The most common question I get asked by other founders and people interested in the startup scene is “How did you go about capital raising, how much did you give away, and were you happy with how things went?”.
To a founder these questions can be as awkward as “What color is your underwear?”, “What’s your sexual preference?”, and “Have your stopped beating your wife yet”. Personal, kinda none of your business, and sometimes where “Yes and No” are both the wrong answer.
Not to say these things are or should be secrets, but every founder wonders if they went about it the right way, raised the right amount and gave away as little as they could have.
At the end of the day, funding is like oxygen, having a lot of it makes you dizzy and stupid. Have too little, slow, exhausted or dead. The trick is to find that middle position.
It is freaken hard.
You will need to spend all your time in full time capital raising mode, usually at the same time as you are building your product, or trying to find customers. But here is a summary of how I went about the seed capital raise, and my thoughts at the time, where I can remember them.
NOTE: This is not a playbook for how to get funded. This is how I did it, and only the initial round and could be wrong for you, besides my underwear is green, what color is yours?
Before you start:
Before you even start talking to investors, you need to build a good profile and case. They will mostly invest in you, so make sure you talk to people who you can relate to, and you impress them as someone who knows what they are talking about, and can get things done. I was lucky I was involved with Trade Me very briefly, so I could throw that name around a bit (if you have big names, put them in bold and italics). I had just been involved in a failed startup, Vianet, so wanted to add another credential to my CV that showed I could complete something and win. In the US being involved in a failed startup is considered a positive thing to have on your CV. You can learn from the mistakes. However in NZ, this is not the case mostly and tends to work against you “Bro, didn’t you hear he crashed and burned in XYZ! Flaky!” and that sort of thing.
So I rode the length of NZ solo on a bike (and uphill).
Read my blog about my ride for all the motivations to do it, there were a few. But I wanted to raise some profile for me, and prove I could do what I set out to do. But this created a backstory, and ultimately made it easier for me to raise some capital. Everyone likes a half crazy founder doing amazing physical feats. Having a crazy moustache also helped. More more on this later and in another post. For now…
My bike ride raised my profile a lot, and put me in touch with a lot of great people who were huge supporters of mine. Some in tech circles, some in investment circles, some just big fans of facial hair.
After my bike ride, I was still building Vend in my part time, I was running a software consultancy business and in the global financial crisis I had quite a bit of spare time. So that’s why I was building a product in all the downtime hours I was not able to sell to clients. But I still needed to find work to feed the family. The time came when I needed to make the call, do I do this thing and go at it 100% or go do something else. Basically I couldn’t do both. So I went out and looked for some early stage seed capital.
“Angel” is a term that was once used to describe the retired banker who does some small investments from time to time for fun, and to help out entrepreneurs starting out. Now it mostly means “VC” without all the strings (mostly). The professional Angel is the easiest to find as they will have websites with portfolios. I googled and researched the local Angel scene, and found a few that looked like they got involved in early stage technology companies. Well that’s what their websites said. Some even had online forms that you could submit your funding request and business plan through. Awesome. I just complete the form then they wire me some cash! Yesss! One had a very comprehensive form that asked all sorts of the right questions, so I gave that one a go. A few hours later, after many pages of questions on a very flash application form, the whole thing crashed gave me errors and said my application could not be completed. Their website also said they only take applications that have completed the form.
So I followed up via email instead, and it turned out the machine “ate” my application. Neat. So a exchanged a half dozen emails with this Angel instead. Now, when I say “exchange”, I mean I send an email, wait a week then have to chase up on it as it seems the machine eats emails too. The times I did get a response, sometimes with some questions in it for me to come back on, sometimes months later, I replied the same or next day. Then waited a week, and then two, then a month and then nothing. No reply.
I got to meet with one angel and Vend wasn’t for them, another wasn’t actually an Angel but brokered introductions to Angels (huh?). But mostly people failing to reply to emails and phone calls. At the time I thought this was normal behaviour, and I was failing an initial screening process, and perhaps they got hundreds of approaches a day. I had never done this before. But now, having been through the cycle a few times, up and down Sandhill Road in the heart of Silicon Valley, I know that this was not normal behaviour. My timing could have been wrong. Perhaps I was too early stage. My business plan could have sucked. My bike shenanigans could have been a turn off, thinking I might disappear for another 6 weeks on my bike any second. Perhaps it was the moustache. Things might have changed since the GFC and I hope so. But an email or phone call saying “no thanks” or “we are busy” would have actually been nice.
