Businesses pursuing early-stage venture capital likely found their efforts waylaid, at least in part, by COVID-19. Angel investors, a main source for a company’s earliest fundraising rounds, are generally investing less right now, noted Eric Bahn, co-founder of Hustle Fund, a venture capital firm that focuses on extremely young companies, on a recent webinar with NetSuite.
Given the extra challenging VC market, young companies that need cash might be better off using cost-cutting mechanisms such as renegotiating lease terms or pursuing annual contracts versus month-to-month contracts with customers to secure more cash on hand, Bahn said. They might also apply for government loans or pursue revenue-based financing, which entails giving investors a percentage of ongoing gross revenues in exchange for their support.
For an overview of the various ways to finance your business, read “Everything You Need To Know About Financing A Business.”
But for some young companies — especially those in the technology sector — raising money from investors is still and attractive option, Bahn said.
Bahn provides early-stage startups 10 tips for securing their first round of investor financing (usually called a pre-seed round).
1. Prioritize angel investors
Though angel investors are “shrinking” in terms of the amount of capital they’re willing to invest at the moment, Bahn advocates pursuing funds from them vs. venture capital (VC) firms for your pre-seed round. Two reasons for this:
- There aren’t many VC firms that make truly pre-seed investments, he said. Firms often focus on larger fundraising efforts for more mature companies.
- While VC firms are under pressure to deliver monetary returns to their investors, angel investors aren’t. They’re spending their personal money, and therefore they can be more bold in how they dole it out, Bahn said.
2. Pitch like crazy
No matter the economic climate, you’re going to need to pitch many more investors than you hope to ultimately work with. When Hustle Fund was just starting up, for example, it secured investments from only 70 of the 700 potential investors it pitched.
Founders will need to use even more “brute force,” as Bahn called it, when raising their first rounds of capital in this post-coronavirus climate.
At Hustle Fund, “we have a rule of thumb that it takes about 100 pitches to get $100,000,” he said. “In this environment, I think we need to bump that up to 200 pitches for every $100,000.”
That’s not a hard-and-fast rule, of course. Founders with strong networks often find it easier to fundraise in any climate. But by and large, the fundraising process will be “bigger and slower” until the effects of COVID-19 wear off, Bahn said. Prepare to send lots of emails.
Learn more about sending emails to potential investors in “How to Find the Right VC To Fund Your Business.”
3. Start a flywheel
When reaching out to angel investors, founders commonly ask each of them to name another angel investor who might be interested in the company. Bahn has a simple tip for this:
Don’t ask: “Do you mind sending my company materials to anyone else who might be a good fit?”
Do ask: “Do you mind sending my company materials to just one person in your network who might be a good fit?”
A pointed query for just one recommendation (vs. multiple) is easier for the investor to mentally digest, Bahn said. This process—of securing support from one angel investor, then one more, and then one more—is what the Hustle Fund team calls “creating a flywheel.”
4. Consider “tranching”
Hustle Fund also advises the early-stage companies it works with to seek money from investors in tranches, or smaller pieces of a whole.
Imagine, for example, that your company aims to raise $900,000 over the next three months. Bahn suggests raising three tranches of $300,000, each at a different valuation cap.
Bahn suggests raising a first, small tranche of capital at a valuation cap that is arguably too low for your business. This is favorable for angel investors and can help get big names to invest in your company — after which you’ll use the flywheel technique to attract more big-name investors.
A few weeks after raising your first tranche of capital, raise another, and then another, with increasingly higher valuation caps.
The cons of this method:
- Raising money this way tends to take longer than doing so without tranching, Bahn said.
- Investors who contributed to, say, your second tranche of capital might learn of your first tranche and ask you why you raised the valuation cap. Bahn advises responding to these concerns by explaining that:
- within, say, the month between tranches one and two, your business made enough progress and got enough traction to warrant a higher valuation cap.
- between tranches one and two, the competitiveness of investors increased.
The pros of this method:
- Anecdotally, Bahn has seen “tranching” work well for Hustle Fund’s portfolio companies. The strategy, he said, can create a fear of missing out (FOMO) among potential investors.
- Raising money at various valuation caps shows you, the founder, how circumstances affect potential investors’ reactions to your company. The exercise “is a good way of building momentum and … understanding where the market is comfortable investing in your business,” Bahn said.
