Founders Factory's Fundraising Manual
Founders Factory's Fundraising Manual
Words David Hickson
January 11th 2021 / 15 min read
As the Chief Strategic Development Officer at Founders Factory, David Hickson has helped hundreds of startups fundraise. For the first time, we’ll be sharing his considerations for fundraising effectively, or what he refers to as the “No-Bullshit Guide to Fundraising”. This guide is useful for those raising pre-seed to pre-Series A.
Chief Strategic Development Officer at Founders Factory
20 years tech veteran operator across 6 startups/scaleups
lastminute.com (5 years & $~1bn exit)
Founders Factory (founding team, +$100m raised)
mydeco (founding team, £12.5m raised), Tribe Sports (co-founder, $5m raised)
Fundraising strategy for 100+ startups.
At Founders Factory, we’ve proudly invested in almost 200 startups over the last five years, 40 of which we’ve built completely from scratch. The way we’ve structured our venture studio and accelerator is different from many others. We’re not a fund. We’ve raised money directly onto our balance sheet. This difference is important.
The investment we have received from our partners enables us to fund a team of full-time operating specialists. We run entirely bespoke programmes. There are no batches. No cookie-cutter one-to-many programmes. No mentor-madness sessions. No end of batch demo-days. An accelerator with a thin operating team and a big co-investment fund can't do this.
We often talk about those who stand at the side with clipboards, and those that drop the clipboards and get on the field. We drop the clipboards. We measure ourselves on the value we add to our founders, and our dedicated team works day in and day out with our portfolio - including helping them to fundraise. We have been involved in each one of their fundraising activities from the hard side – the sell-side.
We’ve had our own banner-raises: Karakuri, born in our Venture Studio, has raised a total of £14.5m, and portfolio-companies Cosmose, Perlego and Previse have all raised more than £9m. But ask any of these companies what their experience of raising capital was like and they will say it was hard. Fundraising is hard. Really, really hard.
We are incentivised by the success of our portfolio. We feel every failure and enjoy every success. Naturally, it’s not the same sense of individual failure that a founder might feel, with a mighty coup-de-grace – but a death by a thousand cuts is just as insidious.
I make this point because I believe that the only way to improve at anything is to learn by doing – for real, over a long period of time; with many points of failure and successes – and with your mortgage depending on it. This, in my opinion, is the only way to really feel the burn of the failure, and the glow of the successes.
A lot of what you will read in this guide is going to run counter to the advice you’ve heard on popular investment podcasts and blogs. Those content providers see the world through their prism – and before taking-as-read the musings of a partner-level Tier-1 Series A investor - remember that they are suffering from massive survivorship bias, as often for them to take real notice a company has to have already achieved the highly improbable (£150k MRR anyone?).
“In theory, there is no difference between theory and practice; in practice there is.”
– Nicholas Nassim Taleb
I recently came across this as a summary from a panel of Accel, Balderton, Index, Atomico and Northzone:
Now, I'm not saying there is anything wrong with this per se – it may even be true. In the real world, however, much of the above is not under the founders’ control. No seed company I've ever come across wanted to have 20-30 investors on their cap table.
One of my favourite examples (some flavour of which I've seen at least thirty times) can be summarised in the following (imaginary) conversation:
When you set about fundraising, you’re going to get a lot of advice from investors you speak to – but who don't invest. Often their advice is worse than rubbish. At least with rubbish you know to trash it immediately. On the other hand, no-strings, no-cheque investor advice can be dangerously diverting.
Here is an interesting counter-intuitive view by Harry at Stride.VC:
Something I believe to be true is that good investors invest because they get a great (but intangible) feel for the founding team (their passion/enthusiasm, integrity, team dynamic etc). Ironically, at the very early stage, there might be something optimal about that. If you spend too much effort on go-to-market, market size, product etc; you tend to over-fit.
Equally, GTM, market, product etc are often used as a post-rationalised excuse for why investors won’t invest. In other words, they tend to jump to a “no” quickly, rather than taking the time to post-rationalise it. They might take longer to get to yes, but their reasoning is often equally post-rational.
In other words, even when getting to yes, most-times the (real) reasons are often much fewer than the number of variables founders agonise over.
The question then is how to help early-stage founders best avoid the quick jump-to-no.
This is our no bullshit guide to fundraising.
Some people may be triggered by these guidelines because their experiences don't match the advice we’re giving. There are a tonne of variables that count towards the success of an early-stage tech company. Sufficiently so that many think it’s stochastic: random at an individual level, but showing some regularity at the collective level. Remember, for systems that contain more than a small number of variables and entities, the average exists, but no entity is average.
There are exceptions to everything. Your experience will be an exception to something below. It’s why these are just guidelines – not rules.
