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There’s a very slim chance you know who Steve Schlafman is, but you’ve probably heard of Turntable.fm, the fleeting viral interactive music sharing service that raised US$7-million, before pivoting to focus on live, interactive music performances as Turntable Live.
Schlafman was VP of Business Development at StickyBits, a QR code startup which eventually became Turntable.fm
Since then, Schlafman has turned to investing. First joining Lerer Ventures and then RRE Ventures, an early stage investor in New York City with investments in startups like BuzzFeed, Kik, MakerBot and Bitly.
While at Lerer, Schlafman focused on seed stage work, and now overlooks Series A investments. In the hope of attracting hot up and coming startups, he shares his knowledge in an annual presentation on raising venture capital — his latest focuses on landing a seed round.
While Schlafman’s guide is not the definitive template for raising funding at the embryonic stage of a startup’s life cycle, his presentation is a solid general guideline — especially for entrepreneurs who have started thinking about funding.
We’ve read through full presentation and extracted some highlights.
Consider your options
Before giving up an ownership percentage of your company, are you sure VC or angel funding is your only option? Consider grants, family and friends, traditional debt and credit cards, and crowd funding. The latter transforms customers into investors — engaged, existing customers can be a great source of funding for expansion or new products.
Why are you seeking venture capital funding?
Schlafman believes that the only reason for pursuing this class of funding should be to accelerate growth — a green light from a VC will help you scale, but it “absolutely will not validate your product and market,” he says.
That said, it’s interesting to note how VC funding can serve as a signal for future success.
At the end of last year, Crunchbase indicated that the average successfully acquired US startup raised US$29.4-million and sold for US$155-million. Independently successful startups raised US$41-million and exited at US$242-million. Startups that got to IPO-stage raised US$162-million before going public.
Although the numbers are US-based, the prevailing message does seems to be that the more a startup manages to raise, the more likely it is to succeed.
US-based startups enjoy a healthy seed stage environment. In 2013, seed investing hit a four-year high.
These startups received anything ranging from around US$25 000 to US$1.5-million in seed rounds. Again, the numbers are indicative of the US environment, but the takeaway here is to expect smaller amounts — Series rounds in the US start at US$2.5-million.
It’s important to note that once a startup inks a deal, expectations are immediately raised. It’s a marriage of startup and firm which can last a long time — exists generally occur no sooner than six years, and they are rare.
Are you ready for this type of relationship?
What type of startups are firms looking for?
If your startup has global ambitions, note that US-based angels, accelerators, seed funds and traditional and corporate VCs are looking for startups operating in sectors such as connected cars, unmanned aerial vehicles (UAVs), social platforms, digital currency, context-aware computing, connected home, wearables, clouding computing, space, mobile services, bioinformatics and industrial internet.
If your startup is trying to solve a local problem, don’t forget to consider your long-term outlook. A global strategy opens you up to international opportunities, and it will help you find favour with local investors, who tend to think globally.
Preparing your pitch
If you’re still reading, you’re confident that you can convince VCs to invest in your minimum viable product (MVP) and that you’re ready for the new relationship and the potential acceleration in growth.
While seed stage funding encompasses the financing of the early development of a new product or service, Schlafman notes the benefits of launching an MVP. It validates early hypotheses and it’s a great way of demonstrating social proof or traction, which goes hand-in-hand with feedback and learning from real customers.
More importantly, it shows off the startup team’s bootstrapping mentality and that they are capable of shipping a product — and not just hyping an idea. In essence, an MVP makes it easier to raise capital.
Next, lawyer up — make sure you partner with an experienced law firm — and seek advice. Find a tribe. It’s important to be part of a startup community. Attend events and look at competitions, accelerators and incubators. While you network with founders, successful executives, investors, professors, industry experts and influencers, look for mentorship. But, be careful whose advice you seek, do your homework, and don’t forget to keep iterating over your product with the knowledge you gain.
If you do the above well, you can attract an experienced advisory board that can help with strategy, introductions and general advice.
Once you’re ready to pitch, be picky about who you decide to pitch to. VCs are usually well-connected so look for them at events and classes, online directories, Twitter and blogs, accelerators, incubators and via other founders or people in your entrepreneurial community.
Remember to look at the VC’s partners which could include pension funds, insurance companies, high net-worth individuals, family offices, endowments, foundations, fund-of-funds and sovereign wealth funds — it’s important to know who the VC is in bed with since the VC fund is shaped by these partnerships.
Consider the VC’s location, brand reputation, support network, strategy and history, as well as its expertise and focus — the latter should be closely aligned with the needs of your business. Schlafman recommends keeping track of your VC conversations.
The round size
Estimating the amount of capital you’ll need is “more art than science,” says Schlafman, but offers three tips.
Raise enough capital to give yourself at least 18 months of runway, keeping in mind that it usually takes months to negotiate a deal.
During fundraising, aim to sell no more than 10% to 25% of your company.
As for the actual amount to raise, keep it small and be precise. “It’s always better to nail your target, say you’re ‘oversubscribed’ and then increase the size of the round depending on investor interest and terms / dilution,” says Schlafman.
Know your brand.
Schlafman reckons that a “brand equals the sum total of positive and negative interactions that partners, customers, and employees have with your company.”
“In this ever-changing society, the most powerful and enduring brands are built from the heart. They are real and sustainable. Their foundations are strong because they’re built with the strength of the human spirit, not an ad campaign,” says Starbucks CEO Howard Schultz.
Understanding your brand is critical for conveying something more than just figures and projections to investors. What story are you trying to tell? What stories will your users tell?
Think about things such as the reason behind starting your company, why you want to solve the problem, why you are uniquely qualified to solve the problem, how the founders met and teamed up, why you are willing to give years of life to work on your idea, and what your cause is.
Next, build your pitch deck. Here are some ideas.
The most important thing is to get to the point in the first few slides. Focus on traction, you and your team (are your skill sets complementary?), social proof and your product — is it differentiated enough and how well is it distributed. US investors are increasingly interested in emerging market strategies. If you’re from an emerging market, what are your global aspirations?
Dynamic, culture- and data-driven startups that place value on things like design and customers are bound to attract investor attention. Make those things come across in your pitch.
Schlafman details a number of things to steer clear of during the pitch that are worth looking over (slide 63).
For the actual sections to include in your pitch take a look at slides number 49 and 50.
When executing your pitch, your goal should be to “create excitement, demand and scarcity for your round. Investors often move in packs,” says Schlafman. At all times, remember to be honest — that includes being honest about weaknesses in your business, market, strategy or team, and how you might overcome them. No one has all the answers.
Following your pitch, make some time to ask questions. It’s important to find out what the VC is thinking, what their process is and how they operate.
Back at base, debrief your team, take care of any VC requests, review your pitch notes, attend to any issues, edit your pitch deck and update your VC pipeline.
Seed funding vehicles
If your pitch is successful, note the funding vehicle in the term sheet. They’re usually one of three types — make sure to read up on their pros and cons.
Convertible debt (note or loan) is when a company borrows money from an investor with the intention of converting the debt into equity at a later stage.
Seed preferred is a type of equity funding that provides certain rights, privileges and preferences to investors.
SAFE — Simple Agreement for Future Equity — is a newer type of funding vehicle that is meant to replace convertible debt. In essence, SAFE has the benefits of convertible debt without the maturity date and accrued interest.
Things to do post-investment
Keep the communication channels wide open.
Start a monthly email to update investors on what’s going well (and not), key metrics, hiring, financing and roadmap updates and what help is needed.
Be sure to set up strategy sessions, conduct real-time crisis management — remember expectations are raised — and network within your newly acquired VC network.