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My tips on raising money for your early stage startup


I didn't start this blog to be a startup agony aunt - simply to be frank about my mistakes, successes and learnings. But based on the many - and wonderful - LinkedIn & Twitter messages I have received over recent weeks, I think such a thing may be required! And the most common question asked so far is "any tips on fundraising"?

My thoughts follow, based purely on my own specific experiences and biases. I have deliberately avoided the usual macho stuff around valuations and the mechanics of the terms because I think it is important to first really think carefully about the fundamentals of fundraising before getting distracted by details of the deals.

But first a word of caution in true agony aunt style. Several people have asked me "how do I raise the money I need to start my business"?

I strongly believe that unless you have a really strong track record of raising money across several startups, your chances of raising sufficient money simply for an idea without serious customer traction are negligible. Doing the pitch circuit too soon could further jeopardise your chances of success - because while you are out broadcasting your idea in order to get started, someone actually executing is likely to streak past you. And raising money really is a full-time job - at the very same moment your customer and business model should be your full-time job.

So my single most important point is: do not think of raising money as what you need to do so you can start - think of creating value for a paying customer, or compelling commercially sustainable customer traction, as your starting requirement. If you achieve that, the money will follow.

That may rule out certain business models on day one - all singing, dancing enterprise software is very difficult, for example. At least in phase 1. But if you dedicate your creativity and scrappiness to getting something, anything in front of your potential customer to extent that you can disprove your own flawed assumptions, prove demand and derisk your business model, not only will fundraising be easier, it is likely you will need cash less urgently, which seriously improves your terms of negotiation.

This takes me to point one:

1. Are you in the business of building a business or of raising money?

I have met plenty of founders who define their success by how much they have raised. I can't tell you how many times someone has mansplained their raise to me, usually while also telling me I should be asking for more money, yet never once mentioned how they deliver value to their customer (rather than to investors or by impressing their peers).

I have to confess I love the high adrenaline kick that goes with fundraising, and there are many times when it is an essential & full-time part of a CEO's job. Maybe I like it a bit too much. But unless your long term business is fundraising, ultimately it can be a massive and disruptive distraction.

I love Steve Blank's definition of a startup as a temporary organization designed to search for a repeatable, scalable business model. Know your customer, know what business you are really in and know your reason for existence. Keep focused on pursuing that and the money will follow.

2. Which cookie cutter do you fit into? Only a very small, and very specific type of business suits the VC and angel equity funding model. These businesses will have considerable potential to scale dramatically, clear exit scenarios, product not service (unless it's a SaaS type model) and growth - not profit - is typically the driving force behind the investment. Very few businesses fit the criteria and very few of the businesses that do fit the criteria will ever get funded. This is why you cannot think about funding as the start-line. It may never happen.

Crowd-funding is a differently shaped beast, as is debt funding. Startup competitions help. Grants may be an option. But - dammit it took me waaaay too long to truly learn this - customer sourced funding (aka sales) really does trump everything.

3. How much traction can you create without it?

Assuming your job is to search for a repeatable, scalable business model - not to get funded at any cost - what are the tiniest proof points you need? Are there big leaps you can make with small injections of cash (such as paid pilots, prize money, grants or gifts)? You cannot pursue the "build it and they will come" approach without funding - but isn't that a blessing in the long run? It certainly makes iterating easier. If you spend more time trying to validate a truly commercial business model (as opposed to building a product or application) you can get much further with fewer resources. One of my key lessons for my new startup is to work harder on the business model than the business idea at the very beginning. This is a must read on business models that are fuelled by customer cash.

4. Hobbyists or professionals?

Professional investors have customers and managers to answer to and financial (and sales) targets to make. Their motivations are therefore pretty transparent, and while their actions may typically seem tough and their results requirements are very high, their expectations are broadly predictable.

