Fundraise before you fundraise

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Fundraise before you fundraise

I talk to a lot of founders - both inside Day One, and outside. And a recurring topic is, unsurprisingly, fundraising.

When I talk to a founder about fundraising, I can quickly discern whether I’m talking to a founder who is planning ahead (and therefore has time to implement the right strategies to have the best shot at raising) or someone who’s behind the eight ball and “backing into” a fundraise.

Now let’s be serious, no one like fundraising. And don’t believe anything you see on Twitter about how a fundraise looks or sounds easy. I talk to successful, funded founders who have top tier investors, and almost all of them still have a staring-death-in-the-face moment in their story. And it’s always a grind.

But smart fundraisers are putting moves into action months or even years ahead of time, while they’re building (or even before), it’s something they’re thinking about. But founders who back into a fundraise find themselves doing the math about their runway and are forced into a raise. They’re just starting to think about how their business lines up against fundraising milestones, who they know, and only then starting to execute.

That’s a tough spot to be in. With 3 months of prep (or even a bit less), you can definitely implement a solid process - build targeted lists of investors, find warm intros, write awesome cold emails, etc. But fundamentally the things that are most important for having a successful fundraise are out of your control - namely, the relationships you need to have with investors, and of course how fundamentally sound your business is.

So in this newsletter, I’m going to talk about the things you as a founder can do to fundamentally set yourself up for success in a capital raise - or as I’m calling it, fundraise before you fundraise.

The reality is, almost all of these require many months or even years to set up. So if you’re early, or have the time, please please please adopt this mindset and what I’m about to talk about. If you’re already building and know you have just months before you need to raise, don’t panic, you can still start playing the long game now.

Our fundraising experience with Day One

With Day One, we’ve gone out to fundraise three times, and each time, I think we’ve proven the rule that success in a raise is largely a function of what you’ve done over months and years to prepare, not a crash course or burst at the very end.

The first time was actually within just a few months of launching, and we pulled together a very small angel round (this was also right after Rahul and I officially linked up, so the team was in place, the vision was defined, and we were rolling with our first ever cohort and had line of sight to revenue). And we raised from just a small number of angels where we had real relationships. If we didn’t have these relationships, we wouldn’t have raised (or it would have been much harder, because our business was fine, but not a rocketship by any means).

The second time was towards the end of 2021, about a year after our first raise, and we pulled together a $1m pre-seed round. Again, the success of this raise was due to the relationships we had built with investors over the months leading up to our raise. I can identify exactly how we connected with and knew all of our investors, and they were a mix of:

1. Angel investors from our past lives, people we had close relationships with

2. Angel investors we had gotten to know through Day One over the course of building (some were our Fellows, others were mentors)

3. Institutional investors we had known from our past lives, and

4. Institutional investors we got to know from building Day One

I’ll admit, we didn’t put some of the advice I’m going to share into practice explicitly. It was largely organic, and we had particular situation where part of our business involved connecting with investors and inviting them into our community, which allowed us to meet hundreds of potential investors, and ultimately about a dozen came into this round.

So we got lucky, that our past relationships and the work we did to build Day One put us in a spot to succeed. You have to be brutally honest - has your path put you into contact with the right people, and if not, then you’ll have to make moves to make that happen.

Then our third fundraise was toward the end of 2022, another 15 months after our prior raise (this of course was raising in a much tougher environment), and there we raised money from investors who we had built relationships with - and to our detriment, we didn’t have relationships with some of the bigger funds we wanted to lead our round. In this raise, I think we proved how important it is to be pro active about building relationships with the targeted investors and funds that you’ll want in your round. We didn’t, and we paid the price.

Advice on how to fundraise before you fundraise

Our story is not unique. However fair or unfair venture capital is, if you want to raise from VCs for the business you’re building, you absolutely should play the long game and set yourself up for success. For a venture backed founder, it’s part of the job (and actually, showing that you know the game and are playing it well is one of the things that many investors look for - I know, meta).

So here’s how I would approach fundraising, if I could start from the very beginning and set myself up for success.

Try to not need fundraising

This is advice I just can’t not put out into the world. The absolute best way to fundraise is to not need it. This isn’t about playing games with investors. If your business is profitable, and you identify ways to grow faster, and the missing piece is capital, you will find investors. And if you can’t, talk to me. Seriously.

And even if your business isn’t yet profitable, but you have a side hustle, freelance gigs, or even a steady job that allows you to build and operate indefinitely, then you’ve removed a huge headwind to fundraising - you’re not desperate.

