Brendan Baker, an MBA student at Oxford, created a phenomenal infographic (pdf) of our $1MM angel raise for AppMakr. Here's how to read it and what it means. Additionally, below is a 7 minute interview I did with Brendan going over the top points gleaned from the infographic.
Brendan followed our raise from before I even moved from DC to SF last summer. I made a few trips to SF as I began the raise process, and then moved to SF fulltime in July 2010. The raise was wrapped up by October 2010 (here's the party we had to celebrate!). The core of the raise happened over a 14 week period.
How to read the infographic:
- Chronologically, left to right, with dates at the top, starting in June and ending in October
- A beginning dot is an intro, then the resulting line is how long the intro took to play out
- Large circles are successful funds raiseed
- Brendan separated the intros into 3 groups, on the right-hand side: Timewasters, Old School and New School intros
- Timing is important: I tried to do the raise over the summer. Bad idea. Focus on spring, with fall being second-best. Avoid summer and holidays.
- Nail your message: We iterated on our message during the raise (not ideal). Watch the video for more details.
You can also view the slideshare with the full presentation.
In March of 2013 we were acquired by ShareThis and we also recently sold AppMakr to "focus on focus."
Here are my top tips if you're fundraising (in prioritized descending order):
- Know your lingo and how to read a term sheet. The best book on this is called Venture Deals by Brad Feld. It has great tips on how (and how not) to pitch VCs.
- Know what size round you need, and why. Be able to justify that amount clearly and firmly. Understand the difference between a seed round (typically angels) and an A round (typically VCs), and how the audiences you're pitching to are different and have different motivations. An angel invests in the potential. A VC invests in the traction.
- If you're raising a seed round, optimize your AngelList profile. Here are some tips on how to do that.
- This is the best blog I've ever read about how Fab turned the fundraising process on its head using big data: "How Fab Raised $40 million with a lot of data and not much pain" Try to emulate that if you can (even at a smaller scale)
- Plan on 6 to 9 months to do your raise. If your startup is hot, you can do it under three months. Cash is oxygen. Make sure you have enough oxygen in tank when you're scuba diving (as Ben Narasin once told me).
- Go through an accelerator like YC if you can. At least apply. If they reject you, iterate and apply in the next round. That's valuable feedback.
- Use your personal network to get intros to angels and VCs. I'm happy to make intros; here's how I do it.
- Never give up. A startup doesn't die until the founders give up -- even if it's running on fumes. You will find a way if you want to badly enough.
- Here are some other tips I wrote a few years ago.
Here's the video interview between me and Brendan with my top tips:
Here's another great top tip:
Kima Ventures was an investor in Socialize. I can highly recommend them. And they have a new, super transparent investment offer called Kima15: $150k for 15% stake within 15 days. That values your startup at $1mm. If you're just getting started, it's not a bad way to get some cash in the door to prove your idea out.
If you'd like an intro to the folks at Kima, here's how I do intros, via a double-blind process: http://go.DanielOdio.com/intros
If your startup is more than 6 months old, and you have a working prototype, I'd suggest you try going through Y Combinator, where you may be able to get a higher valuation, more help, and more cash. But for fresh ideas, it's hard to beat $150k right out of the gate.
Really interesting, I applaud the effort and hope there are more similar studies done...but I just can't buy the "Rule of 10" conclusion. Much more to the point is your "nail the message"point, which might be followed by a "lemming rule"--it's always easier (and less risky) for investors to pile on rather than pioneer. I'm a big fan, and have invested multiple times with AngelList. But studying it shows me that it is as much about getting momentum via a bandwagon effect, and that is only done when others sign on...i.e., social proof is big. In contrast, angel groups, which can appear to be big wastes of time, are an efficient way for someone early not just to reach many at once (in which AngelList is really key), but more importantly get live and immediate feedback on messaging, as well as getting champions willing to give introductions, support on AngelList. Most important, of course, is getting someone to break that initial inertia, showing there is always a place for the earliest "friends, family, fools" component.
As for seasonal timing, I suspect this is right, but that's the time to do that message honing, when the downside is lowest. I also would never approach the best prospects earlier.
