There is no conventional timeline on when you should raise money. It’s whenever you have a winning recipe to scale your business with capital investment. If you have data to build a strong story around this, then you’re ready to raise money.
“Hangover drinks! Can we hand them out at our launch party?”
When James Wong, my attorney colleague, asked me this question, I thought he was joking. 12 hours later, an unassuming Asian guy dressed in black showed up at our Atrium launch party, hauling 20 boxes of his liver-boosting supplement straight from his lab in Los Angeles.
This was my first time meeting Sisun Lee, a former product manager at Tesla, and learning about his new company, 82 Labs–which uses the latest research to help us wake up feeling great after a crazy night out.
We watched as the company grew along us, doubling sales and headcount in a matter of months. When Sisun was ready to raise his first priced round, he flew up to San Francisco to attend Atrium Scale, our hands-on Series A fundraising boot camp. We started Atrium Scale because founders (especially first-time founders) find it valuable to learn the mechanics of raising a sizable round of venture financing. Unlike a seed round consisting of SAFEs or convertible notes, raising a priced round invites higher business scrutiny and legal complexity. Seed rounds can be prepared with just a few pages and finished within a matter of hours. Priced rounds, on the other hand, require over a hundred pages of dense, heavily negotiated legalese and take one to two months from signed term sheet to money in the bank.
As someone who leads Atrium Scale, I got a front-row seat to how Sisun raised a whopping $8 million from Altos, Slow and other great investors. Glowing press releases aside, the financing process was not without frustration, patience and persistence. We each compiled key learnings from this journey.
- Spend less time talking about what you achieved, and more time on how you are going to scale your business. Having a great track record gets you into partner meetings, but what matters in these meetings is how you’re going to 100x your already-impressive business. Why else would someone invest in your business?
- Founder conviction is extremely undervalued. Words said with strong conviction and great delivery will carry far more weight than you’d think. This echos BeBe’s learnings from watching Justin pitch. It can dictate whether an investor listening to your pitch will question your logic or nod with you. Startups are hard, and you need to show investors that you’re a tenacious founder who will find ways to get shit done. That determination can be carried out from your pitch delivery. Use it to your full advantage.
- Don’t bullshit. You don’t need a perfect business plan to get funded. If your business plan was perfect, everyone would throw money at you. Talk through what you know, share what you don’t know, and explain how you will work towards plugging the gap. Coming up with a vague answer on why your business has perfect defensibility (when it doesn’t) will just make you look like a clown.
- Fast-track yourself to decision makers. Every firm has analysts or associates that delay your time-to-term sheet. Speak to partners directly.
- There is no conventional timeline on when you should raise money. It’s whenever you have a winning recipe to scale your business with capital investment. If you have data to build a strong story around this, then you’re ready to raise money.
- You should raise when you have the greatest leverage. Startup growth is non-linear. You’re going to go through good times and bad times. We raised early in Q1 based on our previous Q4 track record (traditionally the best quarter for CPG). Use whatever advantage you can get.
- VCs that are excited about your business will move fast on their decision. Firms that take a long time to respond/reply are just not interested in you. Move on.
- Every verbal yes is a maybe. It’s term sheet or nothing.
- There is never a clear math to startup valuation. Forget about ARR multiples, and let the market dictate. My CPG startup of 7 months old is worth $33M because that’s what the market was willing to pay for. Don’t waste time building a sophisticated valuation framework.
- You want your co-founder(s) or key employees to run the company while you’re out fundraising to keep things rolling. If you fail to raise money this time around, your business still needs to grow. The worst outcome is when you stall your growth and you raise no money. That’s double losing.
- Understand your term sheets. Each term you sign is a loss of control and ownership to investors. Invest your time here, and get yourself help through a high-caliber law firm like Atrium.
- Do your homework on VCs: Many VC firms toot they are “founder friendly” on their splashy websites and in person, but are they actually? Do your due diligence and back-channel founders who have worked with them. Most founders are pretty honest and want to be supportive, but in the Valley where founder reputation is taken very seriously, most founders don’t like talking trash even when they were treated like such. The best trick during reference calls is to pay attention to not only what the founder is saying but how they say it. The best reaction is a founder, without hesitation, praising the investor and giving very specific, concrete examples of their help…and if they trusted the investor enough to refer their friends to them. Anything other than a specific, ringing endorsement from a founder should probably be questioned. Investors should be expecting you to back-channel because they certainly back-channel founders they are interested in…and the good ones back-channel a lot.
- Not everyone should raise money from venture: You should pick investors who will add value beyond capital injection. This value-add can take form in helping you think through problems in building a company, the industry you play in, and opening opportunities for the business and talent. Some companies can do really well, if not better, in terms of retaining ownership via other capital means. This can be seeking money from family offices or influential individuals who can help you in the industry you’re in. Sure, it’s not as sexy as tech VCs but at the end of the day, it’s important to calculate the human value ROI of taking money from tech VCs (especially if you’re not a core tech company) vs. other alternatives.
- Leverage, leverage, leverage: When investors ask “How much are you raising at?” The best thing to keep your options is to reply, “We want the market to decide.” Once you get your first term sheet, make sure you use this as leverage to get investors to give you an answer (or even better if they are really interested and verbally committed to giving you a term sheet) faster. Get legal counsel’s help as soon as possible to help you negotiate for better terms.
- Stay Sane: Make sure to schedule breaks during the fundraising process as a sanity check and to keep yourself healthy. You can get so caught up in the fundraising process that you push off free time, exercising, spending time with friends, etc. What I admired about Sisun during the fundraising process is he made sure he got his workouts in! Fundraising is a marathon, not a sprint.
At the end of the day, fundraising is only the vehicle to help you grow your business. As Justin puts it, “Participating in the Silicon Valley beauty contest of who raised what at what valuation is a fool’s errand. There are lots of examples of companies raising too much money from the wrong partner and ending up shooting themselves in the foot.”
Make sure to do your homework, have a support system of friends and mentors to help guide you through the process, and take in the experience.