So before you start, figure out a way sustainably fund your startup and your life. And as much as this is a tactic, I feel I need to speak to the mindset around this.

Building a startup on the side - or having a side hustle while you build your startup - is so much more common than you think. If you got drinks with any handful of successful founders, a large fraction of those founder would tell you about all the crazy things they had to do to survive. It’s a mindset - first and foremost one of commitment to bringing your vision to life, and second recognizing that having a separate income does not make you any less of a founder.

Let me repeat that. HAVING A SEPARATE INCOME DOES NOT MAKE YOU LESS OF A FOUNDER.

To all the VCs who have propagated the opposite idea, that you aren’t fundable until you’ve gone all in and mortgaged your life for your startup - shame on you. I freakin hate that mindset. That mindset is so harmful to founders, and so self serving for VCs.

You know what’s a better way to convince an investor to invest? Stay in the game long enough to build a business they can’t ignore. Just do that instead.

Make a fundraising plan way ahead of time

The first big question about your fundraising plan is whether you plan to fundraise at all, or whether you plan to build your business toward profitability (and as said before, if/when you hit profitability, then you can re assess if you want/need to access outside capital to grow).

If you plan to build toward profitability, then most of the rest the advice isn’t for you - although I’d keep reading, because knowledge is power and knowing how to play the VC game effectively could help you make the call to go after VC or not. Also most of this advice holds for all other kinds of sales and partnerships.

But if you are planning to raise venture capital at some point, then you need to know the milestones and stages, and you need to make a detailed plan that outlines when you’ll raise, who you’ll raise from, and most importantly how the capital you do raise will fund you from one raise to the next.

The first place to start is the newsletter I wrote two weeks ago, which references an awesome article by pre-seed investor Martin Tobias that highlights the specific fundraising stages and milestones to hit for each. My article on top of Martin’s highlights what you do to reach those milestones.

What you as a founder need to do is lay this out for yourself, and go from the generic advice Martin and I provide, and get specific:

1. Identify which funding round is next for you. If you’ve already raised VC, it’s the next round in the list. If you haven’t raised, it’s either an angel round, or perhaps you could skip to a pre-seed. I should say that you might find yourself in the boat of having raised a round, but without enough runway to reach the milestones for your next round. In this situation you might raise a bridge/extension/plus round, where you essentially anchor on the milestones you’ve already hit, and raise capital (usually) at the same valuation as your prior round.

2. Next, identify the milestones you need to hit to be in range for that next round. For example, pulling from Martin’s essay, for a pre-seed round you should be in the ballpark of $5-10k monthly revenue. Now for your specific plan, you need to do some investigating to understand how that translates to your specific industry and business. If you sell enterprise software for $20k yearly plans, then you’re probably talking about 3-4 customers. If you sell SaaS subscriptions of $50 or $100 a month, then you need to have 50 or 100 monthly recurring customers. These milestones are guides, not certainties, and every industry and business will have nuances to account for. If you want help navigating those nuances, hit me up.

3. Now is where you need to get really honest. How long will it take for you to hit those milestones? Do you have the funding to stay in the game that long? If not, see my first point. The advice used to be to raise money 6 months before you ran out… but I think now I would raise with 9 months in the bank. I would also raise 24+ months of runway, so that you still have 15+ months to work in between trying to raise.

4. Now that you’ve anchored your operational plan to get your business fundable, you can start to identify the investors and funds that invest in businesses like yours, at the stage that you’re approaching. Notice I didn’t say “that you want to invest in you”. The market does not care what you want. There are thousands of VCs and you need to be ruthless in prioritizing the ones that you have a good chance to be a fit for (especially because you’re going to put in the work to get to know them).

5. Start by combing through lists of funds, and narrow down first by stage and sector/industry. These lists are all over: here’s one curated by Shai Goldman, this one is curated by Ramp, this one is curated by Failory. Then there are platforms like Signal and Crunchbase (tip, just sign up for the free trial and do all your searching in a week). Capture all the funds that fit your criteria in your own spreadsheet. Get a list of at least 100 sector/stage aligned investors, but probably you should get to 250 to be safer. Then, dig into each fund and identify the ones that are the most on thesis with what you’re doing. Read their website, their GPs tweets, and create tiers where you identify a top tier of highly aligned funds and investors.

6. Now you’re ready to start building relationships with the most promising investors. We’ll get into those tactics below, but map out the timeline of these pre-raise activities against your operational plan, so that you have warm connections with investors well before you need them.