My advice is to be friendly, firm and direct and set the expectation that you want to hear back from any professional Angel ASAP and then if you don’t get the attention you are after, move on very quickly. Remember, these guys do this for a living, so don’t think you are inconveniencing them by bothering them. They do get busy, and sometimes need a reminder email. It happens. But think, would you want an investor on board whom when you needed their help they may or may not reply to your emails? The answer is of course no.
For me at the time I gave up on this path completely disillusioned believing no one is interested in funding NZ technology companies. I was still slowly pushing my product closer to market. The irony being if I had just put my head down and not been distracted with seed funding, I may have got my product to market 3-6 months earlier, and burnt through less of my savings. Capital raising is always a distraction, as it takes you away from doing other things like building the business.
Talk to others who have raised from local Angels, there are a lot of them around but they are quite hard to find. You need to be doing dozens of meetings over coffee to find them. Failing that go here and find some Angels and tap into these new Angel networks around the country, but really do try your networks first that way you will have a common connection and applying cold via websites dosent yield good results in my experience.
Friends and Family?
Friends and family is a good alternative to the angel round, money is money right? If it gets you going then it reduces the risk of your failure. However, I really wanted to avoid this path having had good people and friends lose money in other startups I was involved in. I wanted to keep this completely professional. If this was my next big failure then I would still have some friends and family left. Considering my failure to find a good professional Angel and the disappointing market for investment in general, my choices were limited. I tapped deeper into savings, and cleaned that out, and things were getting really tight.
I entered Vend into the Cloud Connect Launch Pad in Santa Clara, and was surprised to be picked as one of the finalists. This gave me some great exposure so early on, and helped validate that what I was doing was interesting to others. People were starting to get interested in what I was doing now. I was building a profile and validating my idea. A few friends and family were starting to get interested as this seemed to be more than just some side project I was working on.
Two friends I was somewhat hesitant to call on, were Rowan and Sam. Looking back, I think I was perhaps afraid they would say no, after Vianet crashed and burned. I have since discovered this to be typical “kiwi” thinking pattern, “Nahh they wouldn’t want to invest! Besides, the shame if they said no” and just the whole way failure is considered, well a failure. I had caught up with Rowan on my bike ride and at the time told him about my crazy idea for Vend. I think I even had some screen shots in my bag. He helped me with my thinking around my model, and then we rode out of Wellington together over the Akatarawa ranges.
Over a number of months I asked them both for a lot of advice, still hesitant to ask them for cash. I had also gone off the whole investment thing to be honest. I was just focussing on getting the product to market and taking help where I could find it.
Sam gave me a loaner desk in one of his other companies to get me out of my spare room. I only worked on Vend when I was at that desk and I was spending more time at that desk than anywhere else now. I had some beta customers using the software. I was running on the scent of an oily rag, even selling stuff on Trade Me (ironically) for extra cash. Then one day Rowan popped by, and suggested I need to raise some capital now if I was serious about this thing. We talked some terms, assuming he was interested. A month later both Sam and Rowan had invested $100k. I could start working in the business fulltime, and gave us a budget to promote and hire in some help as I needed it. I publicly launched Vend the next month, and we were off.
In the months preceding the actual raise, I spent a lot of time with them showing them my model, talking about what we would do with the capital, and our go to market strategy. It helped that they knew and liked me. But I still had to do the hard yards proving I had a business. I could have had the exact same conversations with others, but Sam and Rowan were a part of a minority of people who took the time to listen and ask questions. I must include Lance Wiggs here too, who gave me a lot of time, and invested later on down the track.
I went to them both for advice first. I respected their experience and valued the input they could provide me and Vend. I didn’t go to them for money straight up. This is true for a lot of my other current and potential investors. Start the relationship around advice, and guidance. Ask them what you should be doing, not just about funding, but about structuring the business, go to market plan. Get their advice on everything. If they have invested in a number of companies they will have been through first hand some of the challenges you are about to face. Take their advice. Demonstrate you can take advice and act on it. Smart investors will be looking to see if you can take guidance, or do you think you know it all. The latter never ends well, unless you really do, but then why would you be asking for their help? You know it all!
