idea to schedule meetings with VCs whom you are least likely to gain funding first. That way, by the time when you're pitching your more compatible investors, you'll already have your pitch down to a T.
As you begin to receive commitments from investors, use them to help you get warm introductions to other investors. Hopefully, you will have more than enough money committed, and you will need to either cut investors out or negotiate with them to give less.
At this point, think about who makes sense as a strategic investor. Think about what advantages they bring you and how they will be helpful to you down the line. Additionally, watch out for side letters and management rights letters that give investors unnecessary control over your company's decision-making.
Be very cautious and don't be afraid to flat out reject an investment because they're asking for too much. If they really want to invest, they'll bend to your wishes.
Again, it is becoming more difficult for founders without an investor network to start their businesses, which is why people apply to incubator programs like Y Combinator and 500 Startups.
However, these programs are costly and can be a distraction if you know what you're doing. Raising money for the first time was more painstaking than we anticipated, but it wasn't impossible. Hopefully, with these rough insights, you can raise with ease.
For similar content, follow me on Twitter @wrgoto. My direct messages are open to everyone, and I invite anyone who wants to chat about this process or their experience with this process to message me.