5. Try SAFEs
A simple agreement for future equity (SAFE) is a type of written agreement between founder and investor that startups use frequently. It “is essentially like an IOU for equity,” Bahn said: It gives investors the right to purchase stock, or ownership in your company, during a future fundraising round, subject to certain parameters.
For their earliest rounds of financing, founders usually choose between two types of agreements between themselves and their investors: convertible notes or SAFEs. Bahn recommends SAFEs, which are generally perceived as simpler and more straightforward.
6. Prepare to explain why your business is “antifragile”
“There are certain kinds of business models, or ways that businesses are operating, where, in regular or frothy times, they’re perceived as weak but in moments of economic shock shine as really successful,” Bahn said.
He cited a recent essay in which finance whiz Alex Danco coined the term “antifragility” to describe these businesses that are uniquely well-suited to withstand tough times.
Consider a software company of five employees that is accustomed to operating without much capital because its founder hasn’t successfully fundraised in the past. This business might thrive in an economic downturn while its competitors, who are accustomed to operating with lots of capital, crumble due to the lack of new investments.
When pitching investors in the post-coronavirus era, make the case that your business is indeed “antifragile,” Bahn said.
“I think it’s a case that you have to make in order to convince [investors] to invest in your company — that they’re not just throwing [money] away into a business that’s going to fail due to the crisis,” he added.
7. Gather your assets
Having the assets you need to successfully pitch your company to investors is critical right now. Before you start pitching, Bahn recommends preparing a pitch deck and a teaser deck.
A pitch deck is a slideshow presentation that you use to showcase your company when meeting with investors. A shorter version of it, or a teaser deck, will come in handy when sending brief inquiries to investors via email.
The format for pitch decks and teaser decks is pretty formulaic and consistent across all industries. Bahn outlined the slide titles of a teaser deck that would entice him as an investor in this post-coronavirus climate:
Learn more about making decks in “The Perfect Pitch Deck.”
- An email “blurb” about your company
This bit of text is what you’ll use when emailing potential investors to gauge their interest in your company. You can also have friends and already-secured investors send it along to others.
- A customer relationship management (CRM) system
A spreadsheet is not the easiest way to track you and/or your team’s conversations with thousands of potential investors, Bahn said. He recommends using a CRM system instead.
- Video conferencing capabilities
Bahn predicts that investors will continue taking meetings on video platforms like Zoom even after stay-at-home orders fully lift and their offices reopen. Ensure you’re ready to do the same.
See a list of free and low-cost video conferencing tools in “30+ Online Collaboration Tools to Rule WFH.”
8. Nail your reach-out email
Whether “warm” or “cold,” your first conversation with this potential investor will likely happen over email. You’ll include a “blurb” that explains the typical stuff: who you are, the need that your business serves or the problem it fixes, and why the business has been and will continue to be successful. In the current climate, you’ll also need to mention COVID-19’s effect on your business, Bahn said.
According to Bahn, a number of features make these emails especially effective: Consider name-dropping some already-secured investors to ignite a fear of missing out, or FOMO, in the potential investor.
Also include a link to your teaser deck in the final line of the email, to give the potential investor more context. Consider using a document sharing platform that allows you to track downloads of your deck; this information can help you determine when to follow up with the contact, he added.
9. Be persistent — really persistent
If you’ve reached out to potential investors and not heard back, Bahn encourages persistence now more than ever.
“What I’ve learned over time from my own fundraises is that just because you hear nothing [back from a potential investor] doesn’t mean it’s a ‘no,’” he said. “Founders are generally giving up way too early.”
Bahn cited a time when he followed up with a potential investor 13 times over email with no response. Ultimately, the contact responded and gave “a large check” to Bahn’s endeavor.
A simple note did the trick:
Follow up persistently and succinctly, Bahn said, and you just might secure an investor in the same way.
10. Start sending a newsletter
If a potential investor declines to invest in your company, stay in touch by asking whether they’d like to receive your company newsletter.
Bahn recommends sending a simple email every month that includes your company’s recent accomplishments to keep your startup top-of-mind with these folks.
Then, when you’re ready, you can use the newsletter to gauge potential investors’ interest in an “insider round” of fundraising, he said. Including such an offer in your newsletter can increase their feeling of FOMO to a point that they just might buy in.
Watch the full webinar with Bahn.