Top 5 Fundraising Guidelines
Number 1: Optimise for Cash in the Bank
This means exactly what it sounds like: having cash in the bank is infinitely better than having none.
Cash is king. Without cash in the bank, your net position will inevitably be worse – and as your cash dwindles, the opportunity to leverage your thus-far-successes fades. Without cash, you die.
Here are 10 things you can do to avoid that:
DON’T be too selective in who you accept funding from. If you have a choice, great. Having the right investors at the table can bring a huge amount of value: from credibility to expert support and access to their network. If you don't have your pick of investors, and you’re up against the clock, don't wait around for “the right” Tier 1 investor to come along. Take whatever money you can get – and put it in the bank.
(Within reason) DON’T spend too much time worrying about your holding becoming “too diluted”. If you are worrying about a few points of dilution here or there, you are worrying about the wrong thing. Especially if it means that the deal takes too long, or falls through, and you run out of cash. The only thing investors care about is their own round of investment and the individual (or team) who’s going to deliver them a return. If you are the individual leading a successful technology business, and you are the person delivering value to investors in future rounds – then you will likely be looked after in those future rounds.
DON’T worry about “losing control” of the business sometime in the distant future. The first step is making sure your business survives long enough to see that future! There’s plenty of time to solve for tomorrow when you know what that looks like. NB: This is not to say that losing control of your business is not a big deal. Of course it is. It is to say that at the pre-seed/seed stage, 99% of venture investors have no interest - and never will - in running your business. Being too unduly paranoid means you start focussing on edge cases: which could put the deal in jeopardy - I've seen deals lost because of it. To reiterate - edge cases exist, and yours might be one - each situation needs to be considered on its merits (please see disclaimer above).
DO expect some, if not all, of your existing shares to be put on a vesting schedule. This is normal, and nothing to worry about. It also makes sense from the investor’s point of view: they don't want to give you £1million, only for you to walk out the next day with 50% of the business. It also helps you when it comes to your own co-founders. You wouldn’t want one of them walking out and taking 25% of the business either.
DO use brokers, such as Angel networks etc. They can be extremely helpful in getting cash in the bank. And don’t forget to give them a sensible amount of the cash they raise for you – but only if they deliver. In the current market, this should be no more than 5% of the cash raised.
Tier-1 investment is best.*, If you’re lucky enough to get a £1m seed cheque from a Tier 1 Seed VC Fund, take it. It is the best money.
* BUT DON’T wait around too long. Once you’ve found an investor, make sure that it doesn’t take forever to close the deal. While you’re waiting around, your competition could still manage to build and release their product; or your “perfect” investor could change their mind. Don’t lose out on building your business while waiting around for funding to come through.
DON’T take it personally when you get a no. And if you get a “soft-commit”, work hard to get that into a hard-commit – i.e. getting documents signed.
DO hustle – but not inefficiently. If you’re going to hustle, do things that scale your business, such as participating in demo days and joining angel networks.
DON’T mess around. Get the cash in the bank.
Number 2: Raise what you can get – not the amount you think you need
The maximum amount you can raise is dictated by the market – not your financial model.
When it comes to seed and pre-seed investments, there’s a popular narrative that founders need to be raising enough for “18 months’ runway”. I’ve heard this a tonne of times.
Many pre-seed founders take this advice to heart, so they go away and create a financial model, which tells them that they need to raise £2m to survive for 18 months. The problem is that the market won’t support that raise.
A small minority of pre-seed start-ups will be able to raise £2m, but most won’t. However, everyone still seems to think they are the exception to the rule – in the same way that 93% of Americans think they are above average drivers (the classic Lake Wobegon Effect).
Remember: what matters is…
How much you can raise
What the market can support
NOT what your model says
Number 3: Be more Daoist (e.g. be in harmony with the market)
Investors are generally price inelastic: they invest certain set amounts at certain valuations into companies at certain stages.
For example, if you’re a startup looking to raise Series A funding, here’s what a VC will generally be looking for (there are always exceptions):
Annual recurring revenue: $1-10m
When VCs review startups, they fit them into their own particular matrix. In other words: you need to fit into their box – not the other way around.
For example, if you are a pre-revenue business, you’re unlikely to raise more than a few hundred thousand – unless you’re a serial entrepreneur with a great exit behind you.
You might raise more. I never said you couldn’t. You’re just unlikely to. And if you think you can, I suggest you go back and read the first guideline.
VC Secret: Nobody has time to negotiate too long and too hard – so everything is fairly standardised.
VCs do many deals every year. They have to, because of the fat-tailed distribution of venture returns. Because VCs have to juggle many different deals, the process by which they invest is much more light-touch than other investment processes (although this is sometimes difficult to believe).
Compared to old-school private equity term sheets, VC is much more standardised. Raises, valuations, and terms are generally all very similar – and this is especially true of seed level start-ups. Seedsummit has even published a seed term sheet template.
