There are some things in life that, because of their nuances, you can only really learn by doing. Fundraising is one of them.
Last year, my co-founder Ian and I had a crazy idea to change the world’s approach to the management of lifestyle disease. In September, we incorporated Ceres (now Habitual), and in December we closed an angel round with some incredible investors on board.
There's heaps of blanket advice on how to fundraise successfully online. The “perfect” pitch deck template, the failproof investor outreach strategy, or the [insert number] top things you need to know to close your deal.
But in reality, there is no silver bullet for fundraising, as there are so many factors at play. There’s less conversation on the less well-defined nuances of the fundraising process, such as:
what to prioritise in your preparation,
how to respond to questions you don't know the answer to, and
how to not run out of steam.
What we found most useful during our raise was hearing other founders’ stories—even those in different sectors or at different stages. Learning about others’ experience increased the number of data points we had on what specifically worked (and what didn’t!), and we were able to develop a much deeper understanding of the process.
Here’s are the less obvious lessons we learnt, that could be useful to you in your fundraising journey.
Lesson 1: At the idea stage, financial projections really, truly, don’t matter
Most investors will ask to see your financial projections. Some of them might flick through and check that you’re not capturing 50% of the market in year one, making an unreasonable margin, or building a world-altering app with a team of three. But beyond that, early-stage investors know that projections are no more than numbers on paper. So, it’s not worth your time agonising over the details.
We knew this to be a fact from the beginning. But somehow we ended up spending many nights poring over that spreadsheet—time which would have been better spent focusing on our game plan rather than the nitty-gritty of (made up) monthly cash flows.
Lesson 2: When it comes to valuations, know your minimum
There are opposing viewpoints on whether to set your valuation or let the market determine it for you. I don't have an unbreakable argument either way - both are valid approaches - however, I would encourage you to figure out the maximum you’re willing to give away (and thus the minimum valuation you’re willing to accept).
Start by doing your research: You should be able to find benchmarks for your market online (and do keep in mind that things can vary significantly by geography). Model out some future scenarios to really understand how the amount you give away now can impact your ownership down the road. Any investor who knows what they’re doing should be reasonable about the valuation they demand, as giving away too much now can impact your ability to raise funds down the road.
And importantly, be willing to walk away from a deal that has terms you don’t agree with (my co-founder and I agreed on this from day one). The last thing you want is to go into your first truly important business relationship resenting your investor(s). They’ll be with you for the whole journey, so it’s important to feel like you’re aligned.
Lesson 3: You’ll make assumptions, so steer clear of the costly ones
As first time non-technical co-founders, Ian and I assumed that we would need an app prototype in order to raise money. We rushed into prototyping with a freelancer, only to find that 1) we didn’t know what we were building and 2) investors were more concerned with the problem, market, and team than with the details of our app.
When you’re raising, you’ll need to make assumptions about what investors want to see. Intro conversations, advisors, and the content you find online can give you a general steer, but the reality is that each investor (particularly if you’re dealing with angels) will be looking for something slightly different. Test your costly assumptions before jumping in, as chances are at least some of them will be proven wrong.
An example of this is how we approached hiring technical talent. At first, we assumed that we would need a CTO or technical co-founder in order to get investors interested (we are a tech company, after all), and started digging through LinkedIn and CoFoundersLab to see who was out there. But we quickly realised that this assumption would be an incredibly costly one—meaning we’d either need to promise a huge salary, or give away up to a third of the company. This pushed us to really think about our product roadmap and what a true MVP would look like. This gave us a much clearer sense of who we’d actually need on board. As it turns out, very few investors raised this as an issue—which we’d have never known if we rushed into hiring a developer.
Lesson 4: You don’t need to know every answer, but you do need an opinion
Confidence is in tricky balance when you’re fundraising: You need potential investors to believe in the idea, but more importantly, in you. At the same time, however, you don’t want to appear blind to your own limitations.
There was one question in particular - "What will your marketing strategy be?" - for which we still don’t have a perfect solution, and after stumbling through it a few times we landed on the truth: we would need to test it. For some investors, that may have been a deal-breaker. Others (and not coincidentally, the ones who came on board) appreciated the honesty. While they continue to push us on it, they’re comfortable with this specific risk as long as we aren’t ignoring the challenge. The reality is that no investment is a sure bet, and investors know that—so it’s a matter of finding the people who are comfortable with the risks you’re taking, and ideally who have the relevant experience(s) to help you tackle them.
It’s also important to have your own opinions. Most people (investors and otherwise) will give you advice based on their viewpoints—some of which will be golden, but much of which can cloud your vision or distract you from what’s important. I’d argue that being a first-time founder exacerbates the issue. My co-founder and I are pretty opinionated but we still got caught up in a number of pointless conversations trying to argue a point to deaf ears, or fruitlessly editing our pitch deck only to decide we liked it better before.
TOP TIP: Spend some time after each investor meeting to debrief what went well and what could have been better. Which questions stumped you, which answers did you stumble through, and—equally important—which answers did you feel really resonated? For those questions that didn’t go so well, have they been problematic before—and if so, what can you do to improve in the future? Many investors will raise the same questions, so it’s worth using each pitch as a learning experience.
Lesson 5: Know your survival plan
The most useful piece of advice we received was from one of our angels, was to think through what we would need to prove before our next funding round. While it can feel counterintuitive to think about your next round before you’ve even closed the first one, it’s a critical piece of selling the opportunity to investors: They need to be confident that you’ll survive with the runway provided until you go out to raise again—and that you’ll be able to close that next round when the time comes.
The first step to doing this well is figuring out what needs to be true by the time you go for your second round. Initial conversations with investors should give you a good steer (and can even be an opportunity to open doors with investors who might be interested in that next round). From there, work backwards to figure out what you need to do between now and then to make those things true. And this isn’t just lip service to investors—it can have a huge impact on your product roadmap and hiring plans, so it’s worth dedicating time to.
Lesson 6: Humour is key
Fundraising can be a long, hard process, often including tons of rejections—so it’s important to keep things as lighthearted as possible.
For us, that looked like a black book we kept (i.e. a note on my phone) of flattering, funny, ridiculous, and outrageous things people said to us along the way. This was our way of 'picturing our audience in their underwear'.
Regardless of the method you use, the point is that incorporating humour as you go throughout a raise 1) helps to lift your spirits, even when the outlook isn’t great, and 2) reminds you that investors are just people, no matter how impressive.
Lesson 7: It’s all about who you surround yourself with
Everyone shouts about the importance of the team you surround yourself with from the beginning. But I didn’t fully understand it—and don’t think anyone will—until starting something from scratch.
Ian and I were both working other jobs during our fundraise, which meant we spent many odd hours working from each other’s flats, coffee shops, and any public workspace we could find. Fundraising forces you to evaluate not only your capacity to work together but also how much you like each other as people. If you didn’t know beforehand whether your co-founder was the right person—chances are you will after a raise.
The people outside of the business who support you through the process are also important. Starting a company is unlike taking another job because it truly consumes both your time and your mental capacity. Embarking on the journey means bringing your friends and family (willing or not) along with you. I can’t count the number of hours our poor friends spent listening to every intricacy of our business plan, sympathising after bad meetings, and simply telling us that they believed in us. I’d venture to say it’s impossible to go through a raise without a strong personal support network.
Prioritise, plan, test your assumptions, and don't do it alone.
Don’t focus too much of your time on financials—they’re only a tiny piece of what investors consider at angel stage
The market will set your valuation, but know how low you’re willing to go. It can be harmful to give away too much at the early stages
Before spending money, make sure you’re not making that decision based on an incorrect assumption. It can be easy to burn through cash without knowing what you really need to be proving out
Know exactly what truths your round will buy you—that is, figure out what needs to be true by the time you raise again, and work backwards to figure out your plan between now and then
Fundraising is tough, so keep humour and your team (whether that’s a cofounder, employees, or your personal support network) close
Paul Graham’s content on startup investment is great as a sense of the investor perspective. He’s very opinionated, so I wouldn’t take all of his advice blind, but worth the read.
Why We Sleep by Matthew Walker - a bit of an odd one, but the point here is really to say that taking care of yourself as a founder is so important to getting through a funding round (and more importantly, as you’re building the company). I’ve always been a great sleeper, but even so found this book a crucial reminder to take care of my wellbeing as we went through the stress of fundraising.