Fundraising: network and intros
Part 4 of a primer on early stage tech fundraising based on YCombinator's guidance and my own learning in-the-trenches as a successful founder
Previous posts in this primer:
Using your network
One of the best kept secrets in all of Silicon Valley is the incestuous nature of early stage fundraising. We don’t talk about it as an incestuous network that’s hard to break into because we like to live in the fantasy that tech is a meritocracy where the best ideas and the smartest and hardest working founders rise to the top. To a certain extent it’s true that great products will win over mediocre products, so the best ideas well-executed will rise to the top. But in the early days of startups when all there is is an idea and a team, and maybe an MVP product or no product at all, someone needs to make a bet on the founder(s) (unless you have the independent resources to bootstrap your business without external funding). And the chance that you get to play the game at all is highly determined by whether you already have a network to raise from. This is just how it is.
The first $100k invested in your company will likely come from people you already know. If you have a strong network, it may be the first $500k or more. If you think to yourself that you can’t possibly find people to raise $100k from, then you’re going to need to get creative, and applying to startup accelerators like YCombinator will help you get there.
Before you have a product or company that’s massively successful, all that investors have to evaluate you on is their perception of you and your idea. If you have a professional working history with folks who invest as angels, then you’re lucky - you have some sort of actual track record they have witnessed, and you can leverage that track record as a data point that what you do in the future will be successful. If you have a personal friendship with folks who invest, you may be able to leverage that as well - they’ll inherently trust you as a human and you’ll have a leg up compared to other founders they evaluate whom they don’t already know.
Whether you choose to take money from friends and family is a choice you should make with intention. Make sure they are an accredited investor, and think about how you’ll feel if the business doesn’t have the outcome you are hoping for. When you see family for Thanksgiving, will you be stressed if you haven’t returned them their money yet? Will taking money from this friend forever change your friendship? If you feel good about the downside and they can legally invest in you, then go ahead and welcome them into your early round.
In my opinion, the best early angel investors are former successful founders and brand-name executives from top tech companies who either lend credibility to your business (because they are well known for their expertise in your space) or have a fantastic angel network they can introduce you to. Former successful founders likely have a great angel network; top tech company folks may have strong angel networks and may also be relevant to your field. Former founders also have the benefit of having been through it before and can answer your questions as you scale.
Fundraising sequence
You’ll want to raise from people you know first simply because it will be easier to raise from people you know than people you don’t know. Once you have a few hundred thousand dollars raised and it’s clear you are capable of raising money, investors who don’t know you will start to pay attention. If you haven’t raised anything when you get introduced to someone you don’t know, those investors will be skeptical that you’ll be able to raise the money you need to close your round, and they won’t want to be the first in. Typically the first $500k is the hardest and the last $1M of a seed round is the easiest because once the ball is rolling and it’s clear you’ll likely raise your full round, and you will have de-risked the question of “will this founder be able to raise enough to make it to the next round?”
Your fundraising sequence will be:
Angels you know
Angels you don’t know (via intros from angels and entrepreneurs you know)
Seed funds (likely via intros from your network)
Larger funds (likely via intros)
As you can see, steps #2-4 rely on intros. The likelihood of someone in steps 2-4 taking the meeting with you will be reliant on:
How much the person receiving the message trusts the person they are receiving it from as an investment proxy (do they think highly of that person and their ability to pick winners / know great people?)
The quality of the intro: how excited is the person making the introduction to pass you on to them. This is where the energetics come in. If there are great details about how incredible you are, why this opportunity shouldn’t be missed, and how the person introducing you already invested, you’ll be set up for success.
The information you provide via your fundraising blurb
When you meet angels and entrepreneurs you know, before you get off the call you’ll want to ask them to introduce you to a few specific people in their network. There are a few ways to approach this. You can either scan their LinkedIn connections ahead of time and pull out the folks who look like investors that might be relevant for your business (fairly time intensive for you), show them your list of target investors and let them pull out who they know, or ask them to pull up their LinkedIn on the call to brainstorm some folks. You’ll want to follow up immediately with your fundraising blurb and ideally a draft note with a strong endorsement for you that they can choose to put on top (they can always change it). You may also want to send separate emails for each introduction that they can put the endorsement blurb on top of.
For example:
Email 1
Subject: [READ THIS FIRST] Copy to put on top of email forwards
Hi [your contact name],
Thanks for forwarding my blurb to each of your contacts! You should have one email for each one with a customized line for why I want to talk to them, and they are written to be directly forwardable. Here's some sample copy for you to put on top when you forward (obviously edit as you wish):
Hi [name you are being introduced to],
Hope you are well. Wanted to introduce you to a rockstar founder in the social space - Luna Ray. She's a former product lead at Instagram (used to work for me), MIT grad, super smart and capable. I've been supporting her on her latest venture - Plura - thought you should take a look - their raise is moving quickly. Let me know if you'd like me to connect you.
Emails 2-n (to be forwarded)
Subject: Email for [introduction name]
Hi [your contact name name],
Thanks for offering to share our blurb with [introduction name]. I'm very interested in hearing [name’s] perspective on what we are doing given [pronoun] experience in founding [company name].
[insert fundraising blurb]
Building a target investor list
You will want to have a database tracking all of the investors on your radar. You’ll want to keep this as up-to-date as possible and circle back to it often to remember who to follow up with. You’ll likely have dozens if not over a hundred conversations with investors before you complete your raise, so creating systems to stay organized will be your ally. Here is the format that I used based off of YC’s advice; feel free to modify as you need.
The first tab is the target list of investors that I built. By the time I was done fundraising, this tab had over 500 rows (many I did not speak to, they were just names of people I heard that might be a fit so I wanted to track them to try to get an intro to them). The second tab is the status of commitments, signatures, and wires. You may want to keep a prioritized list of the names in the first tab that you haven’t gotten intros to yet that you can send out to the folks who agree to help you with your raise. Most people will feel good giving you 1-3 introductions so be thoughtful about who you ask for what intro; your closest homies and existing investors should be willing to go above and beyond that. Again, fundraising is based on trust and energetics: if the person introducing you to someone else knows both of you well, can speak to how fantastic you and your business are, and is trusted by the person receiving the intro, you’ll be better off.
The strongest intros come from folks who have already invested.
When you are given the option of multiple paths to a single target investor, take the one that will be the strongest intro based on those things. Most angels who do a lot of investing have a circle of people they share all of their best deals to; make sure your blurb makes it out to their network
Next up: Energetics
Luna Ray works with post-PMF founders as an executive coach. She is the founder and Chair of YCombinator-backed Plura and ex-Meta, Instagram, Faire, and Bain & Company.