Tyler Menezes

Raising Early Money

December 2, 2017

To raise money from investors, you generally need to do three things:

  1. Be good
  2. Create FOMO
  3. Talk to serious investors

Be Good

Professional investors are not in the business of throwing money away. You need to convince them of two things:

  1. You are so exceptional that you might make them a billion dollars.
  2. You are well-rounded enough that you won’t fail for a stupid reason.

Put another way, you need to be really good in at least one way, and at least clear the bar in all the others. Here are a few areas that investors look at, roughly from most convincing to least convincing.

Traction

If you have a million users a month and 10% week-over-week growth, you will probably not have trouble raising money.

To clear the bar, you either need a reasonable number of users and some growth, or to have not launched. Yes: launching with no users is often worse than not launching, because once you’ve launched investors know exactly how bad things are, if you haven’t, they have to guess.

Social Proof

If you have other, well-known investors, you can kind of raise on their names (“a16z is already in”). Having well-known users (e.g. Google for a b2b product, famous people for a b2c product, etc) can also be helpful.

(Having well-known advisors, on the other hand, is usually a bad thing, because if they believe in what you’re doing, why haven’t they invested?)

There’s not as much of a bar to clear here, but it will be harder to raise investment until you have your first investor, or if you get lots of no”s and word gets around.

Team

If your founding team includes people with previous exits, people who were employee number five at a big startup, well-connected former SVPs/Politicians/etc, or former MIT/Stanford/Waterloo graduates, you might be able to raise on the strength and connections of your team.

At the very least, your team should have some qualifications, should be small, and have entirely people whose skills are necessary to succeed. Having a non-technical founder is bad unless you can clearly articulate why you need them.

Product

If your product is done, and it’s really impressive, you might be able to raise on your technology. When we got into YC, one of the reasons the partners gave was that our app worked quickly and reliably on really crappy wifi, which no other streaming app could do at the time.

If your product doesn’t literally inspire awe in investors, you can’t raise on this alone, but you should at least have a demo or a good reason why you don’t. Being in development for a long time is a bad sign.

Market

It helps to raise if you fit into a trend (think the we’re mobile-local-social” montage in Silicon Valley), because very few companies successfully create their own trend. You probably can’t raise on this alone, though.

Likewise, your market shouldn’t be tiny. You need to be able to make a lot of money for investors to make reasonable overall returns. You can start with a smaller market, but make it clear that your ultimate market is big.

Create FOMO

Investors will almost never say no.” Investors say let’s talk again in 6 months.” There is no inherent disadvantage to waiting to see how you do.

To get a bank transfer, you need to create a reason why they can’t wait.

  • If you already have at least one investor, the easiest way to create FOMO is to call it a round, and have a closing date. They make a decision, or they’re not part of the round.

  • If you have strong growth or lots of good PR, you may be able to convince investors you’re talking with them early, but your value will increase quickly.

  • If something is going to happen, like participating in Demo Day, you can tell investors there is a deal now, but the deal may change after the event.

If none of these things apply to you, you need to find a way to make one of them apply to you.

Also: the longer it takes you to close your round, the less FOMO investors feel. So move quickly and with purpose.

Note that these are reasons why investors can’t wait, not why you can’t wait. While having a plan for how you’re going to spend the money is good, we need this money or we won’t be able to compete” is bad. Investors want to take a company which will already be a winner and make them a bigger winner.

(More on this.)

Talk to Serious Investors

Even though most Angel investors invest for fun, you still need them to write you a check. There are a lot of self-described investors” who will waste the time of anyone just to play the part.

An easy way to identify people who will waste your time: ask Angels what they’ve invested in before (or look it up on Angel List). You should also stay clear of people who ask for four-year revenue projections or long business plans. In general I’d avoid Angel groups (most of them are more-or-less book clubs for wannabe-investors).

It’s also important to consider where you’re meeting investors. If you’re doing B2C, San Francisco is the best place to find investors with an appetite for risk.

In most other cities, the investment community is usually very conservative. They look for traditional teams with established revenue and clear traction. Even if you look at B2C companies that are based outside of San Francisco, most of the investors are actually from SF. (More on this.)