Raising capital? Here’s the playbook

Hi, I'm Heaton Shah. I've been building startups for 20 years and today we're going to talk about my least favorite topic. Fundraising. I've helped people raise literally billions of dollars over the last 20 years in very different businesses, from software businesses to hardware businesses. And I've learned a billion lessons along the way, literally. Before I bore you with the topic, let's get to the exciting stuff. How do you do this and exactly what advice I have for folks who are fundraising right now. Let's dive in.

So a while back on Twitter I asked people to send me their biggest challenges when it came to their startups. This is for founders. With startups where they were struggling with a problem or whatever, they did that and we've got a bunch of them. You've got mail. Let's dive in.

Question number one. An investor ghosted me. What should I do? You can't do anything. You just keep following up and let them know, like updates. But here's the thing, if an investor ghosts you, they're not likely to get back to you. Move on. That's the bottom line. That being said, if you want to keep them in the know, you had it, you think you had a great convo or something like that. Awesome. Like go ahead and just send them these value added emails that talk about your progress, closing a big customer, some traction you've had or anything like that. But again, I will say this. If they ghost you, it's just like a, you know, a potential partner, a date, whatever, ghosting you don't expect them to get back to you. And I know that can feel like very personal and things like that. It's not. They're busy. This is their job. And to be honest, this is what they do. They ghost people. Next question. How do you know if an investor meeting went well? This is my favorite question. The bottom line is you don't know. Think about it this way. Their job, their literal job, is to make you feel good on the call. Literally. Especially if they come in and they want to invest in you, they don't make you feel good. You kind of already know, oh, maybe, maybe not. They make you feel good. You're going to think the meeting went incredibly well. Get off the call, talk to your co founder and be like, that was awesome. And guess what's going to happen? They're not going to fund you because their job is to make you feel really good on a call. That's just their job. Think about it. They talk to founders multiple times a day in order to fund them. They want founders to like them. This is their job. Of course, there's caveats. Some. Some people have a bad interface or kind of a. You know, it's a. It's a cranky interface or whatever, and maybe you don't feel that way, but most of them are really good at making you feel good, and that's their job. So I wouldn't say, you know, if an investor meeting went well or not. Now, here's the one way you do know. When they reply back to you really fast, that's when you really do know it went well. But this has nothing to do with your opinion about the meeting. And if you have that approach and attitude, you will be much less stressed out in the process and it'll be more of a pleasure to just talk to people and share your story, share your company and practice doing that and doing that effectively and really well instead of worrying about how any one meeting goes or doesn't go. We've got a term sheet from a potential lead investor. Congrats, by the way. But they've only given us 24 hours to accept it. Is this normal? Yeah, is normal. There's always this, like, thing that's like three days or one week or 24 hours to sign the damn term sheet because they don't want you to shop it. So. But you are going to shop it. So how that works is you get a term sheet, everyone knows there's a ticking time bomb. I think it's usually 24 hours, if I'm not mistaken. So that's totally normal. And then you tell everyone, you know, I got a term sheet, I got a term sheet, I got a term sheet. You want to give me money, too? And then they can decide if they want to because they know they have a finite amount of time. So what I like to say about term sheets is. And fundraising is the fundraising process actually starts after you get the term sheet. Because then you get to ping everyone, be like, I got a term sheet. Do you want to shit or get off the pot? You decide. Right. And that's the way to think about that. All right, next question. What are some red flags to look out for with an investor?

