How to raise investment for your startup?

Raising capital is one of the most talked about topics in startup world. Unfortunately, for AEC and CRE technology startups, the process is daunting since so many founders are first time founders and the broader investment market doesn’t have deep knowledge of the industry. Unlike most of my posts that are
meant to get founders thinking about topics, this weeks Sunday Scaries is more instructive. Also, to access this article in its entirety, you will have to join my online community. Why? This one feels more intimate and I want to spur a conversation that I would rather not have on public LinkedIn. My community is free, but you have to share some information about yourself. Many of these thoughts were shared at our annual LP meeting  this past week.

1. Do you need to get an investor?
This is a question that many founders never ask themselves. While you may be in a hurry to quit your day job, the more time you invest in your startup, the more valuable it becomes. This pre-investment period also allows you to find your team. Remember, you aren’t building a company. You are creating a movement. There are generally 2 phases of capital requirement. The PMF (Product Market Fit) phase and the GTM (Go to Market) phase. Raising capital during the PMF phase is expensive AND no startups get it right the first time. Think of PMF as picking a Super Bowl winner during pre-season and GTM as picking a Super Bowl winner during the final playoffs.
It’s less about odds but rather the risk of knowns vs unknowns.
(Writing this while watching football, in case you were wondering).
The most interesting dynamic is that is actually more realistic to bootstrap in the PMF stage than it is in the GTM stage. The bulk of activities during PMF are performed by the founders. So, if everyone keeps their day jobs, you can make pretty significant progress.  Let’s say you can’t do your day job and work on your startup, then you should consider saving a personal war chest of 2 years expenses before you start. This method works for startups without a lot of R&D. For startups that need a lot of R&D funding, one of the co-founders likely has some academic research affiliation. There are big opportunities to get non-dilutive grant money, especially in the world of SBIR, STTR and I-Corps programs. So after all these options, if you think you still need to raise capital in the PMF stage, your starting point is likely Friends and Family. These are people that will write you some small checks because they believe in you. Here is something that I find interesting that is specific to the AEC and CRE space. It’s actually pretty easy to raise $250k of FnF in our space. Why? Many firm owners and leaders both have financial capacity to write a $25k check and they likely understand your problem statement. In most cases a FnF round is typically filled by literally people that are writing a check because they love you. Not because they understand anything about your business. Our industry is very collaborative and building relationships is a big part of it. Also, $25k from the CEO of a construction company is not a big loss, but the frugal nature of our industry will not allow them to write a check to you and not be helpful. The other reality is that when we fund a seed round, we generally will not allow small checks in the round. This is the last chance that strategic investors will be able to invest.
Here is how I would construct a FNF Industry Round. Let’s say you want to raise $250k. I would
target 10 - $25k checks. Now think about who would benefit from you solving your problem statement. To make it simple, let’s say you want to create software that uses AI to estimate a construction project. I would consider beneficiaries of the ecosystem to be AE firms, GCs, Subcontractors, Real Estate Developers, Building Product Representatives and Building Product Manufacturers.
Now here is the key. You are not pitching companies, you are pitching individuals. Create a spreadsheet that it many ways will resemble a bingo board. X axis, all the roles and on Y axis the following. National, Regional and Local. Start filling in the people that you know in each box. Then research people that you would aspire to have as an investor.
Build a simple pitch deck focused on the problem statement and broad market sizing. Don’t give a lot of detail. Why? These people know the industry. Any detail you provide could be met with disagreement.  If they need more detail, then they are not a fit. This stage of fundraising is about “liking the founders” and the problem statement. It’s not about financials and demos. You may have to explain terms like PMF etc. but keep it light. Share your unbridled passion and professional experiences that led you to quit your job etc.
As you “run the process” be sure to document your feedback. Incorporate feedback as it is relevant. Do NOT spam out a deck. Be iterative and start with your coldest targets, NOT your warm leads. Your cold leads will give you the best feedback to incorporate into your pitch. If you can’t raise $250k in 90 days, you need to question why you quit your day job.
Keep in mind, these are regular investors and not VCs. Focus on how you plan on building a business and refrain from venture speak. While this may seem like “a lot”, it’s not.  If you need help, join my incubator. It will be the best $500/month you will ever spend.