Just a couple of weeks before Sam and Rowan signed the dotted line, I caught up in person with a couple of Angels at a founder + angel meet and greet event. They were talking at the event about investment and the ups and downs of being an Angel in NZ. Afterwards I approached one, who had stopped replying to emails, just to say “hi” and let them know about progress. I was pretty excited about Sam and Rowan chipping in, and wanted to say thanks for all their help (which was me being polite because they stopped replying to my emails). I only got as far as introducing myself and Vend then was cut off mid sentence with,
“Oh you, I sent you an email saying we are not interested. You must have missed it. We don’t invest in the retail space.”
I only wanted to say “Hi”. I never got that email, either their or my machine “ate” it. So I just moved on to the sausage rolls.
Investors get approached a lot, and probably get stalked too so they can get blunt. Next I sat down (cautiously) next to Phil McCaw from Movac (whom I had never spoken to before), to get his opinion on what I was doing. He was engaged, interested in what I was doing. At the end I mentioned Sam and Rowan were looking to back me and asked what his thoughts were on the both of them, from his experiences from the Trade Me days.
“Go for it, you won’t look back.” And so I did, and I haven’t.
Do some due diligence on your investors. They will be doing it on you, and you want to make sure you know who you are getting into bed with. Are they helpful, completely hands off? Hard nosed, or relaxed? Do they reply to emails? I have since chatted to Phil a few times, not asking for funding, and he has given me some pretty great advice. Some investors you will talk to won’t be as helpful so hunt out the ones that are. They don’t need to invest in you to be helpful. The smart ones will see the benefit in helping the ecosystem,and perhaps they might get an opportunity to invest in you later on.
So yes finding angel/seed investment in NZ is hard, and still is hard based on the conversations I have two or three times a month with other founders trying to do the same. But with a number of great success stories starting to emerge now, like:
…it has to be getting better. Surely? Honestly I don’t know if that is true.
Don’t let a cold response from a potential investor put you off. When you are getting going, a “no” (or worse, no response at all) is devastating. You desperately want to know others see your vision, and that you are not some crazy nut-bag. I almost packed it in when it seemed no investors wanted to talk to me. But I just needed to feel out what and who were the best partners for me. People do actually get funded, even though we are not in Silicon Valley. But it is hard hard work, and it is hard work in the Valley too. Did I mention how it is hard work? It is hard… work.
So here are some tips if they are helpful to you. Again this is just based on my limited experience:
- Build a profile, and establish a story around you. Investors will invest in you first then your idea second.
- Get enough cash to get you going 100% into the business. Doesn’t have to be a lot. But it starts the investment cycle which is a long one that only ends when you exit or break even. Plan on getting good at raising money.
- This seed backing will make it easier when you come to the next round as you will have some history and a track record, and you will be a little more practised in capital raising.
- Getting backing from successful business people is a bonus, especially if they exited for large amounts of money.
- Friends and family are good too. Spend all your money first before asking them.
- When talking to investors claiming to be professionals (i.e. they do this for a living), if you are not getting a response then drop them a line to say “thanks” and move on quickly. Time to market can make all the difference to your business, and it sucks having to chase people up for a response to an email.
- Talk with a lot of people. A lot.
- Talk with people you like and feel comfortable with. You will hopefully be working with them for a long long time.
- Look for really simple terms. Leave complicate stuff like vesting, liquidation prefs and all the other stuff for much later. You are looking for a small amount of cash to get you going. That is all. You aren’t raising $10M. Seed funds should come with little to no strings.
- I gave away 30% for this round. Your call on if that is right for you. I am a sole founder, so I was looking at my early stage investors as being part time co-founders, and they have supplied more than just cash, in the form of time and resources. It was a good deal for me. You should reward your early stage investors as they are taking a huge punt on you before anyone else does.
I have since moved onto two additional funding rounds totalling over $3M and will cover this stage in another post later on about the A and B (and possibly C, D, E) rounds. Like I said, you are always in capital raising mode
Good luck! If you have a story I would love to hear it.