Number 4: Who to raise from
With VCs, fundraising happens in fixed stages or “tiers”:
The vast majority of start-ups follow this route. So my first piece of advice is to figure out what stage you’re in – and then focus on a particular investor that caters to that stage.
Don’t waste too much time speaking to investors who will not (or often cannot) invest in your stage. Investors are constrained by their own LPAs, their own investors, how much they can deploy, and many other factors. Of course, it’s always good to talk to investors and warm them up – after all, who knows what could happen. But it’s unlikely that you’ll change their mind.
As these guidelines are particularly relevant to founders who are very early in their fundraising journey, let’s start by focusing on the lowest tiers:
“I’ll just get a few angels together and raise a couple hundred thousand.”
“I’ll just get a family office to do a couple hundred thousand.”
Both of these statements are (mostly) mythological. Miraculously finding three or four Angels off the street rarely happens.
Here are the most reliable predictors that an Angel will invest in your company:
you are related to the angel
you have raised from the angel before and made them money
you have worked for/with the angel
you otherwise know the angel
you have an institutional seed lead
you have an SEIS/EIS fund lead
you have a family office lead
you have any other lead
they have seen you pitch at an investor event (low probability)
you use a good quality angel network (low probability)
Many UK-based Angel investors simply choose to invest in an SEIS fund, which offers a tax-efficient way to make investments (SEIS investments give them 50% off their income tax bill, while EIS investments give them 30% off), and a portfolio of investments, which hedges their risk. Alternatively, they may wait until an SEIS fund makes an investment, and then follow on behind them – once the SEIS fund has done their due diligence and set the price.
The Angel/SEIS fundraising round is largely dominated by these SEIS funds. In many ways, this is good news: it’s made the process more predictable, and a lot quicker. SEIS funds have to be very active because they have to make all their investments within one financial year, which enables a faster turnaround.
Now for the bad news: this has caused valuations to converge at the Angel round – so all rounds look and feel the same, have the same terms, and the same prices. I refer to this dynamic as “the Dao of the market”. And the only solution is to live in harmony with it.
If you’re looking for an Angel, my advice is to focus on the leaders of investment syndicates, such as Startup Funding Club, Q Ventures, etc. And don’t be afraid to use broker networks, such as the Angel Investment Network’s broker service. A good broker network can help you secure cash quickly, and when they succeed, they’re worth every percentage you give them.
Advice from Brent Hoberman
Brent is Co-Founder and Executive Chairman of Founders Factory, Founders Forum and firstminute capital, a $210m seed fund with global remit backed by over 80 unicorn founders. Previously, Brent co-founded lastminute.com in 1998, was CEO from its inception, and sold it in 2005 to Sabre for $1.1bn. Brent is also an active Angel investor.
“Raise money when you don't need it. Entrepreneurs may love the idea for their business, but not understand the nuts and bolts of how to run it and manage cashflow, resulting in raising money at the worst possible moment - when running out of cash. The process can then become a scramble, terms unfavourable and founders may end up having to lay off good people. If you can, raise money when you don’t need it.
The founders who blow me away are those whose passion to solve a pain point is so strong, it’s infectious. This will help them to raise capital and also attract the best talent. Mira Duma, founder and CEO of sustainable fashion brand Pangaia, is someone who really stood out for me. Not only did she clearly understand the demands of running a fashion business, she has a real will to win and gets around obstacles with her incredible tenacity. She isn’t on a mission solely to make money, she is mono focused on her brand’s sustainability mission and that gets people around her very excited and ultimately, work hard for her.”
VCs typically enter the fundraising race at a later stage. Institutional seed funds, such as Connect Ventures can put in a decent cheque size (usually around £1.5m into a £3m raise). The bigger VCs, such as Accel, Balderton and Index, come in at Series A or B. But no matter the stage, all investors think about the returns in the same way.
Before we delve into returns, it’s helpful to remind ourselves exactly what “venture capital” means. This can be confusing because not all companies are venture-backable.
In essence, a “venture backable company” can scale as a function of capital.
This presupposes two things:
a scaling element (internet-based, tech-enabled); and
future capital rounds.
When investing at seed level, investors are fully aware that you’re going to have future funding rounds, which will dilute their investment. They might decide to do a follow-on investment later, but if your business is going to become a $1bn unicorn, they know their investment will be diluted. Because of this, they need you to scale quickly in order for them to see a return despite their diluted position.
Investors are also aware that they are taking a risk investing in a startup:
90% of new startups fail
75% of venture-backed startups fail
Under 50% of new businesses make it to their fifth year
Therefore, the investor will need to believe that each one of their investments can return their fund at exit. Not that each individual company will return the fund – no-one can know that for sure – but that it could.