Don’t just network, get involved

This is my go to advice for all networking, and how to move past networking as connecting to networking as relationship building.

I think the #1 barrier most people come up against when they think about building relationships with VCs is “why would they want to get to know me”. And it’s a valid question. VCs, as gatekeepers of LP capital, have a lot of people clamoring for their time and attention (as a means to try and get their money). So their guard is up.

At the same time, they kind of know that if people are coming to them, there’s a selection bias toward less quality startups. That sounds harsh, but this is part of the crazy game that happens within venture capital. VCs want to talk to founders who don’t want to talk to them - either because they’re profitable and aren’t looking for capital, or are too busy running a fast growing business, or are already engaged with more exclusive and higher tier VCs. It’s like high school dating.

So how do you as a founder break this? Yes, plenty of VCs will respond to cold email and review decks. Some say they review everything. Some have applications or submission forms. So yes while these VCs are indeed taking a look at your business, you’re now up against literally everyone. A VC might look at 300 decks a month and make 1 investment. Are you objectively (or subjectively in the eyes of that VC) better than 299 other startups?

The way around this is to be actually helpful to a VC, or to get involved in places and ways that the VC is already involved. You don’t ask to pick their brain (please no), or to just share about your startup / learn about their fund. You don’t need to try and run into them at the country club, but professionally, you should try to get aligned and move in the same ways they move.

Here are a few things you can try.

1. Engage really positively on Twitter (where most of the tech/startup/VC world hangs out). You’ll notice lots of cliques on Twitter. Break in and get in the conversation. Thoughtful replies are great for this. Then try and do more posting and maybe longer form content that gets these folks to engage.

2. Volunteer at their events, or just attend. This is a bit of an underrated way to help, but if anyone has thrown an event (whether it’s a big one like a demo day, a casual one like a happy hour, or an intimate one like a dinner), you know how much having a few extra sets of hands can be huge. This could be welcoming people at the door, helping to organize stuff behind the scenes, or just volunteering to be a plant and drum up conversation and connections. I would gladly welcome free help from someone who offered it, and so would VCs. You’ll also benefit from the event itself and probably multiply your connections. This is probably the best way to move off the screen and build a real relationship.

3. Send them dealflow. This of course requires that you get connected with other founders who are doing really interesting stuff. But as a founder, that’s a good idea anyway! If you’re connected to awesome startups and share them with investors, even if they don’t invest, you’ve now created a connection that has a lot of positive connotations.

4. Send them talent or customers that they can pass along to their portcos. I wouldn’t start with this, because it requires you to know their portfolio and a bit more trust, but if you have a line to a VC, sending them a potential customer for a portco allows them to look very good with that portco… and they will know you made that happen.

5. Many VCs are mentors, and if you volunteer as a mentor to a group that the VC either runs or is affiliated with, you’ll have a good chance to rub shoulders, or the organizer could connect you, or at the very least, you’ll get to drop the affiliation when you reach out to raise.

6. Start a podcast or newsletter (lots of other good reasons to do this, like building your audience and brand with potential customers), and invite them to join / write about them. Use this in conjunction with other stuff, but it can kick off a relationship.

7. Create something that leans into giving-back in ways that these VCs will appreciate, and then get them involved in your thing. Organize your own events and have them speak. The move is to make this a win-win, and these types of events and organizations don’t happen overnight, so this is really the long game.

You can’t do all these things for all the investors on your list. But these are the kind of networking things that will get you connected and known by the investors you’ll be pitching later.

And you know what, these aren’t just tactics to do 12 months before a raise. If you work in or around tech, startups and VC, I would start to do this now. Like I said, these are just plain good networking tips, and the world of tech/VC/startups is extremely small. This is where your next gig, as well as your next investment, will come from.

Last words

The longer you do these things, and the better you align these activities to your bigger picture plan, the better off you’ll be when it’s time to fundraise. You might not be besties with Marc Andreessen, but that’s okay. You’ll not only be connected and known, you’ll have a reputation as being connected broadly and helpful - and to a VC, these things translate into really valuable traits. Why? Because someone who’s well connected with a lot of favors to call in is way more likely to find early customers, early hires, early partners, and as a result, VCs will reward this ability with early funding.

So the best time to start doing this was 20 years ago. The next best time? Right now.

So get to it!

P.S. if you have stories where this kind of thing worked for you, I’d love to hear it. I’ll publish a few stories in our next newsletter.

And if you’re a founder building something cool and wants to get featured in a deep dive, also let me know.

And thanks to everyone who’s been sharing and giving me great feedback. Keep it coming!