Finally, the best way to get funding is to have both credibility, practice, feedback and mentorship--meaning that any early company should kill to get into YCombinator or TechStars, and strongly consider programs like MassChallenge. The first two virtually assure a strong funding platform, and MassChallenge, while intentionally not as selective and therefore less intense, still provides a valuable way to get your act together. Moral--any way you cut it, you've got to have your act together, making you either a) a seasoned entrepreneur, or b) in it, fully committed, for months before you can have hopes to get together a meaningful round.
SAFE = Alternative to Convertible Notes
"Safe" comes from "Simple agreement for future equity." Although the name is an acronym, we got tired of typing "SAFE" all the time when talking about it, and we've already switched to lowercase.
Carolynn wrote the standard series AA equity financing documents that we and Wilson Sonsini published in 2008. In 2010 we advised startups we funded to switch to convertible notes, which have since become the norm, and Carolynn wrote the standard convertible note documents that we offered to YC startups to use when fundraising. (We made those available on Clerky, but we didn't publish the text separately online; sorry about that.) Convertible notes made fundraising a lot easier, but there were still a few things about them that were inconvenient. So Carolynn has created a replacement that is essentially convertible debt without the debt.
Hey founders: If you're trying to get investors to close a round before the end of the year, here's a GREAT way to create a sense of urgency (sent to me by a fellow founder who I've been talking to about making an investment in):
"Hey man, quick note if you were planning on investing, I would recommend doing so by end of year. Not sure how familiar you are with it but the 100% tax exemption on QSB stock looks like it goes away at the end of the year. You can read more here:
http://blogmbbp.wordpress.com/2013/01/08/extension-of-100- exclusion-for-gains-on- qualified-small-business- stock/
Basically investments made before the end of the year if you sell after 5 years, you get a 100% tax deduction, happy to talk you through this if you arent up to speed."
I personally don't know anything about this exemption, so if you want to try using it for your startup, I'd recommend you do your homework. Please post anything you learn about it on this thread to help other entrepreneurs, too!
Here's an interesting, related data point from an email I got from Correlation Ventures:
"This year has flown by for us at Correlation and to date we have invested in 65 companies out of our $165M fund. I thought I’d get in touch in case you anticipate fundraising in the coming months. As you might recall from our earlier conversations, the highlights of our unique process include a 2-week max turnaround on decisions, no additional diligence, flexibility in terms of check sizes and transparency for follow-on funding.
We thought you might be interested in our analysis below regarding how many "winning" startups there are each year from the entrepreneur's perspective. In the meantime, if you have any specific plans for a next round with an outside VC-lead, we would welcome the opportunity to consider an investment.
The graph below considers all US VC-backed companies in our database exiting in the last ten years (2003 to 2012) and presents the percentage of companies whose returns to management were in various ranges. Our data suggests that homerun exits aren’t as rare as you’d think. In fact, over 1,000 companies (or 13% of those in our database exiting in the last decade) returned more than $100M to management and about 2,315 (or 28%) returned more than $25M. "Management" for this purpose includes management, employees, and other common shareholders. Returns to management were calculated as the total realized value of the company upon exit minus capital returned to investors.
BTW my top tip is that you move to the Valley if you haven't already. Here's a post w/ a bit more detail on what you should do first when you land at SFO: http://danielodio.com/community/just-landed-at-sfo-what-you-should-do-first
I moved from DC to SF in 2010 ( http://go.DanielOdio.com/west ). If you don't move and decide instead to "help build XYZ city to become the next Silicon Valley" then you're just fooling yourself: There are so many things out of your control as an entrepreneur that you have to jealously guard & control the variables you can, and where you live is one of the few variables you can control, so make sure you optimize that. (The only exception being if you're a media startup, you can make an argument for being in NYC. But it's just that -- an argument. Not a sure thing by any means).
I also suggest you find an appropriate, relevant accelerator to your biz. Here's a comment from me (below the original post) with a list: http://danielodio.com/uid/39635 And if you can't get accepted by a good accelerator program, then you have to iterate more on your idea until you do.
George, thanks for the awesome feedback.
I would've been dubious about it myself had the data not shown that it's what worked (at least in my case).
