Raising money

I have to admit that I’ve been a bit behind on my blogging lately. Since November I’ve been pretty flat our closing an investment round for BuyReply.

Last week we announced that BuyReply had closed a $1m seed round from a consortium of Australian and US investors led by Adrian MacKenzie and Square Peg Ventures with participation from Valar Ventures in San Francisio which is Peter Thiel’s international fund. Additionally we bought in 6 local angels to make up the rest of the round.

BuyReply was covered by the Wall Street Journal, Tech Crunch, AFR and a bunch of other outlets around the world.

It was my first time raising funds having bootstrapped my first company, Lind Golf so it’s fair to say it was a new experience.

I though I’d to share a few of the lessons that I learn’t along the way. To seasoned entrepreneurs they might see naive however if you’ve never raised money before, you might find these points helpful.

1. Back yourself before you ask others to back you

I invested a considerable amount of my own money and time in BuyReply before I looked for outside funding. Doing this will give you a better chance of receiving a healthy valuation and it will also align you with your investors as they can see you have skin in the game and are committed to the business.

Depending how far you get with your own money, you’ll be able to demonstrate your resourcefulness. How far can you get with very little resource? We were able to build a fully working product and run three meaningful proof of concepts before we asked for money.

A note on founder vesting: My view is that this should be inversely proportionate to the amount of cash the founder(s) personally invests. Some investors will want all your shares to vest over 4 years however if you’ve already taken a huge risk financially, why should you have to earn your company twice? Negotiate hard here if you can!

2. Your pitch deck should be a product not a PowerPoint

When we originally met with Valar we had a pitch deck and an idea. We were told to come back with a product and a customer. When I met with Adrian I had a working product and a proof of concept business deal in the pipeline so the conversation was very different.

You are doing yourself a disservice by trying to raise funds from a PowerPoint presentation. In the lucky chance that you do get funded, you’ll get a terrible valuation.

Investors want to see a working version of your idea. This demonstrates that you can transform ideas into products. It shows that you can manager a team and attract the right resources. It shows that you truly believe in what you are doing because you’ve jumped off the cliff before you’ve found funding so to speak.

Most importantly it gives your investors something to see, touch, feel and play with. At the seed stage they are investing in people and ideas and they need to be convinced of both.

Anyone can build an impressive PowerPoint presentation. It takes more than that to execute.

3. You can’t fake an orgasm

Passion sells. When an investor backs an entrepreneur they need to be convinced that the founder is 100% committed and passionate about their business and vision. You need to sell the dream and take your investors on a journey which they want to be a part of. You need to convince them without an inch of doubt that you are whole heartedly committed, and that is something that cannot be faked.

4. Tell a compelling story

Raising money is not just about having an impressive product. It’s about having a story as to why your idea is novel, unique and worth backing. It’s about knowing where you want to be in 1, 3 and 5 years time and taking your investors to that place in the future. You need to sell your vision and your ability to execute to get to that position.

5. The entrepreneur runs the process

I thought that investors run the investment process and entrepreneurs build the business. I was wrong. In our case myself and one other ran the entire process. Once we had a term sheet, I engaged the lawyers, negotiated the deal, bought in other investors and drove the deal over the line. In some cases the investors might run the process however in this case, it was run by myself and our team.

6. Don’t use corporate lawyers or private equity lawyers. Use startup lawyers.

Startup financing is a very specific skillet and it needs to be done at a low cost. While it sounds good to use the biggest most well known firm in town, chances are they don’t have the specific skills needed to close a venture round in a reasonable time frame at a reasonable cost. We had to incorporate in Delaware, flip our AU entity into a US entity, establish a share plan for employees, set up license agreements and do it as cost effectively as possible.

If you want to keep costs low and do it the right way, make sure you engage a firm who specialises in this. The documents and work required is very specific and can be turned around quickly and affordably if you use the right people. We used Richard Horton and his team who are probably the best guys in the business for Australian –> US venture financings. They did an incredible job and moved fast.

7. Momentum matters

Raising money has a domino effect. If you can convince one or two influential investors to back you, the rest of the process becomes significantly easier. Some investors like to be the first money in and some prefer to be the last. Once we had the first two investors committed, the rest of the round filled up pretty quickly on the back of that momentum. You need to capitalise on early momentum and move quickly. Try to get the big names in first for as much as they are willing to commit then leverage that to bring in others who were already interested.

The trick here is to approach investors very early on. You don’t want to be selling the story at the 11th hour. Have conversations 6 months out and inform potential investors about your startup. Tell them you are raising money but don’t come across as desperate. Once these people hear you have interest from a couple of lead investors, it takes just one call to ask if they are in or out. Do the story telling before the momentum builds so that you don’t need to sell the story at the 11th hour.

Additionally, investors like to see good management capabilities. If you can convince a credible executive to join your board during the investment process it will show investors that you can attract the right people and increase their confidence in your abilities.

8. For founders, venture money is better than strategic money.

We had three interested parties who were strategic investors. As an entrepreneur it might make sense in your mind to bring in a customer as an investor however customers are only interested in using your product for their own benefit whereas investors need to make a return on their equity. So if investors make a return on their equity, then as a founder, so do you!

Furthermore, if a customer is interested enough to invest, chances are they will become a user of your product in any case. Try get venture money not strategic money if you can.

9. Don’t accept unfair terms

When you need money it can be tempting to accept any term sheet you receive however if you truly believe you have a great product, team and vision, then you deserve to receive a fair deal. Seasoned investors understand they are taking a 1 in 10 chance and should give the entrepreneur a fair deal. That means a priced round at a healthy valuation without any tricky terms.

If your investors are trying to shaft you from day-1, find someone else who really believes in you. You’re in it for the long run.

Don’t be afraid to walk. I walked away from two term sheets before I got what I wanted.

10. Investors need you more than you need them, but remain humble

There is no chicken or egg scenario when it comes to raising capital. Investors need something to invest in, I.e. businesses and founders, and while this might seem arrogant or naive, you need to maintain a demeanour that reflects a sense of confidence and belief that the “train has left the station”. Investors will flock to a founder that has confidence and conviction, and a great idea, however confidence and conviction are vastly difference characteristics to arrogance and ignorance.

Finally, be patient and DFTBA . It took almost 10 months from our first investor meeting to close the round.