If anyone embodies the resolve of an entrepreneur, it’s Dorrian Porter, who crowdfunded a WiFi-emitting statue of Nikola Tesla in Palo Alto and drove traffic to the project through an animated video showing what would happen if Nikola Tesla pitched a VC. A founder and CEO himself, Porter is highly familiar with the VC fundraising process, as he has raised tens of millions, and he started his career as a lawyer at Wilson Sonsini Goodrich & Rosati where he worked on multiple financings. He also understands the VC mindset, having sat on a number of boards with VCs. To hear his take on raising a seed round, we invited Dorrian to speak at a recent Yodlee Incubator Bootcamp. Porter came to our bootcamp to give our entrepreneurs some advice on raising a seed round. He started his talk by showing the financing path of a healthy startup on a path to raise VC money. He mentioned that while the capitalization tables of many successful companies follow a path similar to the one shown below, most start-ups don’t come close.
Porter then went on to highlight the key considerations founders need to understand when raising a seed round. Friends and Family: It’s business. And it’s personal. Lots of entrepreneurs have questions about how to treat friends and family. Porter said you can go about it two ways. You can either treat them like founders (common stock), which can create strange circumstances and expectations. Or you can treat them like investors (SAFE/Simple Agreement For Equity or preferred terms), which makes it clear that this isn’t a loan or favor, but a risky investment. No matter how you handle it, you’ll want to tell friends and family that they could lose everything. And then you’ll want to make sure you do everything in your power so they don’t. Who’s an angel? Porter defined a true angel as “someone willing to write a $100,000+ check because they believe in you”. While there are many angels looking and willing to invest less, Porter considers those investors more as participants in an angel round.
With the rise of syndicated funds, many “angels” are acting like micro-VCs by pooling their funds with a full-time investor responsible for other people’s money which puts a different spin on things. How should you approach your angel or seed financing? Porter said it’s key to find people who are excited about what you’re doing and who quickly understand the market opportunity. He advised Bootcamp attendees to get investors excited about what they’re doing before they answer the key question that will be asked by the investor. What’s the key question? For any investor, it’s, “How much are you raising and where will the money take us?” Porter said it’s crucial have a clear answer to this.
Before you talk about whether or how much they’re going to invest, Porter said it’s important to ask the investor questions like “who are you, what motivates you, and how do you typically invest?” You should be able to back-channel if you think they might be a fit for you already, but it is good to confirm that you are on the same page with them before you pitch your heart out. How to close the angel /seed round Best practices for closing include having a clear sense of the amount you want to close and why. Entrepreneurs should focus on getting to a verbal ‘yes’ or ‘likely’ (i.e. getting some soft commitments) with a group of investors before focusing on collecting the money from any one investor. If an investor is willing to write the check on the spot, by all means, take it but it’s usually more important to build momentum on closing the entire round then tackling it piece by piece. One tactic is to negotiate soft circle commitments.
For example, ““Would you participate in my $500K round? We are already on a path to close between $300K to $500K; would you be able to get my round to $400K? Could I come back to you once I hit $500K?” Porter said most people want to be the last money in for an investment, either because they’re smart and want to know that the company is well funded; they’re afraid of missing out, or they just want validation from others of what they’re investing in. What should you think twice about? Here are a few things to avoid when possible:
- Having a round of financing that stays open longer than 6 months (from first money to last money). This can be unfair to your earliest investor, your own company’s progress, and it can be painful and stressful. According to Porter, this still happens all the time.
- Promising different terms to different people. This will likely hurt you and your reputation in the end so it’s better to be transparent. For example, it’s better to say to an investor “I took your $200K one year ago; I’d like to take their $400K at the same valuation now. Are you ok with that?” Some investors may want to put in more money on more favorable terms, check with them even if it’s not in the written deal that they control future terms.
- Agreeing to terms you don't want to agree to. It’s smart to follow your gut and your instinct.
- Accepting money from people you don’t really want to accept money from. If they are a little crazy before you take their $20K check, they will probably be a lot more crazy after.
What does it take to get a Series A deal? Porter brought up the 4 big factors to getting Series A:
- A new emerging big market - $15 billion + potential, with an immediately addressable market in the coming few years of $1 billion.
- A big disruption of an existing market. Since it’s often hard for the VC to see how a small idea will lead to something big, you have to show them the product roadmap and vision from the get go.
- Actual traction. If a Series A takes 6-9 months to get done and the business is not growing users or revenue at a rapid pace, it’ll be very hard to get the deal done in the end. Sometimes a large deal that will help with distribution can do it.
- A great team and being clear about the gaps in the team that you will fill with the Series A money.
What are the things that aren’t as important as founders think? Porter said that having a list of advisors and having a board is not as important as you think in getting an early stage financing done. The business itself and the spirit of the entrepreneur is the key to a healthy financing. Focus on building your board after you get more traction or when a particular person can bring obvious business impact by joining the board. “I’m way too honest when I fundraise because I hate hype and b.s. However, hype and b.s. often work and being honest about challenges and risks often doesn’t work. You get to decide who you want to be.” Dorrian provided some good starting points for the Incubator’s entrepreneurs to be thinking about as they raise money.
Understanding the difference between a pre-seed/seed and a series A and how certain actions can affect your raise is a good place to start in the fundraising process. Check out the Incubator HERE. If you are interested in applying to our next Cohort you can read more about what we do HERE. Start the application on our F6S page HERE. Applications for Cohort 4 to be submitted by August 31st, 2017 deadline extended to Friday, September 8th, 2017. Happy fundraising!