There is no shortage of fundraising tips out there and I read a ton of fundraising advice when I launched the first startup that I knew I would need to raise money for. That didn’t stop me from making many of the seed round mistakes I read about. Here are 25 lessons I learned the hard way raising a $1.7 million Y Combinator-backed seed round.
Starting from Scratch with No Investor Connections
Eight years ago, in 2010, I started Earbits, an online radio service designed to help artists with marketing. Specifically, we were going to apply the Google Adwords business model to streaming radio and allow high-quality bands to bid, per stream, for airtime.
I did not grow up wealthy, nor did I know many wealthy people. I’d worked at several startups but had not rubbed elbows with any investors and didn’t even know anybody who had raised money. Nevertheless, our startup wasn’t one that could be bootstrapped, and I began sending cold emails to investors early on, committing the first two of many mistakes.
Fundraising Tip #1
Do not reach out too early.
Fundraising Tip #2
Do not cold email investors.
Getting Meetings with Investors is Damned Hard
Over the course of nearly 10 months, I never got a single meeting with an investor that wasn’t friends and family. I even got a warm introduction to a VC with music industry experience from one of our advisors and still couldn’t get him to meet (specifically because we were a music startup). We applied to Y Combinator’s summer class and did not get an invitation to interview. We raised a meager $100k from people we knew, $5-10k at a time, and it was enough to have about 5 part-time resources going, plus three full-time founders not getting paid.
To Apply or Not to Apply? That’s a Dumb Question
In fall of 2010, one of our advisors recommended that we apply to Y Combinator again. At this point we had a website up, a few thousand people going to it each month, hundreds of bands, and things were moving right along. We said we weren’t sure if we really needed YC anymore. Our advisor, thank god, suggested we apply, and if we were lucky enough to be selected, decide then if we want to do it. Smart enough. So, we did, and not long after were invited to interview with Paul Graham, Jessica Livingston and all of the other partners at the time.
Fundraising Tip #3
Pick good advisors (who have raised capital before) and listen to them.
Fundraising Tip #4
Barring investing significant time, it’s better to secure a bad opportunity and turn it down than to miss a good one.
Becoming a Y Combinator Company
As we prepared to go up for our 10-minute interview, we spoke to several YC alumni’s and they all said the same thing – impossible to overstate the value, worth every share of equity. By the time we were done talking to people, we felt we had to get in at all costs. We practiced answering tough questions in mock interviews and made sure we knew who would speak about what. We went to YC, interviewed, and went to my co-founder’s brother’s house to wait for the verdict. Hours later, we got the offer and officially became a Y Combinator company.
Fundraising Tip #5
Other entrepreneurs can be a great source of information and good back channel references. They are generally supportive and willing to connect.
That night, we called and sent messages to a dozen or more people. Most were our friends and family investors and others who knew how big a deal getting into YC was. One of them was a friend and entrepreneur whom we had been trying to get to invest for months. Within a few days of our being accepted into Y Combinator, he put in $50,000.
Fundraising Tip #6
Always leverage social proof. The minute a high profile investor joins your round, confirm that it is okay to tell others and follow up with all of your other investor leads.
The Runup to Demo Day
Throughout YC, their number one piece of fundraising advice is not to raise funding, yet. It’s a distraction and Demo Day will create better results for most companies anyway, so we avoided raising much more money during the program. We closed only the two people who YC had assigned to advise us, both of whom were strong signals.
Fundraising Tip #7
Do not have fundraising conversations when you are not fundraising. If people reach out to you and you are not raising money, politely tell them that. You will save time and only make them want you more.
Fundraising Tip #8
Within reason, it is okay to offer slightly better terms to someone who comes in before other folks. We offered two high profile investors sweetheart terms to join early, then used their names to attract other investors.
As Demo Day approached, everybody was hunkered down working on their investor presentations. I think we got 2.5 minutes on stage, and that’s it. Arguably, the future of your company, determined by 2.5 minutes. For that reason, and because investors have very short attention spans, we were instructed to summarize in one or two very concise sentences what we do right away – the first thing out of your mouth. Then, tell your story. I knew this was a death trap for my pitch.
Fundraising Tip #9
Keep your introductory pitches short, especially decks you send. An intro pitch is just to get someone interested and excited, not tell them everything about the company.
