How to raise money
In this article, I will walk you through my fundraising formula that has helped me raise over $1 billion of capital in my career. I’ll also walk you through building a predictable and repeatable fundraising machine.
The probability of success for a high growth company is predicated on your ability to raise capital. As a leader, you will never achieve your maximum entrepreneurial potential without being able to raise capital quickly and successfully. Capital is the lifeblood of any high growth company. It has to be treated as a key priority. It can never be outsourced or downgraded to a second priority.
Context
For some context, I’ve been building technology businesses for 20 years. The first 15 years were in internet/software. The last 5 have been in advanced hardware. I’ve raised over $1 billion in my career as a technology entrepreneur.
I’ve pitched almost every VC and technology investor on the planet. I’ve also been declined by almost every technology investor at some point in my career. Over the last decade, I’ve developed a process that can help optimize the probability of raising capital.
Investors are looking for certain traits. Without these, you have little chance of raising a single dollar. Let’s talk about how you can use my formula to build a repeatable process for raising capital.
Fundraising Formula:
You need to maximize the amount of shots on goal in fundraising. Aim to get as many meeting attempts with investors as possible. My formula for capital raising is a combination of A) the number of qualified investors you are targeting combined with B) the company idea & overall branding.
The first step in the fundraising process is defining success.
The ultimate goal is to raise capital successfully. If you work backwards from there, getting to a lead investor “term sheet” is the next clear milestone. And if you work backwards once more, the goal is to maximize the number of unique investor meetings.
The Fundraising Formula is a way to compute how to maximize the number of qualified investor meetings. Fundraising is about talking to 200 investors and finding the 1 person who will take a bet on you. I’ve always experienced really low conversion rates in these efforts - it’s never been easy for me to raise capital. And that’s quite normal.
Here is the sensitivity to each part of the formula:
Qualified investors: You want to drive this number as high as possible. I speak to so many founders who are “waiting for referrals”. This inevitably means this number is too low. You want to identify every possible investor on the planet or else your equation will point to low odds of success.
Outreach: This is your reach-out process to investors. I gauge this as a percentage conversion rate. This will be really sensitive to the way you are reaching out (referral vs. cold email) and the messaging associated with the reach out process (e.g. subject and body of a cold email). There is an art to this. The percent conversion rate can greatly increase if you treat it as a recursive project to getting better.
Idea: This is the company idea ⸺ and it’s fixed. There is very little you can do besides pivot your company to a new idea. The idea will instantly either A) resonate or B) turn-off investors based on their industry focus or their internal thesis of the market/industry. As an extreme example: If your idea is in the Space industry, talking to an internet marketplace VC fund will likely not be fruitful.
Branding: This is how well-branded or attractive your company is at first glance. You have limited time to impress an investor enough for them to commit to a meeting. There are many ways to drive this up, including a nice investor deck. But ultimately that’s a small lever so don’t stress too much over this.
Investor Meetings: This is the output to all your hard work. The goal is to drive up the number of qualified investor meetings as high as possible. You want to do 50-200 of these meetings. The more qualified investor meetings, the higher your odds of raising capital.
Building the Fundraising Machine:
I believe in building and executing on a highly structured “machine” for fundraising processes. This machine is something you can wash, rinse, and repeat. This should be similar to how you would run a sales or marketing team.
I track this process in a Google sheet, similar to how you track items in a CRM. Let’s break down the key elements of the formula so you can go out and execute on it yourself.
Key Elements of a Fundraising Machine
Qualified List of Investors: This is a list of investors who are tailored specifically to your company. First, start with a list of investment groups that match well with your company sector. A good example of this: “VC Firm x” because they do a lot of internet investing in my category at the same maturity stage. I find Crunchbase to be one of the best resources for finding a list of these investors and also analyzing the investors of other similar companies in your industry. Once you have your investment groups, work to find the investment partner who covers your specific industry and maturity. Research this person online to make sure it’s a close match. Ideally at this stage, you have found 100% of every investor on the planet that you think could give you a term sheet. Lesson I learned: don’t spend time with investors who can’t give you a term sheet at this stage.
Outreach Process: The next step is to reach out to this person with the goal of getting a meeting set up. The two standard ways are going through either a referral (inbound) or message the person cold (outbound). I suggest spending a few days trying to get as many referrals as possible.Once you hit your limit, move to outbound for the rest.
Pitching: This is your first interaction with the investor that also includes them previewing the deck. Your goal is to optimize the conversion rate from the first meeting to the term sheet.
Term Sheet: Receiving a term sheet is the ultimate goal for the first leg of capital raising. Once you receive a term sheet, negotiating this quickly and fairly is critical to getting the lead investor signed up.
I’ve found this entire process from start to finish will take at least 3 months. I suggest spending 30 days preparing the investor deck, data room, mapping out investors, and your cold email template.