Obviously a sample size of one isn't statistically significant, and the bias could've definitely been because of me, i.e., maybe i'm a lot better at following up on multiple intros from someone vs. single intros.
However, I don't think that's it. I'm very organized, using a Highrise CRM implementation with tracking, and I didn't let many leads slip between the cracks.
So, then, that brings me to the same conclusion: There's a cost to everything. And if the cost of following up with individual intros netted multiples less than the cost of following up with multiple intros from one person, then wouldn't any rational entrepreneur want to maximize what was providing the best return?
Too often the inexperienced entrepreneur falls victim to the complex practices of the VC community - and their greed. The result is a present climate of innovation starved for capital. However, money can still be raised. I will soon be out looking for $2.5 million for a green play, and will probably not talk to VCs, but seek individual investors through a Series A Preferred Offering. This is where experience counts - I am a serieal entrepreneur with over thirty years experience and 9 startups under my belt. Experience comes from bad decisions - Good decisions come from Experience.
Raising money is hard work. I applaud what you accomplished, but take issue with the assumption around your rule of ten. Any entrepreneur that doesn't follow up on every single investor lead he gets is lazy, a flake, or has a method and a deal that is very unique. I recently did a Series A Preferred offering across A & B rounds and raised over $6.5 million from high net worth individuals. We made roughly 85 pitches and closed 56 investors, including $1.25 million from a Swiss private bank; we went to Zurich twice to do it. And, at the bottom line, the two founders kept voting control of the company - something a VC would never allow for that much money.
Read Next
Fundraising Cribsheet: Guide To The Fundraising Manifesto
On DROdio
In 2010 I started writing a series of blogs titled "Fundraising Cribsheet" describing our experience raising a $1MM round for AppMakr.com.
My goal has been to allow other entrepreneurs to raise money more efficiently than the 14 weeks it took us. Brendan Baker, an MBA student at Oxford University, has added a deep layer of analysis to this experience by doing his thesis on our fundraising experience. Brendan's initial work is outlined in this blog post, with much more analysis here.
Here is my guide to this manifesto on fundraising, so you can consume the information in the chunks most relevant to you:
In 2010 I started writing a series of blogs titled "Fundraising Cribsheet" describing our experience raising a $1MM round for AppMakr.com. My goal has been to allow other entrepreneurs to raise money more efficiently than the 14 weeks it took us. Brendan Baker, an MBA student at Oxford University, has added a deep layer of analysis to this experience by doing his thesis on our fundraising experience. Brendan's initial work is outlined in this blog post, with much more analysis here. Here is my guide to this manifesto on fundraising, so you can consume the information in the chunks most relevant to you: Daniel's "Rule Of 10" Angel Intros + $1MM Raise Infographic with Brendan Baker. Cliff Notes on Raising Your First $1 Million Through AngelList' Keynote + Panel Interview with Naval Ravikant, co-founder of AngelList, an angel fundraising vehicle I highly recommend Interview with George Zachary, a partner at Charles River Ventures, on how to approach and pitch Venture Capitalists Interview with Stephen DeBerry, a partner at Kapor Capital, on recommended deal structures and more Interview with Shai Goldman, a director at Silicon Valley Bank A panel hosted by Shai discussing the differences in raising angel vs. Series A funding A blog showing visually how 8.47% of the potential investors I spoke to ended up funding us How to 'Hack Your Funding' by Naval Ravikant of AngelList Other good resources include: VC Panel at the Digital Media Conference Fundraising Panel at TechCocktail's Startup Mixology Event Don Rainey talks about investing in LivingSocial
VIDEO and CONTEST - Ramit Sethi's Financial Bootcamp
On TynanOne of the more interesting people I've met since moving to San Francisco is Ramit Sethi, bestselling author and blogger at I Will Teach You to Be Rich.
He takes an out of the box approach towards personal finance that resonates well with me. In particular I like how he focuses on conscious spending and automation. His stuff is extremely practical, to the point of sharing fill-in-the-blank scripts to be used when calling credit card companies and banks.
His advice is practical and immediately applicable, and he focuses on getting people take action and really improve their lives, rather than sit and read about it all day.