How To Raise Millions For Your Startup: A Q&A With The Authors Of Get Backed

P&Q: Are there any ‘don’t do’s’ that could derail fundraising no matter how great an idea is?

Loomis: I think if you’re an asshole, you’re going to get derailed. Because people almost never give money unless they like you. And there can be shades of asshole-ism. If you don’t listen to what they’re saying, they are going to write you off as like an arrogant guy that maybe is brilliant, but they don’t take feedback or their ears are plugged. Or if you’re just kind of rude. That’s a quick one for me.

People are going to feel around for your character. If they don’t trust you either, even if you’re a nice guy, and you’re not an asshole, if they don’t trust what you’re saying is true or you’re kind of a ‘hype guy,’ that’s a big strike against you. The little dirty secret is most of the VC firms at a larger level and certainly angel investors at a local level, they’re all communicating with each other. If you offend one, word gets around pretty fast that you’re either not a good guy or you’re not very trustworthy because you’re using language that is intended to coax people in an emotional direction that they may not be ready for.

Baehr: A personal example here, to go with Loomis’s point about reputation. Reputation is everything in early stage ventures. And that’s why a warm introduction is so helpful. Because it shares that social capital. It shares and provides that stamp of approval from a trusted source to another that even without saying the words, it communicates this is someone you should consider doing business with.

We had a very personal case of this with my last company, Outbox. We had raised a second round of funding and decided to shut the company down. We were going to shut the company down, but we had money left and so we had this situation where our board and our largest investors shared with us that they thought we should keep the money and build a different company, which was an awesome thing to hear–not what we anticipated hearing–but that’s the message they gave us. So we had this situation where we had literally dozens of other investors that our reputation was on the line with. We could just go straight to them and say, “Look, here’s the deal, the board voted, we’re keeping the money. We’ll let you know what we’re going to do next.” But we were really afraid of getting this reputation like, ‘Oh, you’re the guys that took the investors money and went and did something totally different.’ So we were very cautious in going one-by-one on the phone or in-person to meet with those investors to explain the situation, give them ample time to ask questions, and make sure they were comfortable with the direction that we were going.

So I think reputation lasts a very long time and is shared very widely shared among such a small, tight-nit community that is the world of venture capital.

P&Q: What are your thoughts on all this VC money flying around, especially in Silicon Valley? Is it a potential bubble? 

Baehr: I’ll just say if I were a predictor of equity markets, I would be in investing. And since I’m not investing, it means I have no inside knowledge about equity markets. And I would say that the widespread counsel I hear now to founders is raise as much as you can right now. Mainly because of a fear of equity markets collapsing and the markets really drying up. And this raises two hugely interesting topics for me. Number one is the importance of timing. That timing can have such a huge power in explaining the success or failure of a company. And that timing is around what is happening around venture capital and public equity markets. So you can find the companies that have really weak fundamentals that raise on higher valuations and IPO and they’re off to the races. And that’s because they did not experience a major equity downturn during the rise of their business. And a lot of that has to do with timing.

The second point is that at the end of the day, the number one responsibility that a CEO has is the growing concern of status of the business. Meaning, if you run out of money as a CEO, the company, regardless of its numbers, is dead. That brings us to a–just thought of this—third point, which is this tension in early stage founder advice. And the tension is you want to raise as little money as possible as late as possible. And you want to raise as much money as early as possible. Now you may notice, if you study that very closely, that those two things are the exact opposite.

What do we make of the tension? Why would you want to raise as little money as late as possible? Well, that means the less money you raise, the less diluted the financing round is and the later you raise, the higher the valuation is. So a lower percentage of a more valued business means more money for the employees. And that’s a great thing. Meanwhile, the other side is to raise as much money as possible as soon as possible. The sooner you have a lot of cash on your balance sheet, it means that you can invest in resources like people and office space and marketing dollars. And it means you have that money sooner so you can share more traction faster. Implicit in that is this takeaway that there is actually not a right answer for how much money and when to raise for your venture. There is this real tension being how much to raise and when to raise it.