What to Do When You’re in a Toxic Industry for Fundraising
Internet music startups are by far one of the worst businesses to try to raise money for, period. Over the past several decades, since the launch of Napster, and this was especially true in 2010, every investor worth their salt had gone in on, and lost big on, a music startup. The entire ecosystem had turned into a fleecing factory for record labels to siphon billions of dollars off of investors through bad licensing deals for those who played by the rules, and lawsuits for those who didn’t. From Napster and Pandora to Spotify and iHeartRadio, in 2010, none of them had turned a profit, ever. Every investor had been lured in by the sexiness of owning a hot music startup, and every investor had lost their shirt. We often got replies to emails that just said, “No music.”
An investor once told me he would not meet but not to take it personally, that they avoided music startups. I wasn’t going to let that slide. “If we all picked our business partners based on the reputations of their industries,” I replied, “nobody would work with VCs either. I promise not to judge you by other VCs if you won’t judge us by other music startups.” We got the meeting.
So, I started my pitch. “Hi, my name is Joey Flores and my startup is Earbits. It might not look like it (I had 3-foot dreadlocks at the time), but I used to manage $60M in advertising for LowerMyBills. In 2004, I met Yotam. He graduated magna cum laude from Berklee College of Music and, in 2006, we started a band. We began doing all of the things bands do to market themselves and what we saw was….” I built immediate credibility by citing me and my co-founder’s past accomplishments, then told the story of how we struggled as a band, one day had an epiphany about how to solve our marketing challenges, and how we started a company based on that epiphany.
Now, there is nothing new about a presentation with a problem and solution statement, but what I knew was that if I said, “Hi, we’re Earbits and we’re a streaming music platform that addresses the problem of X with solution Y…”, I would lose every investor in the room. Instead, I decided to walk them through the problem, the thinking that led to our epiphany and why this solution made so much sense so that they could have the same epiphany, too.
Sometimes You May Have to Go Against the Advice of Your Advisors
We practiced our pitches in front of the other founders and the YC partners. Paul Graham told me my pitch was not good, that I had to tell people what we do right away. I knew I did not suck at pitching. I’d won $50,000 in free services at a pitch competition in Orange County before we even had a product live. I tried to explain to him why I thought doing that was a bad idea, but he felt very strongly about the YC pitch formula. After all, other startups were having good fundraising success with it. But that’s, perhaps, another lesson.
Fundraising Tip #10
You’re going to get fundraising advice and tips from a lot of investors. Sometimes it is incredibly valuable and, the better the investor, the more right they are likely to be. But your investors are often getting a 10k foot view and have a perception based on spending more time with their top startups than those struggling more. That means that the strategies they see working are those of companies with a rapid growth trend, or brand name founders, factors you may not have. The job of a great entrepreneur is to learn how to validate and filter the advice they receive.
Paul and I had a passionate debate and then he sort of threw his hands up.
Demo Day – The 2.5 Minutes that Could Decide Your Future
On Demo Day, we rocked the house. There were actually some cheers from investors. On one slide, where I described my band throwing $20,000 down the drain on bad music marketing tactics, I showed a picture of a toilet and got a room full of laughs. By the time I got backstage, I already had an email or two in my inbox. Later, during the drinks and mingling session, Paul Graham told me that most investors told him our pitch was the best one. We weren’t necessarily the hottest startup in the room, but our pitch had been the most exciting.
Fundraising Tip #11
Pitching your company is all about knowing your audience and storytelling. It’s also about getting people’s attention, especially in a competitive and difficult to endure event.
Closing Your First Investor and Setting Terms
Based on that pitch, we got a strong amount of interest from investors, which was good. We wanted to raise close to $2 million. Over the coming weeks, I would follow up on the leads, sending data, documents, decks, or whatever various investors wanted. Pretty quickly I was talking to one guy who had two investor friends he often went in on deals with and the three of them were interested. He asked me what our terms were. I told him that we were open and discussing that with our potential investors, and I asked him what they thought was reasonable.
In the end, based on those three investors, we secured convertible notes at an $8M cap with no discount. They were not officially pricing our startup at $8 million. They were saying that they would accept up to that price when the notes converted to equity during our next fundraising round. I was ecstatic. Somebody was saying my startup and $8 million in the same sentence and putting their money where their mouth was.
We continued to close investors who had seen us at Demo Day with these terms. Over the coming weeks, leads would begin to dry up. We started to run out of fundraising steam in the bay area at around $650,000. I packed up and headed back to Los Angeles to fundraise there and wrap up our round. We gave TechCrunch an exclusive on our fundraising and then used the TC article to drive more interest.