To put that into context, Atomico’s fund V is an $820m fund. If you assume Atomico will have a 10% holding at exit, that means it needs to believe that each one of its investments could get to a value of $8.2bn.
Contrary to popular opinion, VCs are not monsters. As a rule, they are generally helpful and accommodating people. However, the overwhelming likely response to any interaction with any investor at any time is an explicit or implicit “NO”. So learn to expect little or no response, and prepare to be let down and disappointed. This is intractable – and it doesn’t mean that you should give up.
4b) Other funding sources
Crowdfunding - this is, to some extent, angel investing via another name (but typically you need to raise at least 75% yourself). It can be a powerful marketing and PR tool if done correctly. More on how crowdfunding works here.
Bank Loans - only if you are making money and can service the debt and are willing to stake your house.... not recommended.
Pre-orders/Pre-selling your product - providing you have funding to build/create the product.
New Venture Lenders such as Pipe - Pipe works for companies that make recurring revenue. It’s not equity and it’s not a loan. Pipe lets businesses raise money by selling their monthly or quarterly subscription cash flows. They charge a one-time maximum 1% fee to companies and another fee to investors.
Number 5: Putting together a great deck
5a) The investor deck
When it comes to your investor deck, there are only two all-encompassing rules:
Your decks need to tell your story using your product
Your decks need to look great
Here’s my secret: show, don’t tell. Instead of using bullet points to describe your product, or communicate a big partnership, show me what this looks like on your product.
Take a look at this slide:
Here is a new slide making the same point:
The second slide instantly shows several things: it’s clear how the triaging process works, and how it might be useful to the customer while demonstrating how the product uses its mobile application powered by an AI chatbot. Do you see how this slide is more powerful?
Make your deck look amazing. I could give you all sorts of reasons why you should do this, but I’ll leave it to just two:
(i) There are several online services that allow you to send your decks as a link (DocuSend is one), where the reader can tab through the presentation without downloading the deck. We do this at Founders Factory, and we send out tens of long investor decks to hundreds of investors.
How much time do you think an investor spends reading one deck? If they look at yours for more than a minute, you’re doing well. Most slides within any presentation only get a cursory glance. Once the investor gets a feel for the idea, they decide if they want to take it further or not. The time they can take to get to “no” can be lightning fast.
Do you think it matters how the deck looks when they tab through the slides in a lightning-quick fashion? The rational response should be that looks don’t matter, that it’s ultimately about the content – but the truth is more nuanced.
Investors are humans. Sending over your deck is all about leaving an impression – and how it looks contributes significantly to that.
This brings me to my second point
(ii)Your competition will be making their decks look amazing. Think you’re only being assessed on your merits? Not true. At least in part, you’re being assessed relative to your competition. And you need to be better.
One of my all-time favourite quotes is that by Mark Suster: "Whenever you write your deck and send it out I think you should actually think to yourself, “my competitors are probably going to read this one day and this will be forwarded widely” and if your response isn’t “so what!” or “that would be awesome” then I think you’re doing something wrong anyways."
5b) The Financial Model
The Founder/CEO of the company needs to own and produce the financial model, which tells your investor-story using numbers.
For early-stage tech start-ups, the Financial Model is a relatively simple beast. Using a decent template, you can piece together a cohesive model fairly quickly and simply.
There are only three general rules when it comes to financial models:
Your assumptions have to be credible (however, optimism is allowed)
If you are a VC-backed tech startup, you need to include a cash-flow line that shows in the right column that you have done enough with your previous raise in order to justify the next one. Making the new raise fit the VC Dao.
If you want VC backing, you will need to show how you will scale (in a capital-efficient way) to be a sizeable business within 7-9 years
For example, depending on their industry, a Unicorn business could have a £300m annual recurring revenue with a 10% EBIDTA margin – I'm not saying you need to be there by the end of the seventh year, but you get the point.
5c) The Cap Table
Finally, the Founder/CEO needs to understand and have the technical skills to manipulate an excel version of the cap table. There is good advice here. This will not only ensure that you understand the fundraising process, including how dilution works – it’s also the kind of skill that can help you close the deal on an investment. Sometimes being able to present a deal in the right way - is the final nudge needed to get it over the line.
Most importantly: it helps you to get the cash in the bank.
Most founders want to believe that their business is different, that they will beat the odds and that fundraising will be a breeze. We have to be optimists in order to go into venture capital in the first place. But by tackling the process with an informed perspective (and some tricks up your sleeve), I hope you’ll be able to succeed quicker, and more easily than you otherwise would have.
Who knows, maybe you will turn out to be that lucky 1%. Just don’t forget to Optimise for Cash in Bank.
Join Founders Factory’s Accelerator
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Interested in joining one of our programs? Then submit an application here.
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