Alexis Horowitz-Burdick is the founder and CEO of online cosmetics store Luxola, which has raised US$10 million from investors. But before she was able to get to that stage, she adopted a brute force approach to raising money.
Soon after starting Luxola, she created a list of 500 investor email addresses and contacted all of them. Half wrote back expressing interest in learning more, while the other half either turned her down or gave no reply.
But despite having worked in sales, she still found the process tough going. Raising her first round was one of the most painful experiences of her professional career, and she had to come to terms with it.
“I’ve had a cry before outside a meeting, I was like ‘oh it was going so well, but three weeks later it fell apart and I was like sad’,” she said at Tech In Asia’s Singapore Meetup, titled What to do differently when raising 50K, 500K and 5M.
Horowitz noted that pitches will inevitably get rejected after the first few attempts, so founders will have to learn to deal with failure.
“Go work in sales for a year, and it’ll be the most helpful thing you can probably do.”
Horowitz wasn’t the only one sharing war stories about fundraising. Darius Cheung, founder of long-term property rental site 99.co, was also on the panel discussion with Aravind Sulekha, founder of community discussion platform Scrollback.
99.co recently raised $560,000 from investors while Scrollback is in the midst of closing a round. Prakash Somosundram, founder of digital and social media agency Yolk, moderated the discussion. Here’s a summary of the key points:
1. No piecemeal fundraising
All three panelists agreed that fundraising should involve long-term planning and strategizing. Horowitz makes a list to prioritize potential investors and ranks them from those she’d really like on board, down to those she’s unsure about.
She’ll then arrange back-to-back meetings for the next two weeks. This builds momentum and creates a flow: pitching becomes easier and you’ll better understand the ins and outs of your business.
Cheung added that raising money is a long process of relationship-building. Investors may say ‘no’ once, but they could say ‘yes’ in the future. Treat them like potential customers, he said.
One tactic that’s ineffective is dressing up for a presentation. While Horowitz finds it a requirement given she’s at a beauty startup, Cheung and Sulekha can just wear their usual work attire.
“We dressed up once, but it still didn’t help us much. We were still destroyed,” says Cheung.
2. Short pitch decks for seed funding rounds
Early on in a startup’s lifecycle, founders should keep their pitch decks short. Sulekha and Horowitz agreed that 10 slides is a good rule of thumb.
“I think it’s a great loss if they get sucked into a demo… it’s very clunky. We all have really short attention spans. When you’re fiddling around trying to get something to work for three months, you’ve just lost the momentum of the meeting,” said Horowitz.
Horowitz’s pitch for the latest round had 50 pages, but that’s because her company’s at a more mature stage.
3. Expect fundraising to be painful even after you’re successful
Cheung already has one exit under his belt: his mobile security startup TenCube was acquired by McAfee in 2010. But that did not make raising money for his next startup any easier.
While he had certainly befriended more investors, these now familiar faces still displayed the same reluctance towards backing him. That had to do with how his team spent one year building Billpin and realizing it wasn’t a fundable project.
“Investors look at companies as a line, not single dots,” he said. If your company is struggling, investors will wonder if you’ve already peaked.
“We actually got a lot of rejections. It’s easier to have a conversation. But that doesn’t make raising money easier.”
This isn’t to say that Cheung anticipated an easier ride. Experience taught him that everything about venture-building is painful. So he expected 99.co to be the same.
4. Project confidence even when you feel iffy
Creating a sense of inevitability is crucial to getting money, especially in the early going. Horowitz said that investors won’t fund people who feel iffy about a project. To appear extremely confident, founders have to know their product inside-out. They also need to show passion. Investors care less about the founder later on though, as they want to see good traction and growth numbers.
“Almost 99 percent is about the founder. You really need to learn how to sell yourself. Go to your friends, try to pitch to your friends, ask them where you come off as unsure or not clear. You need have clarity in your idea, and come across as completely capable of executing on that idea.”
5. Know how to deal with investors from different backgrounds
Luxola’s latest round was led by Japanese strategic investor Transcosmos. From Horowitz’s experience, sealing the deal with Americans, Singaporeans, and Japanese investors requires multiple approaches.
The Japanese, for example, are more about trust building. They’re less transparent in the beginning, but they give more clarity as you move forward. The process is also lengthier than investors from other countries.
Meanwhile, Americans will tell you directly if they’re not interested, whereas Southeast Asian investors might leave you hanging for weeks or months.
6. Find a good reason to harass startup investors
Horowitz is aggressive about getting an answer from investors. “I’d much happier to get a no than not know,” she said.
To make sure she has a reason to chase investors for a decision, she would seek a consensus with the investor on a timeline after the first meeting. So, if an investor says that she can make up her mind within a week, you have a reason to go back to her.
7. Later funding rounds requires team effort
The complexity of later stage investment rounds requires taming from a competent team or outside help. Horowitz is aware she lacks financial savvy and is only average in operations. To compensate, she hired a CFO and head of operations who were crucial in raising later rounds.
8. Get a frickin’ lawyer
Most of the panelists advocated getting legal help right from the start. Horowitz did her own term sheet, and called it a big mistake.
Somosundram, who moderated the session, said he tried relying completely on Google, but that didn’t work out. He later invited his lawyer friends out for drinks, and crowdsourced expertise that way.
Cheung recommended the convertible note – essentially a loan that can be paid back with equity – as an investment vehicle due to its simple legal structure. Since there’s no need to agree on a post-money valuation, startups can receive money in batches from investors in a ‘rolling close‘.
However, the downside is that you don’t know how much equity you’re giving out since the valuation isn’t known. The startup could end up diluting more than they want since the valuation of the next round could be lower than expected.
Unfortunately, Asian investors in general are not as aware about what a convertible note is. This means a lot of education is needed. Convertible notes in a startup context are different from convertible bonds in broader finance. Red flags should be raised against investors who insist on an interest rate, said Cheung.
Asian investors may try to pull some other tricks on the startup. Lawyers are necessary to sniff out the bullshit.
Sulekha has come across an accelerator in India that demanded 3x liquidation preference. So if the company is sold, investors have the right to claim three times the amount they invested. Cheung said that 1x is the norm.
There are other terms that can get scary. Veto rights can take authority away from the founder and grant investors significant power to make management decisions.
9. Ask the right questions
A mature startup ecosystem has plenty of startup and investor wannabes. Cheung said that asking the right questions can sieve out investors with real money to back a startup and those who don’t. Here’s his list:
- What’s your fund size?
- How many companies have you invested in?
- What are your reserve funds?
- How many more deals are you doing this year?
- What’s your decision time frame?
- How is your decision being made?
- How many votes will it take to get a deal approved?
10. Set the right expectations with investors
In the case of startup investing, more doesn’t always mean better. If a startup sets a higher valuation and traction goals in a seed round and fails to perform, investors might be unhappy. This increases the likelihood of a down round, a sure indication to investors that a company isn’t worthy of a venture capitalist’s attention.
“That’s a good reason for setting expectations with investors as you go along with different phases,” said Horowitz.