The Not-So-Subtle Difference Between Silicon Valley and Los Angeles Investors
In Los Angeles, based on our Y Combinator status and the strong pool of investors we already had, we had a much easier time getting meetings than a year prior. We leveraged introductions from old colleagues, our advisors, and, our new investors most of all, to get in touch with other investors. But the feedback was near universal. “You’re not worth $8M.”
Investors in Los Angeles had not seen our pitch at YC Demo Day. They had not been part of the frothy, competitive environment that it creates, or heard the other investors cheer. They were just looking at our deck, and our business, and us, and they thought $8M was outrageous. It was. I had been excited about getting that valuation cap, but I knew we weren’t an $8M company. That was Silicon Valley bubble shit and it would prove to be one of the biggest challenges we would deal with – being overvalued in an early round.
Fundraising Tip #12
Try to get the best terms you can, but make sure they leave the right environment for future funding needs.
Closing Less Than Your Desired Round
After beating my head against a wall for several months, we decided to give up on closing the rest of the round and put focus back on growth. As CEO, I was in charge of marketing and other business initiatives, and I was spending so much time fundraising that our growth efforts were being hindered. It was time to get back to work.
Fundraising Tip #13
Fundraising is a distraction. If you do it for too long and your lack of focus begins to drive metrics downward, you may have to answer questions about declining numbers. Raise money as fast as you can, and during periods of reliable growth.
Raising in Tranches – The Dumbest Shit I Ever Did
About a year later, in early 2012, we decided that we had achieved a ton and that it was time to raise money again, under the same terms. $8M was ridiculous before, but maybe less so now.
We started to gain traction and closed a couple of people, but it would prove to be temporary, and it would continue like this for the next one to two years. Part of this was me not knowing the scale of the effort I really needed to make and doing less than what’s needed multiple times until it was finally enough. It was a terrible mistake. We raised small amounts of money every 3-4 months under the same terms. As the company did better, more people were willing. As I ran out of leads, I would return to my growth work and then fundraise again in a few months. We tried to get out of doing it this way several times and failed. Eventually, I would finally go on an all-out blitz on angel investors. If I can give you any fundraising tips at all, one is to get the job done, in full, as quickly as possible.
Contacting 500 Investors, a Madman’s Challenge
Over the course of Earbits, my very gracious network of personal and professional contacts introduced me to over 500 investors. To contact that many investors, I became a master of finding leads, mutual connections, asking for introductions, and then getting the pitch. I got to pitch 200 investors and closed 36. Anyone who knows about the music industry and fundraising for it will know what an accomplishment an 18% close rate was. I will always be proud of that number.
To find 500 investors that I had some form of connection to is no small feat. It required keeping a lengthy Excel spreadsheet (or CRM) full of investors, why I liked them, the name of the best person to connect me with them, the name of the second best person, and so on. It also required having built a strong professional network on LinkedIn and knowing that my startup was investable. Do not hammer 500 investors with a bad opportunity. Just like you don’t turn on marketing before you find product-market fit, do a blitz only after some people have invested.
Fundraising Tip #14
Start slow with investor outreach and get feedback. Fix your deck. Fix your business. Reach out to the next batch. Only after you have investors jumping in do you begin to scale.
When You’re Truly Ready to Fundraise, Go on an All-Out Blitz
If you really want some fundraising tips, there is a play by play guide to how I found my investor leads at the end of Part 2 of this post (you’ll need to join my newsletter for the password). After I had developed my list, I began to reach out for introductions. Rather than do it like I did, 30 leads at a time, I now find the correct approach is to find all of the leads you need, multiply that by 5 or more because you definitely underestimated, then start all of your outreach at the same time and try to do things in phases that make it more efficient. If you can keep your conversations running parallel, it is much easier. It also means that, as the first people begin to close, your other investors will be close to closing, and a new investor joining can be the reason to send an extra follow up email and the thing that pushes them over the edge.
Getting Comfortable Asking for Introductions
Three things to note about reaching out for introductions. You’re basically asking former colleagues and people you know to introduce you to their rich contact. It may make people who don’t know much about investing uncomfortable, but the truth is that investors actually prefer introductions from people they like and respect. Tell them that the investor specifically lists them on a site for investors looking for new opportunities. Second, make it as easy as possible by offering to provide a note to forward. And, third, make sure they know it’s okay if they aren’t comfortable. It’s important to make sure these people feel okay about this no matter what they offer to do, because you need to maintain the willingness of your professional network to help you out.
