In my last post about startup life, I wrote about trials and tribulations around getting funding here in the DC area and how I met my mentor Todd who guided me through the next steps and then COVID hit. So it was mid-March 2020, COVID was turning everyone’s life inside out. Around the same time, my boss left at work and I was basically left in a state of limbo as to what exactly I would be doing. I had a lot of free time. Given all the uncertainty surrounding COVID, it didn’t seem especially prudent to approach investors at that moment. (Also remember the stock market was in turmoil as well). At that point, Todd and I strategized that the best thing to do would be to keep refining the pitch deck, work up some demos, and see how the pandemic played out.
By now it was early summer, and I had been participating in a really great community called the data standard (TDS). After doing a podcast on TDS, and participating on a few group conversations, I reached out to the head of TDS, Darren Kaplan, and asked him if I could show him my idea and see what he thought. Darren invited me to give a presentation on TDS of one of the capabilities I was looking to incorporate into my tool. Which leads me to:
Founders Tip Number One: Showcase Your Idea
As a founder, or prospective founder seeking backing, you have to be prepared to speak about your idea to pretty much anyone who is remotely interested. Some call this the “elevator pitch”, which means something you could literally pitch during an elevator ride. However that really isn’t what I’m talking about since I wasn’t pitching the idea to Darren because I wanted money. I wanted to see if he thought it was a good idea. So as a precursor to reaching out to VCs, my advice to you is to speak to as many people as you are comfortable, show them enough of your idea and ask them what they think. Remember, you’re not asking for money, you’re asking for their advice and opinion, full stop. You don’t have to have a product at this point, but what you DO have to be careful of is your IP. You don’t want someone telling you that is a horrible idea, only to replicate it themselves. So you want to explain enough of your idea to demonstrate the usefulness, but not enough for someone to rip it off.
Darren generously invited me to demo a piece of idea (which I still haven’t told you!! I’m terrible aren’t I?) to a group of data scientists. So while I was camping at Assateague Island with my family, I drove to a Starbucks and demoed this capability. The results were amazing. Everyone who saw it wanted a follow on demo and we actually set up a competition between my tool and another project that someone else was working on. This demo and people’s reactions were a turning point in my journey because I realize at that point that the product could work and I should resume my quest to get financial backing. I started final revisions on the pitch deck and by late summer I was ready for investor introductions.
The First Pitch
Todd generously agreed to connect me with some of the people who invested in his company so once we felt I was ready, he made the first introduction to a partner at Foundation Capital. At this point weird things started happening. It was almost as if the universe somehow knew that I was looking to raise money and I started getting emails from a few VCs and investors. It wasn’t from me or Todd. I was nervous as hell, but I had my first call with Foundation, and the next day I had an intro call with Unusual Ventures. Todd wanted me to start with Foundation because he thought I had a pretty good shot with them and he’d already given me a warm intro which was well received. The first call went really well. REALLY WELL. What was supposed to be a 30 min introduction, lasted almost 60 min. We really had a great conversation and we scheduled a follow on call. The same thing happened with Unusual.
I’ll fast forward a bit as it probably isn’t too interesting to the readers, but I kept telling my business partner that they haven’t told us to fuck off yet, so I’m seeing that as a good sign. I’d describe the feeling as cautious optimism. But this optimism raised another question which was more serious: What happens if they say yes??? What do I do? To this point, my idea had been exactly that, an idea that raised eyebrows and people seemed to like. But if this worked out, I’d be expected to quit my relatively safe and secure job, and work to transform an idea into a marketable product, in one of the most competitive markets, all on a limited budget. Clearly, this is not an endeavor for the sane or risk averse. Furthermore, who in their right mind would join me on this quest?
Now, to this point I hadn’t mentioned how much I was looking to raise or really spoken about any of the details, so we were looking to raise about $1.5 million which I thought would be enough to give us about one year of runway. At that point, we’d either have enough built to raise more money, or we’d have to go back to our day jobs… One of the many calls I had earlier told me that if I was looking to raise that amount, I should expect to have to get about 10-15 investors on board. That person was completely wrong. Let me tell you how it actually played out.
After about the third call, the parter at Foundation, calmly says to me, “I think I’ll take the entire round.” So… after three phone calls, I was on my way to closing my first ever VC round. I was in complete shock.