Oh, okay. The main red flag is their sophistication as an investor. There are investors that are at great firms that are very good at investing. Most of them are in the Bay Area, some of them are in other areas. But then there's all these investors that just have a small business real estate investment, other mindsets about investing, but they're trying to still invest in startups. So a lot of red flags are when you read a bunch of the Y Combinator stuff and you understand what terms are and raising money and all that is, then you go meet an investor and if anything smells funny or is off, from what you read from Y Combinator, you're probably finding some red flags or some things that should give you pause. Because to be honest, in startup land and fundraising, there's a lot of standards about valuations, amount raised, stage terms in a term sheet and things like that. And your job is to not take any of it personally, but your job is also to identify the best investment partner for you. In my experience, a lot of folks that are kind of random investors or investors, I'll say this, don't hate me, all you East Coasters, but investors from the east coast, they can kind of have a little more quirks about their criteria or some of these things that are, I'm going to call it non YC style terms. And I don't mean the valuation terms, I mean like just basics like option pools and like, you know, liquidation preferences. When someone starts giving you some of these signs that things are off or they're outside of the calibration, you have a problem. So I've been in companies where I'm heavily involved in one way or another, whether an investor, a board member or something like that, and the investor just provides an absurd valuation that's extremely low to the founder that they've already invested in. To me, that's a red flag. And I've seen that happen over and over again. And that, that puts that investor in a certain bucket. For me, it's one that doesn't really understand the game because if you go to a founder and you're trying to give them a lower valuation than the last round randomly, and again, this is just a very specific scenario. That's the kind of red flag that I kind of get concerned about. Unless they have really strong justification. There are reasons that this makes sense, but most of the time this is because you're dealing with an unsophisticated investor. So my biggest red flag is trying to identify if someone's an unsophisticated investor. All that being said, if you're investing from any of the big names or like some of the tech angels out there and, and getting money from them and things like that, you should be fine. There are really no red flags, except probably your own personal thing of taking things personally instead of just letting it kind of slide off your back or so to speak, because, you know, they're investors and they're not operators. And they have all kinds of variables, factors and things like that, of why they would do a deal or not. And here's a real honest truth, especially at the earliest stages, it truly is a scenario where no one really knows if your company's gonna be successful or not, regardless of how successful you are right now. And they're investing in a company where they believe it to be successful, but they're also making bets. So you're just another bet to them. The biggest thing is just unsophisticated investors or investors that are on the east Coast. No offense to any investors on the east Coast. There's great ones on the east coast. But I've seen this pattern where they're cal in the Europeans, foreign sort of non US Investors have this bias too, where they're trying to get a lower valuation because they're used to it, or they're trying to provide less money for some reason and things like that. But those are just patterns that they've learned from the investing they've done. So it's not a red flag. It's just like, are you into that? Are you okay with their terms or not? And you get to decide. As a founder, no one's forcing you to do anything. Hi, Heaton. Is there a maximum amount of time I should spend on fundraising? I've been actively talking to investors for the past three months and I still haven't gotten a solid commitment or anyone to lead the round. I've heard stories from founders who did a hundred plus meetings before they got their first. Yes, but this feels like a meaningful distraction from building the company. Should I call it quits and try again at a later date or stick at it until I find the right investor? This is a very loaded damn question, and I will just start with that. The reason for that is I just want to shake this founder and say, hey, fundraising is your job. Fundraising is your job. It is not a distraction. It's your job. And I'll give you my experience here. When I'm fundraising and I'm prepared to have those a hundred plus meetings, because no matter what anyone says, whether it's a hundred plus or 50 or 500 or whatever, it's a good heuristic that just keeps you going. So to me, when I'm fundraising and in a very active process, I'm literally waking up doing the thing. My primary job is fundraising. Emails, calls, demos, in person, whatever I have to do. And then I'm going to Sleep. And it's a long day and it's kind of a sucky day compared to operating, but it's my job. So as long as I can say I wake up, I did the thing, I went to sleep, it doesn't matter how effective I was, it doesn't matter how much progress I made, as long as I did the thing which is the act of fundraising. I'm not kidding. There's not a lot of things like this, but this one is exactly like this because it's a grueling process. So yes, all that's true. But it's your job. So first, find a way to not make it a distraction. I'm not saying enjoy it. It's very hard to enjoy the process. But there is one thing you should enjoy. You should enjoy talking about your company and learning how to speak about it to people who are investors. That's what gets me excited. Because every meeting, every call, all the cadence and kind of the things you're doing there, they're all opportunities for you to learn. Just like when you're building a product and iterating it, think of it that way and hopefully you won't think of it as a distraction. So that's kind of thing number one related to fundraising and this whole hundred plus meetings myth. It's not a myth, it's true. But you could get lucky too. But you're not optimizing for luck here. You're optimizing for getting the job done. So now a couple things underneath, from what I heard, I'm just reading through this a little bit again. I saw if you're even willing to call it quits right now, my assumption is you don't need the money yet. So that's like just ringing in my head, like, why did you try to raise money in the first place? Now if you need money, and what I mean by need is you're running out of money. You have the kind of growth that if you raise more money, you'll be able to grow faster and you have a narrative around that. All those kinds of things are good reasons to go raise money now versus wait. But if things are working, you have plenty of cash in the bank. Yeah, stop fundraising. I don't even know why you started it in the first place. Maybe we need to have a personal, longer conversation when it comes down to like sticking with it to find the right investor. Yeah, that's really important. And I think that like, if it takes that many meetings, totally fine. But the last piece of feedback on this that I would I would give someone who's in this situation is to really think deeply about raising money. And is that something you really want to do? Don't do it out of a need. Do it because it makes sense for your business. And then once you kind of calculate that and think through it, don't think of it as a distraction. Because if it's a distraction, it means it's not going to help your business to raise money. But if it's going to help your business to raise money, you can't think of it as a distraction because why would you think of something that as a distraction if it's valuable to you? Right. And again, I'm harping on that a little bit because it just means something else might be out of whack. You might not have the right other folks on the team to support the company's efforts and things like that. But I digress. The bottom line here is that there seems to be a bunch of contextual reasons why this founder is not being able to raise money or seeing traction is what I'm hearing underneath it in three months of pitching. So if I were to like, guess, I think they need to work on their pitch and narrative more than they need to do anything else first.