Hobbyists - be that certain types of angels, crowd-funders or friends/family - are a far more complex bunch. As a result, I think they can be more unpredictable and problematic for a startup founder/CEO to manage. In my last business, for example, I had in excess of 25 individual angel investors - each with differing levels of engagement, expectations, experience, proportional financial commitment relative to their wealth, and with different motivations for investing. Some believed in me, some in the business, some were hedging their bets, others wanted to be involved in something they understood, others to be involved in something they could learn about.

The terms of investment - ordinary shares, fair valuations, may seem more attractive from angels or friends/family - but you need to understand the time and emotional impact that can accompany the non-professional investment route.

5.Too little, too often or not often enough

The funding decisions you make at the beginning can also constrain your ability to scale and raise money in the future. Everyone tells you it will take you far longer and you will need more money than you ever imagine - very true, but also very unhelpful. They will also tell you to raise more money than you need, to raise at least 24 months money each time and to never raise if you have less than 6 months money in the bank. Well yes, also very true. But seriously!!! For a European based, early stage founder who has never raised money before, the chances of this happening are minimal.

Of course I would have liked to raise 24 months money at a time. Of course I'd like to have raised 3 or 4x more than I needed. But the reality is, if your business is not sufficiently advanced in its traction, or you lack the personal track record, the most likely thing that will happen when you go out to raise £1.5 million is that you will be asked what you can do with £150k. And the chances are you will take that £150k and try your very best to make it work.

The risk then is that you spend your next 1, 2, 3 or more years constantly raising money - never enough to stop fundraising, never enough to truly scale, but enough to keep you going on and to keep you distracted. And each time you give up more control - including the board seats, the share cap, the strategic vision. The big raise and the big goal you had in mind may no longer align with the interests of your investors. And because you are chronically underfunded, you may not actually be able to execute on the vision you have sold them, seriously jeopardising your position.

I have worked with some wonderful angels and I have no absolutely no issue with angel funding in itself - quite the opposite. But I strongly caution against getting pulled into the cycle of too little, too often - it is very very hard to escape from. The solution? See point 3. Execute point 3.

6.Most people who want to talk to you do not have money to invest right now

One of the most important things that I want to share is how easy it is to spend all of your precious time speaking to people who cannot or will not invest - at least not in your time frame. This is the worst possible scenario as you'll neither be working on your business nor achieving your funding objectives.

There are the brokers/advisors/consultants and job seekers in disguise. Call me a cynic but these are the people who will give you the most time because in reality, they are selling to you. The problem is that this may not be immediately apparent to you. But in the majority of early stage scenarios, paying people to help you raise money - or paying to pitch at exclusive events - is a really high-risk use of your limited funds and time. If you feel tempted to pursue this route be very careful, get references and ask yourself why you haven't already achieved the same results yourself. Is it because you literally know no-one, and so the introductions and exposure will help? Or is it that you have already been out there but you are not really hearing the objections that potential investors are raising?

Then there are the wrong funds/groups for you - they do not invest at the stage you are at, or in your sector, geography, whatever. They may give you airtime, even approaching you for a friendly chat, but this is not a buying signal. You may be talking to an analyst who is mapping out the space (possibly for your competition), or a person genuinely interested in your ideas who may be a great contact in the future - but when time and money is so limited, these are not the people to fly to San Francisco for (at least not yet). Finally, there are the right funds at the wrong time in their cycle. As in they have no money to invest. You may become deal bait (a poster child helping the investors raise money for their next fund) - this is fine if you are both thinking long term, but not if you need cash in the bank within six months. Worse still, they may already have money in a direct competitor - in which case beware of brain suck by flattery. You'll be amazed what people nervously overshare when approached by people who might give them money (I'm not judging, btw, I've done it myself)!

So do you homework and focus on a small number of relevant funding sources, rather than trying to be everywhere. I strongly caution against "pay to play" events when you're at a very early stage unless you've referenced the heck out of it. I recommend using resources like CrunchBase, UKBAA and CB Insights so you totally understand who you're dealing with and the deals going on in your space.

7. Relationships, dating and dealing

An insider friend (you know you who are, you lovely, lovely people) is worth their weight in rare, precious elements. Such relationships are earned, they do not appear overnight, and if you're "that guy/gal" they may not appear at all.

