Worried about the Series A crunch? Choose not to participate in it and go raise a bigger seed round. You can never predict what crunch, cliff, crisis or collapse will make investors pucker, so take as much money as you can, and take it now. Startups are often too worried about dilution, instead of whether they are capitalized enough to dominate their space.
At Speek, which provides super-simple conference calling solutions with a visual interface, we originally went to market with a convertible note for $750,000. We decided to take a more prudent course of action--one that would allow us to both aggressively play offense and sustain us through a potentially prolonged Series A capital raise--and raise a larger seed round. Let’s call it a seed+ round. We determined that $1.2 million would be the appropriate amount, which we closed and announced in December. It is worth mentioning that the majority of this raise was done in approximately 2 months and on the East Coast in Washington, D.C.--not Silicon Valley. Here were some of our key decisions and takeaways that helped us close our seed+ round successfully outside of the Valley:
1. It's very hard to raise funds on the side, so staff appropriately.
It takes a lot of time and effort to raise venture funding quickly--so staff for it. It was primarily all John Bracken (our CEO) and I did for two months. You have to be very diligent in reaching out, following up, setting up meetings, pitching, requesting intros and answering questions, which simply can't be done well on a part-time basis. Additionally, having two people helped us brainstorm better responses to questions and perfect the pitch. We felt that it was crucial to shield the tech team from the process. We left them alone to do what they do best--build cool stuff. Our CTO, Danny Boice, spent only a few hours during the process to address technical due diligence questions and shake a few hands. This was key to keeping the business going and building additional product momentum.
It is very difficult to know what the right fit will be with early-stage investors and angels, so schedule lots of meetings. We averaged approximately three meetings a day during the two months--which helped us perfect our pitch, too. We sent thoughtful, cold emails to known active investors, leveraged LinkedIn and requested intros from fellow fundraising startups. We designed our deck for both an in-person walk through and for investors reading it without us and always attached it to the email. We kept intro emails brief, but informative, hitting all the key takeaways--product, experience, traction, and how much we were raising--with as few words as possible. Investors are too busy (or attention deficit) to cull through massive amounts of detail or rely on vague emails with little teasers.
3. Force an answer from all investors.
Many investors avoid saying yes or no. They linger without committing, always saying they will stay in touch. We refused to waste our time with a large pipeline and were determined to move everyone into the pass or commitment column as quickly as possible. Shortly after we had a meeting or two with an investor, we politely asked if they were a yes, a no, or if there was a specific question that was holding them up, so we could address it. If this didn't move them to an answer, we considered them a no.
4. Leverage momentum to overcome investor hesitation.
Many investors will prefer to wait a while and monitor progress before writing a check. We leveraged our momentum and milestones to move investors to overcome this hesitation. In Speek's case, we would send updates on how we continued to accelerate our week-over-week growth rates, won the Distilled Intelligence 2.0 pitch event, received great press hits, trended on AngelList and closed on investors which limited availability. We leveraged each of these to follow up with our active pipeline. Again, having our tech team focused solely on improving the product was crucial to building the momentum.
5. Focus your message and have a clear plan.
Be focused. Everyone wants to change the world instantly and be the best in all adjacent markets, but we believe that we can only do one thing very well at a time and were very clear about our singular focus to innovate the antiquated, 20-year old conference calling experience by upgrading it for the web. Of course we have long-term ideas, but we made sure to stay focused on audio conference calls, regardless of how many investors wanted to discuss the larger unified communications space of video, screen sharing and others. Many investors responded well to our strategy and appreciated our focus.
6. Use convertible notes and stick to your terms.
Convertible notes are much faster, cheaper, and easier to execute than equity rounds since you do not have to worry about negotiating every detail of a term sheet and creating a valuation for something nearly impossible to value. Plus, it keeps your cap table simple. There were handfuls of interested investors who walked away from us because we had a note, but no deal will satisfy everyone. And if you aren’t receiving push back on your cap, then you have probably set it too low.
7. Time is money (literally, in this case)--so be responsive, but efficient.
We made sure to reply to questions quickly and thoroughly, but didn't waste time on every random request. While we spent many late nights on thoughtful analysis for investor inquiries, we politely declined others, such as providing a formal business plan. We felt that the plan would be obsolete by the time the ink was dry and it wouldn’t help them understand our business any more than our presentation already did. We created an FAQ document for the common questions so we could quickly paste canned, yet thoughtful, responses into emails. We didn't cater to each diligence request list and simply put everything we had in one Dropbox folder (financials, corporate docs, personnel docs, intellectual property, business info, etc.) and shared it with all investors that moved into the diligence phase.
8. It's a seed round, not Series A. You don't need all the answers, but you better know what the questions will be.
We were comfortable explaining how we were a seed-stage company and didn't have all the answers yet, such as pricing, paywalls and conversion metrics, or when certain features would be released. However, we made sure to have good thoughts on each subject and explained our assumptions in addition to our methodology of how we intend to test and measure each of these assumptions. We also made sure to know what our Series A milestones were and walked investors through how we planned to achieve them with our seed round capital.
Bottom line, if Series A funding is going to be more difficult to obtain, make sure that you raise enough money now with a seed+ round to give you sufficient time to hit those Series A milestones. While there may be more competition for capital in the future, investors will always write checks for a good business idea that solves a real problem. Get the money in the bank and get back to growing your business--just make sure you don't run out of cash before you have the chance to succeed.
--Konrad Waliszewski is the VP of business development at Speek, a 500 Startups-funded company that lets users do conference calls with a simple link rather than using phone numbers and PINs. Prior to Speek, he helped numerous clients--from large, publicly traded companies and investment firms to starups--with corporate finance, strategic planning and merger & acquisition projects. He was also a tech-focused investment banker at GCA Savvian in San Francisco. You can find Konrad on Twitter.
[Image: Flickr user Felix Schmidt]