This stage of a startup’s lifecycle seems somewhat neglected to me, as this is the first article I’ve seen that really addresses what you need to do after you have closed your first round. The Entrepreneur article You’ve Raised Early-Stage Funding! Now What? by Candace Sjogren lists four “to-do’s” post-funding.
Raising capital is a totally consuming, exhausting process, even if you didn’t have 225 conversations and 95 investor pitches before you raised capital, like Candace Sjogren. She had 30-second, 5-minute, and hour-long presentations and it took her over a year before closing her final investor. I would suggest that founders do have a 30-second pitch and a 5 minute pitch, as both are critical in the increasingly prevalent pitch contests. I’d only differ on the hour-long presentation. That’s way too long for a presentation. As I’ve written elsewhere the goal of a presentation is to get to a conversation. Presentations are monologs, what you want as a sales person are dialogs. And selling equity is a sales process! Perhaps that’s why it took her so long to raise capital. Obviously hard to say of course. But the goal of a presentation is engagement, you want to get the investor talking. Hard to do if you are presenting for an hour!
Here are her tips, with my comments beneath each tip and one or two of my own:
1. Communicate early, often and to everyone.
This is very good advice. But more to the point is how you handle bad news. That’s going to happen in your startup and how you communicate it and how you handle it are critical in managing your investors. First, get bad news out quickly. The worst thing that can happen to you as a founder is to have one of your investors find out the bad news from someone else. Your investors will respect you for not trying to hide the bad news. But make sure you have a couple of options on how you plan to handle the bad news, whether it be a CTO jumping ship, a missed launch date, or an employee harassment issue.
Keep in mind investors are very busy people. I still remember Bill Kaiserof Greylock telling me he went through over a thousand business plan to make two investments, one in us and one other company I’ve long since forgotten in one year. So make sure you aren’t getting into that bad social media habit of communicating trivia. Investors don’t care what you ate for lunch or where you ate it! They want to know are you making or better yet, exceeding your numbers! When my partner and I were running HyperVest, a very early incubator, Kevin set up a password protected web site where we posted news of interest to investors. Kevin had a lot of angel investors so self-service leveraged his time and effort.
The most important time to talk with each individual Board member is before your monthly meeting. If there’s an issue that will require a Board vote you want to know in advance how they will vote. Make it a practice to touch base with each Board member at least once and preferably twice between Board meetings.
2. Structure board meetings before you have a board.
Scheduling meetings of investors before you have a board certainly makes sense. But I would advise you to create a Board before you start to raise capital. You need that structure in place and it shows you are a real business, not a hobby! The one thing investors want is predictability. So the purpose of a Board during the emerging company phase is to review the previous month’s actuals versus projected, discuss plans for the next month or more, and ask for the Board’s help on strategic issues, such as should you accept an investment from a strategic investor? Keep in mind the one thing investors want from a founder is predictability. Don’t low ball them on your revenue projections and pay attention to top line, bottom line, and most importantly your cash position.
3. Engage your investors for assistance.
I never had angel investors and I suspect that Candace had many. I’ve only worked with either venture capitalists (Greylock, Highland, Sigma et al) or strategic investors (MIT, Apple, Silicon Valley Bank et al). So her advice may be sound for angels but I don’t advise it for institutional investors. As I said before, they are very busy people. However, where they can and will help you is in recruiting. VCs have giant contact lists and often an acquisition of one of their companies will result in redundancy of roles, with the concomitant layoff of CFOs, CMOS, etc. Also ask them to interview CXO candidates. VCs have a lot of experience in this area. Bill Kaiser in particular was a very astute interviewer. And of course they should help you raise your next round. The best thing you can do for a VC. aside from making your numbers consistently, is to give them an intro to an exciting startup that you think is a fit with their investment strategy.
4. Know when to say “no.”
The domain expertise of your Board members will vary widely. You should know their expertise and experience thoroughly. Then you will know who to go to for what type of advice. But be very selective, only ask for advice on major issues, like key hires, and prospective partnerships. As said before, VCs and strategic investors are extremely busy, so be very selective in taking up their time. And as Candace writes, just because you are asking their advice doesn’t mean you are committed to following it. Board members may differ on which direction to go in, as CEO it’s your job to set the direction of the company.
5. Use of proceeds
Candace doesn’t touch upon this issue but when you pitch your use of investment proceeds is an important, and usually last part of your pitch. Where will you invest that money? Things change in rapidly startups and in the six months or more it normally takes to raise a first round and close it things can change. So make sure you review your use of proceeds with all the investors in the first round and make sure everyone is in sync with major investments, be they hiring a CXO, capital outlay, or other major expense items. Keep in mind, investors hate surprises! You should have your Board set a ceiling on how much you, as CEO, can authorize before needing Board approval. It’s been sometime since I’ve sat on a Board so I won’t try to give you a number. That’s what your network of peers is for. They should be able to tell you what is a typical spending authorization level for CEOs.
6. Celebrate!
Raising your first round is cause for celebration. Hosting a dinner for all your investors won’t just show your appreciation for their faith in your company, it will give them an opportunity to get to know you and your management team, as well as each other if they weren’t already acquaintances.
Raising your first round is a like a sailing race, where an important part of the race is getting to the starting line just on time, not too early and certainly not too late. The race is now really just beginning. So take a deep breath, replenish yourself and get ready for the really hard work of company building that lies ahead.
Mentorphile 