What I Learned Raising $30M in Venture Capital

Starting a business is hard, and I celebrate everyone who tries, regardless of outcome. Businesses often need capital and the competition is fierce. Trust me, I know.

There are so many things to consider, which I’ll share with you throughout this post, with anecdotes from what worked for us (and what didn’t):

• Business models and corporate structures that facilitate fundraising
• How to craft your funding pitch
• How to put together a network and funding processes
• How to think about valuation, exits, equity splits, and governance

I co-founded ZenLedger.io, a software as a service (SaaS) business that helps cryptocurrency investors and accountants with their tax filings. We have been through three rounds of funding at this point, raising $30 million in total from angels and venture capital firms across 5 rounds. We’ve used two convertible notes and three priced rounds. We have a 35-person team and tens thousands of customers now.

Equity funding might sound awesome, but you really need to consider all the details before deciding whether it’s the right choice for your business model. A fundraising approach typically fits if there will be a delay before revenue comes into the business in sufficient amounts to fund the operations. Perhaps you need to hire highly skilled people, market heavily before reaching profitability, or you need a lot of experimentation.

Bootstrapping is when you fund early operations out of personal savings or by working other jobs. It is better fitted to ventures that will not have as long a gap between founding and break-even revenues, or where the founders have significant savings.

Fundraising success is the result of luck, timing, hard work, creativity, intuition, and years of preparation. It’s tough, and by no means guarantees your business success even if you secure funding. But neither does bootstrapping. After each round of financing closed and the money was in the bank account, I felt a sense of relief, but not a feeling of success. Funding just means we have the opportunity to keep building a business. It’s not really an accomplishment in and of itself.

I feel inspired! Do we have to keep climbing?!?! Are we a SUCCESS yet?!?!?

I decided to raise capital because I wanted to accelerate my personal learning and the growth of the business. I’m glad we went the fundraising route, as it has allowed us to grow quickly while engaging with lots of fun, interesting people and companies.

I hope this post helps you plan your own fundraising strategy, maximizing your chances of success. Please reach out to me on Twitter @PatrickLarsen if you have any questions or ideas.

Realize That Fundraising Is Really Hard

Fundraising is a full-time job and drains your time and energy. It is an emotional rollercoaster. The investors you depend on for the life of your company can be confusing and fickle. It’s hard to gauge your progress, and you have no idea if the next pitch will be successful or if the next 10 will be all for naught.

Here is journal of ZenLedger’s funding to date:

Sept 2017: we have no idea if anyone will every invest in this company.

Dec 2017: we get our first commitments for a convertible note seed round raising $300k. Feeling great.

Jan 2018: we get $600k in commitments and decide to cram down or turn away money, betting on ourselves and raising only $300k. We also increase the valuation. 75 pitches delivered. Many iterations on deck and pitch. Crypto markets reach all time market cap, and start a 75–100% decline.

Mar 2018: we get a successful Minimum Viable Product (MVP) out to the market in 10 weeks and get decent traction.

Apr 2018: Crypto Winter 2018 is in full effect with asset prices dropping. We are worried about running out of money and wish we had taken all $600k in commitments.

2Q 2018: We get $500k in Angel investments on a second convertible note. 130 pitches to Angels and VCs.

3Q 2018: $1.5M raised from two VC’s. We also got two term sheets from VC’s that I turn down. One of those VC’s offer strange terms and eventually imploded, was lucky to have dodged a bad investor, it would have killed the company. The other VC, I actually made an almost fatal mistake in not accepting their term sheet as I was ignoring the classic “one in the hand is worth two in the bush” and ended up with no offers for a while, which could easily have been the death of the company. I would have regretted that terribly. It worked out in the end, but it didn’t have to. Feeling relieved.

4Q 2019: $3.4M raised from 5 VC’s. Vestigo offered to lead and Castle Island committed to participate in Sept 2019 and that made things much less stressful. 50 pitches delivered with several trips to Boston, New York, LA, and San Francisco.

4Q2021: Series A. Raised $6.5M. The round was led by Bloccelerate VC, and other investors include Mark Cuban’s Radical Ventures, G1 VC, Borderless Capital, 4RC, Centrality, BIGG Digital Assets, CoinGecko, Accelerator Ventures, and angel investors Jon Staenberg and Darren Lau.

2Q2011: Series B. Raised $15M. The round was led by ParaFi Capital with participation from Bloccelerate VC (Series A lead), King River Capital, G1 Ventures, Main Street Investment, Three Point Capital, Shorooq Partners, VaynerFund, Blizzard the Avalanche Fund, and AngelList Quant Fund.

All along the way we grew the team well, managed expenses, improved the product, improved the marketing, grew the customer base, grew revenue, engaged in business development, and communicated well with existing and prospective investors.

It’s imperative that you stay humble, calm, mentally strong, and upbeat throughout the process. You have to continually evaluate if what you are doing will work, while continuing to line up that next pitch.

You are going to hear a lot of people telling you “No.” Don’t fight them. Accept their input, learn from them, and move on. Handle this with grace.

You will take the “no’s” personally; how could you not? This process will be messy. You will be elated by your successes. You will be elated by vaguely positive mumblings from potential investors. You will be embarrassed by your slip-ups. You will regret some of the things you said or forgot to say. You will be frustrated by your slow progress. You will demand perfection and fail to attain it, or you will set too low a bar and be unprofessional, sometimes all within five minutes.

Even after a “No,” you can stay in touch and keep the potential investors updated. Rarely does a ”No” become a “Yes” in investing. If something has materially changed in your business (some very positive development) since you last pitched someone, you can reach out again. If you think the investor was simply mistaken about some key point and you can quickly explain that, just do that in a follow-up email rather than trying to get them on the phone again- and be very polite.

Since your odds of success in raising capital and then creating a successful business are something like 10% to 20%, the investor is probabilistically correct in turning you down. Again, don’t take it personally. You are both playing by the numbers. You are both incredibly optimistic people, just perhaps, not about the same things.

Realize how special it is to get a “Yes” from an investor. Angel investors may only make a couple investments a year. Seed funds typically place 20 to 40 bets over a few years. Fewer will follow on with additional funding. Series A funds make five to 15 investments for the fund.

There is incredible competition for startup capital and founding team members. As a founder, you are competing against all the other startups seeking funding at the same time. You have to worry about macroeconomic conditions. You are competing against each fund’s previous investments and what they are getting pitched right now, and how much capital they want to keep on hand for the future.

Very few companies that seek funding actually get any, let alone a sufficient amount. Fundraising often takes a very long time. Longer than you want. Have personal savings and a low burn rate. