How To Raise Money, Series A Edition
Twenty months ago I posted an article “How to Raise Money” after we closed our Seed-Round. Since we just raised our Series-A, it’s time for an update.
First of all, some quick history. The founders met in 2006 in the Biomimetics Lab of the Auckland Bioengineering Institute at the University of Auckland. Between 2009 and 2012 our company was incubated pre-startup by Auckland UniServices. In November 2012 we incorporated with cash put up by co-founders Todd Gisby, Iain Anderson, and myself, Ben O’Brien. The first external investment was in July and October 2013 from long-time mentor and now chairperson Ralf Muller. UniServices also invested at this stage by way of a license deal. The second external investment was a Seed-Round from the Flying Kiwi Angels and New Zealand Venture Investment Fund in December 2014. Our third was a Series-A from Japanese company Start Today in June 2016.
So how did we raise our Series-A?
Three months after our Seed-Round we decided we wanted to raise money to support further growth. We thought it would take eighteen months (it only took sixteen in the end), so we decided to start immediately. We approached NZTE who helped us plan our strategy, and I highly recommend their support for anyone about to embark on this journey.
By a happy coincidence, Todd won us a three-month place at the Sunnyvale California Plug and Play Tech Centre as part of their internet-of-things spring programme. With an office, coffee, a list of VCs to pursue, and a brand new pitch deck, Todd hopped on a plane and shifted to The Valley for three months. Meanwhile, I had to keep the company running while flying between NZ and the USA every few weeks.
We initially approached maybe fifty VCs, mostly in the USA. This part of the process is tough! You get rejected over and over again, and it can be incredibly disheartening. In the early days, many wouldn’t even reply to the introductory email or just flat out said no. These rejections weren’t even the worst part. Of the fifty we approached there were around twenty who showed some interest, engaging with multiple meetings and expressing a vague intent to make a deal possibly one day. But this is where you get chewed up. Imagine this:
- You fly to meet a VC, and they would cancel once you were in the air.
- You write and rewrite your business plan over and over to accommodate every whim of one potential investor only to have them just say “nope” without reading it.
- You get strung along and strung along and strung along by VCs who have no intention of ever saying yes, or no, just because they are bored, and you’re teaching them things.
- You’re promised ten term-sheets before you actually get one.
As you can see, it’s not easy or straightforward. However, through this struggle, we were getting steadily more confident. We learned how to get follow-up meetings, and developed answers to an encyclopedia of common objections. Meanwhile, the business was going well back home which helped a lot, and we won another place at Plug and Play.
Now nine months in we had around ten interested parties. At this point, people split into “Lead” and “Follower”. “Follower” meant that they had expressed interest in joining the round, but wouldn’t lead. This reluctance to lead could be for a range of reasons. It could be because of some rule they have. They might not have enough money. It might be they just don’t want to say no to your face.
“Lead” meant a credible investor who genuinely wanted to negotiate a deal with you and could usually cover most if not all of the round. We had around five potential leads for the rest of the process, although only a maximum of three at any one point in time. We spent ninety-five percent of our time on potential leads because followers are easy to convince – if you need them – once you have a lead.
This is where everything changes and you start to learn the art of capital raising.
Talking with serious potential lead investors is nothing like the earlier stage in the process. They have already bought into your plans and like the team. They have already seen traction and your ability to deliver on promises and they want in! The trouble is, they don’t make the decision. They will have general partners who still have to vote, and they have their own investors they need to satisfy. They will have their own fund investment cycle, maturity, and risk profile to consider. The people and structure are different with a strategic investor, but the same basic rules apply.
- You need to give your lead the ammunition they need to convince their team to make the investment.
- You must be candid about the number of potential leads you are talking to, and this number must be greater than one. Creating competitive tension and setting a time frame to the proceedings is important and ensures the relationship isn’t built on false pretences.
- You need to groom and test the lead to be a future member of your board. This means asking them for advice, introducing the whole team, and getting introductions in their networks. You should also offer to help them in return in whatever way you can.
- You have to be aware of the broader economic climate because this hugely impacts the risk appetite of any investor big enough to invest at this level. We were on the ground in The Valley when all the “unicorns” started to be called “unicorpses” and we felt the impact of China’s economy wobbling at the negotiating table.
