It is worth pointing out that startup investing is rapidly evolving and it is likely that certain elements of this course will at some point become obsolete, so make sure to check for updates or future posts.
Fundraising is a necessary, and sometimes painful task most startups must periodically endure. A founder’s goal should always be to raise as quickly as possible and this course will hopefully help founders successfully raise their first round of venture financing.
Often that will seem like a nearly impossible task and when it is complete, it will feel as though you have climbed a very steep mountain. But you have been distracted by the brutality of fundraising and once you turn your attention back to the future you will realize it was only a small foothill on the real climb in front of you. It is time to get back to work building your company.
Fundraising Rules to Follow
• Get fundraising over as soon as possible, and get back to building your product and company, but also…
• Don’t stop raising money too soon. If fundraising is difficult, keep fighting and stay alive.
• When raising, be “greedy”: breadth-first search weighted by expected value 2. This means talk to as many people as you can, prioritizing the ones that are likely to close.
• Once someone says yes, don’t delay. Get docs signed and the money in the bank as soon as possible.
• Always hustle for leads. If you are the hottest deal of the hour, that’s great, but everyone else needs to work like crazy to get angels and other venture investors interested.
• Never screw anyone over. Hold yourself and others on your team to the highest ethical standards. The Valley is a very small place, and a bad reputation is difficult to repair. Play it straight and you will never regret it. You’ll feel better for it, too.
• Investors have a lot of different ways to say no. The hardest thing for an entrepreneur is understanding when they are being turned down and being okay with it. PG likes to say, “If the soda is empty, stop making that awful sucking sound with the straw.” But remember that they might be a “yes” another time, so part on the best possible terms.
• Develop a style that fits you and your company.
• Stay organized. Co-founders should split tasks where possible. If necessary, use software like Asana to keep track of deals.
• Have a thick skin but strike the right balance between confidence and humility. And never be arrogant.
What Not to Do While Communicating with Investors
• Be dishonest in any way
• Be arrogant or unfriendly
• Be overly aggressive
• Seem indecisive – although it is okay to say you don’t know yet.
• Talk so much they cannot get a word in edgewise
• Be slow to follow-up or close a deal
• Break an agreement, verbal or written
• Create detailed financials
• Use ridiculous / silly market size numbers without clear justification
• Claim you know something that you don’t or be afraid to say you don’t know
• Spend time on the obvious
• Get caught up in unimportant minutiae – don’t let the meeting get away from you
• Ask for an NDA
• Try to play investors off each other when you are not a fundraising ninja
• Try to negotiate in real-time
• Over-optimize your valuation or worry too much about dilution
• Take a “No” personally
A Brief Glossary of Key Terms
• Angel Investor – A (usually) wealthy private investor in startup companies.
• Cap / Target Valuation – The maximum effective valuation for an investor in a convertible note.
• Convertible Note – This is a debt instrument that will convert into stock; usually preferred stock but sometimes common stock.
• Common Stock – Capital stock typically issued to founders and employees, having the fewest, or no, rights, privileges and preferences.
• Dilution – The percentage an ownership share is decreased via the issuance of new shares.
• Discount – A percentage discount from the pre-money valuation to give safe or note holders an effectively lower price.
• Equity Round – A financing round in which the investor purchases equity (stock) in the company.
• Fully Diluted Shares – The total number of issued and outstanding shares of capital stock in the company, including outstanding warrants, option grants and other convertible securities.
• IPO (Initial Public Offering) – the first sale of stock by a private company to the public.
• Lead Investor – Usually the first and largest investor in a round who brings others into the round.
• Liquidation Preference – A legal provision in a company’s charter that allows stockholders with preferred stock to get their money out of a company before the holders of common stock in the event of an exit.
• Maturity Date – The date at which a promissory note becomes due (or at which it will automatically convert to stock in the case of a convertible note)
• Equity Incentive Plan / Option Pool – The shares allocated and set aside for grants to employees and consultants.
• Preferred Stock – Capital stock issued in a company that have specific rights, privileges and preferences compared to the common stock. Convertible into common stock, either automatically (e.g., in an IPO) or at the option of the preferred stockholder (e.g., an acquisition).
• Pre-money Valuation – The value of a company prior to when investor money is added.
• Pro-rata rights (aka pre-emptive rights) – Contractual rights that allow the holder to maintain their percentage ownership in subsequent financing rounds.
• Protective Provisions – Provisions in a company’s charter that give exclusive voting rights to holders of preferred stock. For example, the approval of these stockholders, voting separately from other stockholders, may be required for an acquisition.
• Safe – Simple Agreement for Future Equity – Y Combinator’s replacement for convertible debt.
• TAM – Total Available Market. In pitches, this is the estimated total revenue available for the product(s) you are selling.
• Venture Capitalist – A professional investor in companies, investing limited partners’ funds.
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