While I didn't get to reflect on Techstars during the last couple weeks as much as I would have liked, given that I was traveling back to Montreal and Nova Scotia on the weekends, last week was yet another week full of learning. And while the title of this post is Fundraising, we aren't really there yet. But the workshops at Techstars were focused here this week, and they were so good they deserved the title.
We had fewer sponsors this week, which let all of us (including Associates) really get into our work, and we had another couple great workshops and Founder Stories.
This workshop, while perhaps not the most interesting of topics, was very useful. The workshop focused on modeling different investment and cap table scenarios and the resulting equity distributions. The bottom lines:
- You need to understand in detail all the implications all term sheets you consider, including the future consequences with your likely fundraising milestones.
- Beware taking a lot of convertible notes - this can kill you down the road.
- Pre-money vs. post-money has major implications for every deal you do, but make sure you know all the different situations it applies, as they're often wider than most people think.
- The combination of employee equity pools, equity guarantees (for things like accelerators), and high amounts of capped convertible debt can spell disaster for founders, so make sure you don't end up in this situation.
- The investors you're dealing with have done this a hundred times; get a mentor and/or lawyer who is equal to the task and has your best interests in mind.
The bottom line here is that with a few small mistakes in interpretation, you can end up with very little equity. Don't take fundraising of any kind trivially.
This workshop was given by David Cohen, and was the single best resource I've ever been exposed to on closing an investor. I'm still trying to find some public resources to share since it's so good, but for now here are some tips (keep in mind this is based on Techstars companies only):
- You should have an amount of money to raise as your target (call it 'T'), and should 'know' that you can exceed this target. In other words, the overask is the killer in fundraising.
- If you have a demo day coming up, you should be aiming to have at least 1/3 of T committed going in.
- Ask investors you have developed relationship with to "help you" by committing early.
- Don't ask them to lead, just to commit.
- Make it safe for them to commit (ie. no cheque required).
- "Soft commit": agreement to invest specific amount of money with specific, well understood conditions.
- Example of one condition: "I can't commit without the valuation." "Will you commit, assuming the valuation is ultimately acceptable to you?" - provide the "out".
- Practice active listening to get to commitment.
- Your job is to remove concern, not solve it.
- Once condition is mentioned, write it down, repeat, ask if you got it right, ask what else.
- Your goal is an exhaustive list of conditions under which they will invest.
- Ask clearly for the commitment at the end:
- "So, assuming [condition 1], [condition 2], [condition 3] are met, I understand you are willing to commit $[___]."
- Ask if you can use their name when talking with other investors.
- Enjoy having your lead investor!
Okay, so it's not quite that simple. But the active listening, and removing concerns was a huge revelation for me. Everyone will tell you that once you have a lead investor, things become considerably easier, as investors like to invest with others, but this is the best methodology I've ever seen for getting the soft commit you need to get other investors on board. Enjoy!
While the details of this story, as with all Founder Stories, are kept among those who are present when they are told, this was one of the more amazing stories. Tom Leighton from Akamai, a company which has been through a bunch of ups and downs on all sides of the business, from the valuation to the leadership, shared his story with us, and some of the most amazing takeaways I got were based on Tom himself:
- Being humble, kind, and extremely successful are not mutually exclusive. To the contrary, I think that a disproportionate number of great entrepreneurs are good people, and Tom is a great example of that.
- Leadership and the ability to be a CEO can be learned; the caveat is that it might take time. Tom himself was with the company for many years before stepping into the role.
- Culture and hiring is extremely important to the company; on the topic of navigating crisis, breaking bad news, or other general obstacles for the ups and downs of a startup company are often a non-issue when you have a great team made of great people.
- You have to be lucky to be good, and good to be lucky. This old cliché holds true for most aspects of life - but you need to always be positioned to take advantage of opportunities that come your way. Often they can be the break you need to get ahead, or to keep the company alive period.
If you're more interested in the story, check out this book:
- No Better Time: The Brief, Remarkable Life of Danny Lewin, the Genius Who Transformed the Internet - Molly Raskin
Airplanes & Productivity
I flew home this past weekend for a funeral, which while obviously a sad occasion, provided me some much-needed reading time during my flights. I was once again reminded how valuable carving out undisturbed time to read and learn can be. During one ninety-minute flight, and the last three quarters of a book (Traction, in this case), I had the best ideation session of the past several weeks (maybe even months), and no doubt it was the lack of distractions aside from my book, notepad and pen.
Whenever you can, make sure to escape somewhere to take some time to read and think. And don't just hope it happens - schedule it in your day.
The books I finished recently:
- Traction: A Startup Guide to Getting Customers
- The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers
Until next week!