Your goal at this point is getting a term sheet or another concrete offer of investment. Getting this, however, is difficult. In hindsight, I think this is because one of the hardest things when pitching your business is reconciling the hyper-optimistic world of venture capital with the gritty pessimistic reality of day to day operations on a tight budget. This struggle can affect you in a number of ways.
- Being on a non-stop rollercoaster of imminent success and failure can be emotionally exhausting. (I am part of a Callaghan Innovation supported peer-support programme run by Rudi Bublitz and Fiona Mogridge that really helped me here. Callaghan if you’re reading this, there needs to be more of these programs!)
- If your day to day plan is different to your big vision, your traction is not evidence for a real market, it just shows that you can captain a dinghy.
- Most crushingly, it means that your team won’t know what the plan is, which means that if the investor talks to anyone that isn’t you, the house of cards will come tumbling down.
You are ready for Series A when the day to day operational plan converges with your long-term plan, and you need more money to make things go faster. At this moment it feels as though a fog lifts and everyone starts working together. When we eventually got our round over the line, it wasn’t just me doing the negotiating. Ralf (Chairman, First Investor), Heath (Head of Sales, Angel Observer), and Todd (CTO, Co-founder), all played a key role in the negotiation of terms, including some critical solo trips and conversations. Because we had a single clear plan we all sung from the same sheet, and I believe this constancy of purpose got us there. Once you are mature enough, the deal will be there.
The game shifts yet again at this point as you move into due diligence (DD) and Negotiation.
DD is all about the homework you put in before an offer is made. We had had a DD policy in place since the last round. This ensured that we kept key documents in one location, and we got in a vCFO team from Deloitte to make sure our finances were spot on. I cannot overstate how important this is! Without clean company records, you will stall at this point. During DD we had an internal policy of 1-day turnaround if at all possible to make sure that we were never holding things up. Additionally, every time we sent documents we then prepared whatever we thought would be needed next, be it a new draft to the documents, or some information on a critical issue.
We used Simmonds-Stewart as our lawyers for the negotiation. They were a rock of calm and helped us navigate tricky legal concepts with just the right mix of paranoia and pragmatism. It was paramount that they were involved early on so that they had the complete picture at critical decision points.
Details of the negotiation are confidential. However, one thing I cannot recommend enough is to over-communicate to your shareholders through the process. After all, they will sign the documents and without clarity around the process and decisions they need to make, you will have holdups that could kill a deal.
I wrote this because I don’t think there is enough information out there from a founder perspective, especially in NZ. Here at StretchSense we are actively trying to grow the entrepreneurial ecosystem. If you have questions, or would like some free advice over coffee (take it or leave it), please feel free to get in touch.
Finally, this only happened due to the hard work from the StretchSense staff and our long-suffering families.
And I was only able to do my bit with the support of my wife Michelle and daughter Chloe.
You are all amazing.
“Our time in Sunnyvale was very well spent.” Ben test driving a Tesla Model S-P85D during a capital raising trip in June 2015”
WHAT DID IT TAKE?
- About 16 months
- About $80k of direct legal and accounting fees.
- About $60k of direct travel costs.
- About 1 founder year of salary and sales opportunity cost split between Todd and me.
- About 30 simple rejections.
- About 15 painful rejections.
- About 5 potential leads.
- Exactly 1 yes.
TIPS FOR CAPITAL RAISING SUCCESS:
- Assume you won’t raise money and get on with growing the business.Sales are your best source of capital. They give you negotiating power, prove there is a market, and mean you can weather setbacks.
- Get a CFO as soon as possible.This will give you control of your finances so that you can take calculated risks, truly understand the business, and fly through due diligence.
- Pitch to as many investors as possible.You will suck at raising capital, and the only way you will get better is with practice. Ignore anyone who tells you to “get your pitch right first” because you will be rejected anyway. Pitch, pitch and more pitch.
- Tell a consistent story.You need to tell the same story to everyone (investors, customers, supporters, staff, etc.) Consistency means that when they dig they will see strength.
- Over communicate.As you go through the capital raising process, you need to keep all your stakeholders well informed and happy. No one likes surprises.
- Plant some trees.It is stressful so dig some holes and plant some trees on the weekend. The exercise is good for you, it creates habitat for native birds, and it’s a fantastic time to reflect.