After you have read through all of this, do you still feel like you need to get an investor?

2. The dreaded Seed Round.

A seed round in theory is funding the product development from MVP to a commercial product. It’s to fund revenue growth based on what you have learned so far. Here is the hard truth. I have yet to see a Seed round execute to plan. Why? It’s just way too early to know anything as fact. It’s more of a directional journey and finding ones Northstar. This Northstar is based building the right team, to build and communicate the right solution to the right customer. The biggest point of failure that I have seen with founders after raising a seed round is to delegate tasks. For a seed round, your team is there to help the founders get scale, not to scale the business. Why? The founders need to receive real time feedback to validate that their PMF is to a market that is large enough to support an investor. Think of an investor as a non-working business partner. They own a chunk of your company. So you have to use their money to build a company that sustains the founders but also sustains the investor. If your investor is a VC, then the bar is very high. They want to see 30x their money back. Also, once you take money from a VC, there is no turning back. You have now entered an investor group that is very competitive and would rather your company go to ZERO than grow sustainably and generate cash flow. The idea is that investing cash back into the business creates greater enterprise value than taking it out. As a founder, you have to believe that the cash your startup generates is best deployed back into the company and not anywhere else. The reality is that your FnF round investors are probably fine if you create a moderate growth cash flow business. VCs live by certain financial rules. Be sure that you truly understand the VC-Founder relationship before you go down this road. Many founders believe that VC is the only way to fund a startup. The reality is that there is other capital out there. However, if your goal is to build a massive business with a massive outcome, then you need a business model that scales with capital and you will likely need VC.

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3. Think like a VC
When you are looking to raise VC, it’s important that you understand their business model. Speak to VCs in the terms that they understand. Think about how much total capital that you need to get to $100m in ARR. Then think about how you will get there and how much capital you will need to raise. What effect will dilution have on previous investors etc? Not enough founders run scenarios on their cap table. It
may turn out that as a founder, after dilution that it’s not interesting to you.

4. Avoid half-baked cakes
In an era of SAFE notes, seed extensions etc. Too many founders raise enough money to keep the business going, but unfortunately it’s going nowhere. If you “need” $3m for your seed round, closing on $1m puts you in a predicament. You may be better off shutting down the company than raising short of what you “need”. Also, many founders wonder why VCs want to follow. They want someone else to do the front end work and also they want to be the last money in the round. Especially when startups are doing rolling closes.

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5. Create a sense of urgency.
Investors, whether professional or strategics rarely have a sense of urgency to invest. Many founders try to artificially create FOMO. The problem is that VCs are very gossipy. In many cases when you talk about having met with another VC and that you are “expecting a term sheet”, we have already talked or will talk about you. If it’s not true, then you just burned 2 relationships. My advice is do not lie, but withhold good news. For example if you have a new client that you closed, don’t share in an initial conversation and pipeline. Sandbag a little. The “checking in” emails that VCs get are largely ignored. An email subject that says, “closed a monster customer” will get responded to promptly. VCs get more FOMO from a founder not needing capital than another firm investing. I mean, we don’t like that either but a lot of times we can still get in. That’s why you see deals get oversubscribed.

6. Research, research, research.
I cannot stress enough doing deep research on investors. Startups that are in fundraising mode. Here are some tips.
⁃ Research VCs deeply.
⁃ Determine fit. Your conclusion should be “we are a no-brainer for these folks”
⁃ What to research? Backgrounds of GPs, stage, amounts and 3 portfolio companies that meet a pattern that aligns with your startup.
⁃ Look for at least 3 ways to get in front of the GPs. Reaching out to a founder in their portfolio is an easy method.
⁃ If you must cold email, draft the best email of your life.
Research isn’t just Googling a bunch of firms. Create a spreadsheet that maps out the variables that are important as fit for your company. Then fill in the blanks.

While this is not comprehensive by any means, hopefully it helps you build a framework.