<strong>Joshua SMITH</strong>
Joshua SMITH

Executive Trainer & Edtech Co-founder @ Coursely.eu. Head of Higher Education Partnerships & Adjunct Teacher Recruiting in France.


108. How To Start A Startup: Raising Seed & Series Investments For Your Startup

16 important takeaways from this panel discussion:

00:00:42 Having interviewed thousands of entrepreneurs and invested in over 700 companies since 1994, there are several key things that go through my head within the first minute of our discussion:

  • Are you a leader who can take charge?
  • Are you focused and obssessed by your product?
  • When I ask ‘What inspired you to create this product?,’ I’m hoping that your answer is based on solving a personal problem, and your product is the solution to that problem.
  • Are you a solid communicator?

Two additional general concepts investors:

  • Look for are extreme outliers
  • Invest in is strength rather than lack of weakness

00:04:11 Often, many of the most sound business ventures have nothing special about them, while many of the most potentially lucrative business ventures have a few serious flaws to deal with. If investors follow a checklist and only invest in sound business models, they may make some money but will miss out on the really lucrative outliers.

00:04:47 When you pitch to an investor, you’ve got to be able to say in one compelling sentence – which you should have practiced like crazy! – what your product does so that the investor that you’re talking to can immediately picture the product in their own mind.

If you move on to your 2nd sentence and the investor has no idea what you do, then forget about it.

00:05:48 You have to make decisions. Once you have a great product, then it’s all about execution and building a great team.

Procrastination is the devil in startups.

00:07:46 Get your business so streamlined that it could almost be possible to not need investment; these are the kinds of businesses investors love to invest in.

Secondly, bootstrap (be self-sustaining without need for external sources) for as long as you possibly can.

Comedian Steve Martin wrote Born Standing Up, a great book on his startup career. His advice is to be so good that they can’t ignore you. Do that, then the whole discussion of raising money is beside the point. Being 1:1000 will make it harder and harder to raise money.

You’re almost always better off making your business better than you are making your pitch better.

[EDITOR’S NOTE: In our interview, Timoni West, Product Designer suggests that you should address the question of how good is your product already? If you have a very simple product and you’ve already nailed what your product does, and when people open up your app or visit your website they know exactly what it does and why they need it, then by all means don’t spend any more money on UX and invest in getting the word out about your product. But if when people go to your site people don’t know what it does or why they should use it, or if you’re having problems with growth because people aren’t being retained (or converted via signing up or purchasing) that means that there is a problem with your product or your product’s presentation.]

00:10:34 Raising venture capital is probably one of the easiest things a startup will do, as compared to recruiting the first 20 or so engineers, selling to customers, getting viral growth going on a consumer level, getting advertising revenue…

Raising venture isn’t the hardest thing, it just puts you in a strong position to do all of the harder things to follow.

00:11:37 One of the single biggest things entrepreneurs are missing when it comes to fundraising and how they run their companies is their relationship between risk and raising cash, and the relationship between risk and spending cash.

00:14:06 The relationship between investors and founders involves lots of trust. It’s not advisable to require potential investors to sign a non-disclosure agreement (NDA); Investors are rarely asked for this anymore because for an entrepreneur to request this is equivalent to saying “I don’t trust you.”

That being said, another one of the biggest mistakes entrepreneurs make is not getting things in writing. Fundraise as quickly and as efficiently as you possibly can without obsessing over it. As mentioned before, fundraising is fundamental, but it is but a tiny step in a long process of starting and running your business; don’t let your ego get too involved in this process. When someone makes a committment to you, get it in writing immediately. And don’t make financial decisions on a commitment until you get it in writing because investors will quickly forget that they promised to invest in you, or how much, or that they were going to introduce you to co-investors, etc.

Take notes in all your meetings and follow up with an email in writing on whats important.

00:16:08 When seeking to procure seed stage funding, make sure you have a really great executive summary. Usually, at this stage, if the investor calls you and then goes on to set up a meeting with you, then you are probably well on your way to procuring that investor.

At the series A stage, investors typically only invest in two kinds of startups:

  1. Those which have already raised the seed round
  2. Successively lucrative entrepreneurs the investor has already worked with in the past.Very rarely will investors go straight to series A with startups.

00:20:16 When it comes to negotiating terms, the first and foremost decision is picking the right seed investors because they will lay the foundation for your future fundraising events and make the right introductions.

00:23:02 There seems to be a threshold for seed stage companies. Ask more than the threshold, and you may not get it; ask just under the threshold, and it you might be able to raise more. So be sure you set the right valuation for your business. Focus on getting just the money you need, and no more. At the end of the day, whether you raise 12, 9, or 6 million in investments, it’s likely not a huge deal for your company.

00:24:05 When deciding how much of your company to sell to investors, during series A funding you may sell up to 20-30% of your company simply because venture capitalists tend to be more ownership-focused than price-focused.

At each round you need to have as close to the amount of money needed as possible, otherwise once you get to the C, D, and E series rounds, your ownership may be too diluted to be worth it for you.

As the owner, you need to decide from the outset “At what point does my ownership start to demotivate me?” If there is a 40% dilution during an angel round, the owner has doomed himself; you will own less than 5% of the company if yours is a normal company, yet you’ll be the one doing all the work.

00:32:30 When you start a company, you HAVE TO go and find somebody as good as or better than you to be the co-founder. If you do this, your chances of success grow astronomically. The Mark Zuckerberg phenomenon where it’s mainly one owner; that is the extreme outlier.

That being said, if you pick competent investors that have domain expertise and big rolodexes, they’re going to add a lot more value than just the money they put in. Those are the types of investors you should be looking for.

00:35:34 If you walk into an investors meeting with a ridiculously viral idea such as Pinterest or Instagram, then investors will just ‘feed the beast’ and let it go itself.  However, if you have an idea which requires significant investment over several years, then the decision to invest will come down to the quality, comprehensiveness, and preciseness of your business plan and operational excellence.

00:36:47 Signs you should avoid an investor? In no particular order:

  • Lack of mutual respect
  • Lack of domain expertise in your company
  • Lack of a rolodex or ability to introduce you to other quality investors: both for business development and in helping you procure funding for series A
  • If the person is ONLY out to make money
  • You can’t see yourself  in a long-term ‘marriage’ relationship with the person…

00:41:34 Many investment firms have conflict policies to prevent them from pitting one startup against another. The only time this could become a problem would be when a startup pivots, or morphs into a company that moves into the domain of another startup the investment firm is investing in. If the investment firm does have a conflict, they generally will disclose it to both companies. Again trust is the main issue. You’re off to a bad start if you and your investor don’t trust each other.

A lot does come down to opportunity costs – the idea that everything that you do means that there will be a whole bunch of things that you can no longer do. The risk is not so much “We invest $5M in a company, and if the company goes bankrupt we lose that money.” The greater risk investors are worried about is locking yourself out of a category because every investment you make means you won’t abandon your original investment or invest in a competitor. This can be a difficult decision to make because you can only know the companies that exist and fall under your radar today.

If you invested in Myspace, and a year later Facebook launched, you’re tied to Myspace. This brings us back to what was said earlier about what quality investors look for in investments. At the startup stage, products tend to morph a lot, so investors prefer to invest in the owner and team rather than the product.

[EDITOR’S NOTE: For more information on procuring funding through angel investment, watch the interview How To Start A Startup: How Angel Investors Judge Startup Founders with Paul Graham and Charlie Rose.

Also, read the interview Do Startup Names Matter? with Max Garrone.]