The next 30-60 days are investor outreach and meetings, or however long it takes to get a term sheet. Once you have a term sheet it generally takes <10 days to negotiate and sign.You usually close in 30 days.
Additional Capital Raising Insights:
1. In the limit, a company exists to provide a beneficial product or services to people. The “idea” or product at the end of the day largely defines the potential for your company and also the subset of potential investors. Showing metrics and customers that can potentially correlate to long-term success is critical for early investors to understand your product has potential.
2. VC’s all have mandates of what they can and can’t invest in. Understanding this and matching it to your industry is critical. Up until the last several years there were almost no VC’s who would invest in capital intensive hardware. It didn’t matter how good your VC pitches were. No VC’s were investing in SpaceX and Tesla back in 2003. The same is true for other technologies areas so matching your industry and the capital requirements with the investors is critical to not spin your wheels.
3. Behind a great product or service is usually a #1 team. I call it a Championship Team. There’s no way you’re building a great product without a #1 team and investors, especially Seed and Series A, understand this. Showcasing the founder(s) and the team is critical.
4. I have a rule of thumb that 80% of all investor pitches should come from an outbound process which is defined by a cold call or cold email. The other 20% should come from traditional inbound processes - people you know in the industry and referrals from friends, colleagues and other investors. If you are operating below 80% then you are not maximizing the number of shots on goal. As you plan for capital raising, you won’t have time to sequentially take investor meetings. You have to parallelize the entire fundraising process. Your goal is to raise as quickly as possible and get back to building a great product.
5. Build a really nice and well-branded investor deck. This is probably intuitive but the deck is something that is helpful to visualize the company purpose, team, product, key metrics and customers. Think of this similar to a resume. It’s usually the first item reviewed and it will greatly help or hurt your number of investor meetings. If you are successful in your career you will be doing hundreds of investor pitches and the deck is usually the first impression the investor has.
6. Investors will move at lightning speed if they are interested in getting a deal done. If the investor is interested then they will be charging forward. If you are in a situation where the investor is not hurrying, then it is likely a sign you don’t have a deal. These days, investors try to keep the door open to every founder so treat every fundraising as everyone is saying No until you get the first Yes.
7. Only focus on finding a “lead” investor and put on pause any investor who doesn’t have the capabilities to give you a term sheet and lead your round. Once you get the first lead investor to say Yes, then the probabilities of getting other investors interested goes up dramatically. But don’t spend too much time shopping the deal - close the capital quickly and get back to work.
8. Fundraising time should go through different cycles as it is extremely distracting for a founder/ceo. Given the importance of capital, fundraising likely becomes the #1 attention for founders when out capital raising. This is not entirely healthy as it distracts you from working on the most important area of a company - the product. Fundraising can be competitive so once the round is complete, it’s best to put the attention back to the product and get building. I have built a “nurture” sequence for keeping these investors update that I suggest you do quarterly.
My Journey Raising Capital
For a bit of background, in 2012 I was accepted into the NYU Tech Incubator for Vettery (an online recruiting marketplace I founded.) In hindsight, 47 out of the 50 companies that started that year failed - they all ran out of money. Capital raising was extremely difficult for me. In my early days, I couldn’t get a single legitimate Venture Capital investor to invest after countless pitches.
I ended up raising all from angels over the next 3 years to make payroll and survive. At one point, I had pitched every legitimate tech investor in the U.S.
The problems with capital raising compounded. I took a $0 salary for 4 years as I didn’t have enough excess capital to pay myself. I was personally investing my life savings into the company, paying NYC rent, medical, etc. During 2015, I had to borrow $50k to pay for rent. I was in debt, dead broke, and the business wasn’t hitting product market fit.
It was these difficult times that really forced me to get good at surviving and raising capital. I learned what works and what didn’t. I slowly started to build a way to predict the odds of a pitch going well or not.
Over time, I started seeing patterns.It became easier for me to predict which investors would be interested. I started to work on extrapolating these “success stories” and building a process to repeat.
Over the last decade, I've done thousands of investor meetings, dozens of pitch decks created, and $1 billion of capital raised. I realized a lot of the conventional wisdom for early founders is broken and wrong. In 2021, I took Archer Aviation public (which was like winning the super bowl for startup founders.)
The entire venture game is predicated on finding outliers and extreme exceptions. Investors are looking for something A) unique, B) aligned with their personal thesis, and C) within their investing mandate. There are 4,000+ companies looking to raise capital each year and only a handful will return close to all of the returns for those investors.
These lessons come from building companies such as Figure (early-stage), Archer ($2.7B IPO), and Vettery ($100M Exit). Follow me on Twitter for more tech advice and my startup updates.
Some public resources of mine:
Vettery Pitch Deck for $9M Round
Archer Pitch Deck for $1B Round