A benevolent sponsor will introduce you to the right person, tell you when you're out of order and give you the dose of realism & hope you require. They may also may the connection that changes your life. Treat these people like the wonders of humanity they are. Be humble. Say thank you. Always, always follow up. And practise asynchronous reciprocity - help others in order to repay the generous help you have received.

Having said that, not everyone you date while fundraising is appropriate to marry. One of the hardest yet most valid decisions I ever made was to turn down an investment deal when my company had just £600 left in the bank. The next day I called my financial mentor and told him I had made the right choice, but killed the company as a result. He told me never to underestimate what it feels like to be able to look yourself in the mirror in good conscience. And incredibly, another source of funding turned up just in time. Nevertheless, it was a sickening decision - however correct.

If something feels wrong at the deal stage, it almost certainly is. Raising money isn't the end, it is the beginning. If it feels off when it's all good, can you imagine how it will feel when everything you care about is on the line and you do not have the support you require and likely deserve?

8. It is easier - and more problematic - to pitch a concept than a real business

I am a huge supporter of incubators, accelerators and startup competitions - to a point. Pitching is a really good discipline - to a point. But do not accidentally let your pitch become your business strategy.

Hope is not a strategy, nor are your carefully crafted 60-second elevator pitches, or your 8 fantastic investor slides.

They have their part to play, but they should serve the business, not lead it. When you - and your investors - are more convinced by your pitch than your potential customer, you have serious problems ahead. Likewise, the earliest stage of your business is the easiest time to gloss over the gaps in your knowledge, assumptions and product/market fit - don't believe your own pitch or press hype. Once you are pitching a real business (with failures, unhappy customers, wasted money, pivots - and all those other gnarly things that don't play well on slides) you absolutely have to park the wishful thinking and "reality distortion", or it will come back and bite you.

I say this as the official pitch queen of MIT 2013, and pretty much every other pitch competition, ever. However good you are at this, your business must be more than your pitch.

9. Caution - your investor is not your customer

Board directors, enthusiastic investors, advisors, mentors, and even very unenthusiastic investors will have strong views on your product, your performance and your strategy. You will have sowed the seeds of this long ago and moved on. But when you have taken their money or appointed them to your board, you have a duty to take those views very seriously indeed.

Yet none of these people are your customers. A major mistake I made was to give my board and investors more of my attention than my customers - as a result, I over-attended to one, at the cost of the other. Steve Blanks calls it the death spiral and I absolutely witnessed that cycle play out, right down to the board replacing the CEO (me). Although I was the one meeting with customers and crafting the sales message as it rapidly iterated, that did not always chime with my investors' expectations or understanding and I struggled to bridge that gap. As the proverb says, (s)he who chases two rabbits catches none. Big hint - the rabbit you should chase is your customer!

10. Understand what you are really selling when you raise money

When you are raising equity investment you are selling slices of your pie (your "share cap" table) in the hope/promise/expectation that this will make your pie far bigger and more valuable to investors in the future. It is your responsibility to make sure that your personal and ever diminishing slice of the pie also becomes more valuable, as there are plenty of ways that it may not.

You are not selling investors your product, vision, strategy or own indispensability - though these all have their place as tools in the fundraising sales story. You are selling the promise of an ever more valuable pie. Therefore your commitment to your product/strategy/vision and ongoing employment may become wholly unaligned to the goals of your investors.

If you, or any other aspect of the business, are not growing the size/value of the pie, it will not matter how happy your customers are, or what a great culture you have - your days will be numbered. That's often even the case when you get it right - it's called the paradox of entrepreneurial success. Four out of five founders get forced out as CEO of the company they started. That might ultimately be the right financial choice to make for you and your investors, but be sure it is an informed choice!

“Congrats, you’re a success! Sorry, you’re fired,” is the implicit message that many investors have to send founder-CEOs.

Noam Wasserman, Harvard Business School professor and author of the bestseller The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup Quote Jack Dorsey on being fired as Twitter CEO

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