Hey, Joshua, how's it going?

I'm good, I'm good. I am about to be going through a fundraiser. There's an elephant in the room and it's my co founder and CEO left the company earlier this year, took a bunch of money with them and pretty much left our investors burnt. And I stepped in as CEO halfway through this year and I just wanted to know how do I navigate talking about what's happened?

So tell me a little bit more about kind of the state of the business.

Yes. So we raised the pre seed mid last year and that was for half a million. And now we're three co founders, two completely new ones, and a tech lead and a bunch of contractors.

Okay, so four people on the team, three co founders, you're one of them. Two of them are newer, so they're kind of fresh. And the original co founder you had has left the company, but he took a bunch of money, so he did something bad. So how do the current investors feel about the whole situation today?

So at the current investors felt like, obviously they felt burnt. I had to do a lot of like fixing up of the relationship, like explaining what was happening. He had all control, he could have taken anything. He put a bunch of money in himself as well. And so he had all the legal ability to take Whatever. Essentially my hands were tied in that sense.

Is your ex co founder still on the cap table? Does he still have equity in the company? Yes. Is it a significant amount?

No, it's less than 10%.

Okay. Is there any value he's going to be able to provide going forward to the business, in your opinion? No. Okay. So the good news is you got a significant chunk of his equity back. So. Yeah, a strong part of the narrative isn't that. It's just that, hey, I had a co founder I started this business with and to part ways. This is how we had to do it. Right. So there's a. There's a narrative there. So that's like the first piece. I'm going to chunk out your narrative for you, basically. Right. So I think the way I think about this, you're asking the right questions. You just need to have what I call a party line. And that party line is what you tell everybody. And there's no other. There's no other truth except that I'm trying to get a cohesive narrative that I believe in that is as close to the truth as possible, but not sharing the dirt that no one needs to hear. Right. So I'm not the kind of founder that'll tell you to lie. I'm not the kind of founder that'll tell you to hide something because I don't think that builds good relationships. You sound like someone that understands that. So I'm starting out in that place, and that's why I call it a party line. So what we're trying to invent is what is your narrative that you can use as a party line? Right. So so far what I have is I started the company with this person and we got to this stage and we had a difference in what should happen next. And that turned into my co founder leaving, pissing off our current investors. It's fine. You can say that, right? If. If that's true and everyone feels that way, you don't have to say that, but you might want to say that for a very specific reason. That comes later. And we've. We decided to part ways. I became CEO, took over the company. We've been growing like this, so I hope you have growth. Otherwise I'm assuming you wouldn't want to raise money. So let's just say you do. If you don't, we can talk about that. And I was able to take what we had, bring on two co founders, bring on a technical lead, and we work with a bunch of contractors. Now that's the current state of the team. So now you'll notice what I just did. I did all that and then brought it back to you and what you've done in the current state of the team. So I'm trying to make it so that nobody worries about the past state anymore. And then now you talk about everything in the future, which has nothing to do with the past, right? So that's kind of like the party line in my mind. And there might be some details there about your difference in agreement about what to do with the business. Like, he wanted to shut it down, I wanted to continue. I don't know what your narrative is, but that should be part of that story so that folks have a reason that's really pithy and not some long winded. We got on a call, we argued about this, we did that. None of that crap matters, right? What matters is your current state. He owns less than X percentage or this percentage of the business. I've revamped the team, brought on more co founders. Here's how that looks. And this person's no longer involved, but they have a little bit of equity because they helped me start the company. So after that point, the world is yours. You get to say whatever you need to say about the current status and what you're going to do next, right? Because you kind of dissolved that issue. And if anyone brings it up, that's where your party line comes in. You just say the same thing again. Hey, this is what happened, right? You can even just say, I'm friends with the guy. You want to go talk to him, right? He'll tell you the same crap. Because he will. You don't even need to talk to him for him to say the same crap because you didn't say anything that's outside of any, like, problems or anything like that. So here's, here's the thing, right? Oftentimes we're confused about these things because we've taken the whole experience personally, as we should, because we had to live through it. It was personal, right? But once it's over, nobody cares. Even you shouldn't care. And you haven't. You've demonstrated. You could hire founders, right? To join this crazy thing with you. You could hire a team or like a person at least you could manage contractors and you could make progress in the business and you're raising money for the business, right? I think some investors might be like, okay, can we get some of his shares back? More of his shares back, right? There might be conversations like that, but those are better conversations than what happened or Is Joshua lying? Right. Like, those are not good. Right. So you're just trying to avoid any of that and you're trying to tell. Be the closest to the truth without getting into all the dirt. That's personal. And if anyone asks, you can be honest. But, like, again, I heard your story. That's the party line. There's nothing more, nothing less to it.