An Example Email Requesting an Intro:
Hello [colleague or connection name],
It’s been a long time. I hope all is well. [or another personal message]
I was wondering how well you know [Investor Name, include LinkedIn link]. She lists herself on AngelList as an investor interested in new opportunities and it looks like we have some synergy. If I send you a note, do you think you could forward it to her and see if she would take an introduction? Or, if you think another approach is best, I’m all ears.
If you don’t feel comfortable or don’t know her that well, no problem at all. Just please let me know at your convenience. Thanks in advance.
I would send these, and I would set reminders to follow up on anybody who had not responded about 4 days later. If you are not using Boomerang for email reminders, start immediately and thank me later. They didn’t have it back then, and I really wish they had.
Try to Keep Your Prospects Moving Parallel in Phases
Once my connections started to reply and offer to make the intro (or not), I would wait for a bunch of them to come in for about 24 hours and then start to reply with my personalized note for their contact.
Thank you, Mike. You can forward the following note. Please let me know how I can support.
Hello Sheryl [Investor],
I hope this note finds you well.
I found your profile on AngelList and saw that you invested in Calm, the meditation app. My startup Clearly-a-Fakename is also focused on, well, helping people improve focus!
We have over 80 groups and companies who subscribe monthly for their teams, and over 10,000 registered personal users. Recently, John Wick joined our seed round. He is one of the leading experts in productivity tools and self-development and his endorsement says a ton about our results.
Could I forward some information to you about our startup and get your thoughts? Please let me know. I would really value hearing what you think.
Follow Up, Politely but Persistently
Then, just like anything, you have to follow up with your own contacts and make sure these intro emails went out. You have to check in and see if they said anything. Where you feel comfortable, you have to ask people to send a second email. Get the intro and get the opportunity to share your deck.
Fundraising Tip #15
Some of your contacts will say the person you asked for an introduction to wasn’t interested. I would cross that investor off, and indicate the reason in case factors change. If they say the person did not respond, you really never know if that’s true or why. Maybe they don’t like your associate very much, or the email went into spam. Perhaps your friend didn’t have the heart to tell you they didn’t feel comfortable and never sent it at all. If you had a 2nd or 3rd mutual connection to tap, I would ask the next person for an intro.
No Perfect Template Exists for Pitch Decks
There are a lot of fundraising tips for building a pitch deck, and if you want to raise money successfully, you’re unlikely to follow any one of them exactly. One of the ways that I achieved fundraising success was by knowing the way that my audience was perceiving my startup and adjusting the normal investor pitch deck to meet my very unique needs. For example, if you do not have any idea what your business model is, do not waste time with 5-year forecasts. Just exclude them and be prepared to explain why, and how come you’re still investable.
Fundraising Tip #16
Create the pitch deck that puts your startup in the best light. If a normally included slide won’t be flattering, maybe you don’t need it. Never lie in your deck. Never hide problems. But you’re not required to point out everything your company hasn’t accomplished or doesn’t know yet.
The Difference Between an In-Person Presentation and a Deck You Send Out
Unlike my YC pitch, I didn’t have the luxury of captivating an audience while I get around to telling them what we do. Your deck has to be much more to the point. I knew that, once I said we were a streaming music startup, the default answer became no and the rest of my deck was likely to be breezed over. Most founders would probably tell you not to introduce concerns that weren’t there, but my goal wasn’t to stop people from becoming skeptical, it was to change the minds of the already skeptical.
Controlling the Narrative
I spent the first few slides setting the table with stats about the industry and why it was broken (the problem statement), then I said what we did (the solution). From there, you might normally go into a team slide to build credibility, but I couldn’t do that. Immediately after, I inserted a slide that said, “You’re probably thinking…” and I included a list of our most common objections. “You can’t get good content royalty-free.” “Good investors won’t back you.” “Bands don’t have any money.”
Then, slide after slide, I knocked them each down. The objection was written at the top – “Bands don’t have any money.” Below it, we boasted that 12.8% of bands were paying clients with a near 10X ROI on cost per acquisition, spending an average of over $80.
Objection after objection we showed data and achievements demonstrating why they were inapplicable to us, and it worked. By the end of the deck, you felt your objections had been answered. Over time, though it was inefficient and painful, we raised $1.7M in a mix of cash and work-for-equity contracts. This money let us fight the good fight until 2016, when we were acquired by You42, Inc.
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Looking for more entrepreneurship tips? My article 9 Tips for Success from a Highschool Dropout is just as relevant for PhD’s as it is for dropouts.