I couldn’t believe what I’d just said.
I don’t think my boss could either, so I repeated “That’s right, we just got a $50,000 check for my new startup and I’ll be leaving in a couple of weeks.” I was on cloud nine. Our funds had just hit the bank and I was on my way to fulfill my entrepreneurial dream, but it wasn’t always this way.
Here’s what I learned through raising a seed round of financing.
1. Have a product and market penetration
In today’s tech landscape if you can’t put together your first product and get some decent validation working out of a garage, dorm room, or basement you are going to have a rough go at raising any good money. When we approached our first investors we already had a product with about 2,500 people using it in our target market and we were growing rapidly every month without much paid advertising. Growth and penetration is so key to raising money. Investors know it’s difficult to do all of this without funding, but that separates the doers from the people that only have an idea.
2. Don’t be afraid to turn people down
Our first “nibble” from an investor was the kind of offer that feels a bit more like an insult, but we didn’t know if we could do better so it was tough to turn it down without a lot of other options out there. We did turn down that offer and we’re glad we did. Our next offer had double the valuation and a lot better investors behind it.
While we were considering this afore mentioned offer I called a board member from my previous company to ask his opinion about that investor. He invited me to his offices to talk about it and ended up writing us check a few weeks later. We didn’t know what a round would look like yet so we agreed on a convertible note for $50k. He liked our idea and started sending me to pitch his friends. They were all kind and told me I could come to them with strategic questions in the future but most said that they weren’t investing at the time.
I reached out to a few investors per week and was networking the best I knew how while working late nights to keep working on our product and marketing efforts. I kept in close contact with the investors that said I could go to them with strategic questions as I continued to reach out to new potential investors. Eventually one of the investors I contacted wrote us another $50k check, but we were still $400k shy of our target seed round. When the new investor came onboard I reached out to those that said I could come back with “strategic questions” to tell them about the exciting news. In short order a few of them wrote me checks as well.
LOOKING BACK: As I look back on this time I have identified a few keys to my success. The first was building good relationships. When I got turned down I maintained as close of a relationship as the potential investor was okay with. That is where most of our money came from. We also had to have good growth, so I couldn’t leave our business behind while raising. When you have a small team you have to continue to grow your business despite the demands on your time to raise money because the people you are raising money from care about your growth.
Once we had 4-5 investors onboard I would get an occasional meeting setup with an angel that wanted to invest in a hot tech startup. Our investors would refer that angel to me, we would talk for 30 minutes, and they would cut me a check in the next few days. These were the good days, but I started to get worried about taking in too much capital and diluting ourselves as founders.
3. Raise money when it wants to be raised
At this point in the fund raising process one of my investors taught me a valuable lesson. As I struggled with whether or not we actually needed more money I gave our lead investor a call to discuss the matter. He laughed a little at my dilemma and said, “Jordan, you raise money when it wants to be raised.” What did he mean? You’re not always going to be the hot company that everybody wants to be involved in. There will be ups and downs. You’re worth more during the up swings. Take the money then, and take as much as you can, within reason.
4. Startups fail because they run out of money
Speaking of taking in as much money as you can I thought I would share this last tidbit on how to think about money as a startup. One day while speaking with one of our investors he mentioned a recent conference he had attended. At the conference a question came up that he gets asked regularly. The question was, “Why do startups fail?” His answer? “Because they run out of money.” I know, it’s super profound! But while it might sound a bit obvious I think there’s a lot to be said for his answer. I firmly believe that most startups can be successful given enough time and resources to pivot and nail a product and market. The problem? One day you’re going to fail if you run out of money. As a founder you have to watch your resources like a hawk and raise as much money as you can. You have to do amazing things regardless of the limited resources, and you need to make sure your company has enough resources. You have to be scrappy.
There are so many other things that go into the process of getting a startup off the ground including achieving product-market fit, building a great team, designing and building product, creating an investor presentation, identifying and understanding your market, growth hacking techniques, and more. Stay tuned as I share what I have learned about these topics through my experiences being a product manager at a small B2B startup that was acquired in December of 2011 by Proofpoint (now a publicly traded company), and starting my own consumer-facing business that is currently disrupting the student housing search.