So I think that it's great to have that party line to actually get me to start talking about it. And it's something that I can bring up and it's consistent and I know that I won't deviate from the story, go too deep into the background, and it helps me kind of like, hone in on what. What happened, the transition, and, like, how we can actually bring the company forward from it. Because no one wants a co founder who isn't Borden anyways. It's. It's already like a neg. That would be worse.

Correct.

So I think I can build a pretty strong narrative from that. That's awesome.

You got it. Hearing that question from Joshua and the context just reminded me of how much I love founders that are just good at critical thinking and just figuring out what to do off of really good contextual advice, if I do say so myself. So, like, I was very impressed with how quick he picked up on the nuances of my advice and what he can do with it, because that's my job, to make it easy for someone to pick up. But he was able to pick it up and now he knows what to do and that gives me the most pleasure. So that was a really great conversation, Joshua, about a real co founder problem that could have been real hairy and challenging to explain, that we figured out how to explain a very simple and concise way.

These are kind of a unique set of questions I'm going to answer now. I say they're unique because I usually don't answer questions like this. But folks I know are dying to hear stuff that's about me and my experiences, which I usually don't share unless it's contextually relevant. But let me just do something uncomfortable for me, the first one is, what's the biggest fundraising mistake you've made? I've made so many mistakes fundraising, there is no biggest one. So I don't think it. I don't think fundraising works like that. I think. I think, like, I'm going to flip this and say the biggest opportunity with fundraising is to really contextualize your audience and understand the investor mindset and perspective much more than you do today. I don't care who you are, you can spend more time appreciating what they're dealing with and that will help you get what you want from them. The next question is, what was it like fundraising as a second or third time founder? It's much easier to get meetings if you're a semi successful or successful past founder. Even if you're not and you did something somewhat meaningful or there's people that'll intro you to investors, it's much easier to get the meetings. Everything else is basically the same. Next question. What are the biggest red flags you see as an investor? The biggest red flag is when you're an investor and you notice that it's not likely that the founders actually get along. That is actually the biggest red flag. Because usually it's funny, like I have some friends that are very successful investors and that's the one that we, we always end up talking about. And it's the one that's the red flag that will put them off. Because think of it this way, you're presenting to them. I'm not saying you have to be fully polished, you have to agree with everything. But they want to. They're essentially assessing your dynamic and that dynamic is really important to them because that's at any stage, that's what they're assessing. Because you're the team that's going to build the team that's going to build the business. And if you are not with it or you're not getting compliments about how well you work together, you probably need to like work on that and work on your kind of way of acting with each other. Because here's the funny thing, there are lots of different personalities. The co founder relationship is nothing short of intense. I don't think there's anything like it. And if they smell anything funny of disagreement or something where they don't, even if they're wrong, they don't believe you can work together because you might be showing too much of how you make decisions. Because internally and operationally, yeah, things can be a mess and you could be yelling at each other, but if you actually are effective and you like each other, all that nuance won't come out in a single meeting with an investor. So my recommendation would be to really get your act together if you've got founders and make sure that you don't hit this red flag unnecessarily. Next question. If you were 18 with an idea for a startup, how would you go about raising capital? I would not raise capital. I would try to build something without raising any capital. Don't make raising capital the first thing on your mind when you have an idea or want to do a startup. I don't have anything more to say on that unless someone has some questions that come in the future. All right, that's a wrap for the Heaton show for today. It's always fun because I love, love hearing from founders and what they're challenged with and helping them out with it. So I hope you enjoyed it as much as I did. Please go to Heaton show to submit your challenge to me so I address it on a future podcast.

The show is produced by SupermixX. Thanks for joining.