For those who have never been involved in venture capital, what happens next is that when a VC is interested in investing, they will give you what is called a term sheet. As the name implies, this spells out the terms of the investment but is not a binding document. Once the term sheet is agreed to, there is a due diligence period during which the company is not allowed to solicit other investment. For early state companies, there isn’t much due diligence since you don’t really have much anyway. So, with all that in mind, we signed the term sheet, and shortly thereafter, had $1.2M in our bank account!
Now, you’ll note that the amount was less that I originally stated we were raising. What typically seems to happen is that VCs will put in a percentage of the money you are seeking to raise, and then you’ll have to raise the rest by inviting angel investors (or other funds) to fill out the round. Once Foundation indicated their intent to invest, the partner put me in touch with a number of investors and now I faced the opposite problem. I potentially had too much money! I had more investors than capacity to take money! This was in start contrast to a few years ago when I couldn’t even get a few hours of developer time.
Here’s What I Learned
I don’t want to come across as though I’m some sort of expert on venture capital because I’m not. I’m someone who has had the good fortune of successfully closing two funding rounds with two amazing VC firms. With that said, I did learn a lot from the two funding rounds, and here’s what I learned from the first:
Understand How Venture Capital Works Before You Seek It
Firstly, if you are seeking backing from venture firms, it is vital that you understand their business model and vocabulary. You don’t need to be an expert in it, but you should know have a basic understanding of how VC actually works. I am not claiming to be an expert on VC at all, but after reading The Business of Venture Capital by Mahendra Ramsinghani, I did feel like I have a much better understanding of how VC actually works. I would highly recommend this book.
Choose the right VC
One thing newcomers might not realize is that not all VCs are created equal. Now, I’m not saying some or good, or some are bad, although undoubtedly some are, but in order to maximize your chances for success you should first find VCs that invest in the stage in which your company is. For instance if your company is pre-seed, you want to make sure that VCs you pitch do pre-seed investments. Most VCs do state up front what stage they invest in and you want to make sure that you only pitch the appropriate ones.
Along the same lines, not all VCs invest in all areas. VCs use the word theses as in the plural of thesis which are general concepts in which they invest. It is vital for you to do your homework and find VCs whose theses align with your business. For instance, if you have a medical device and you pitch to a VC that is really interested in autonomous cars, you probably won’t be successful.
It’s important to understand that good VCs bring more to the table than just money. A good VC will get you connections to potential customers, advice, help with staffing, introductions. A great VC is an unfair advantage that you want in your corner as your business grows, so make sure you pick the right one.
To date, I’ve raised several million in venture funds and have done precisely zero cold pitches. I don’t know the stats off the top of my head, but from my experience, the best way to get a meeting with a VC is to get introduced. There is a hierarchy of introductions. An intro from a portfolio company is probably best, followed by an intro from someone who invested in your company, and finally another VC. Of course, in the end it doesn’t matter who introduces you if you get the meeting.
We got the money! Now What?!?
Returning to the story, here’s where things get a little raw and a little personal. I was still working at JP Morgan and getting ready to quit. Remember Darren from the Data Standard? Well when I told him about the term sheet, he wanted in so he became employee number one as our head of growth. Things were going really well, and then I had a checkup with my doctor that didn’t go well. My doctor informed me that I’d have to have surgery immediately.
I’m not going to go into the details here (boundaries people, boundaries) but I’m 43 years old and had never had a health issue in my life. I didn’t even have a cavity until I was about 40 and prior to my surgery I had never even had an IV. One of the hardest days for me putting on a smile for an investor call in the afternoon the same day that I found out about the surgery. It was a complete emotional roller coaster to say the least. Darren gave me these words of wisdom when I started this journey:
The highs will be incredibly high and the lows will be incredibly low.— Darren Kaplan
That day was probably one of the toughest of my life. I’m fine now. My follow ups have all been good Thank God.
The episode made me rethink the whole thing. I had already raised all this money, should I do the safe thing, keep my corporate job and return the money? Or should I take a huge risk with small chance of success and go for the startup?
Maybe I’m an arrogant fool, but this whole episode gave made me even more motivated. Starting my own company is something I’ve always wanted to do, and I completely believe our product will be incredibly successful, so I decided to throw caution to the wind, and go for it!
The last two installments ended with a bit of a cliff hanger. No cliff hanger this time, but next week I’ll go through what we did to actually get started and when I quit my job.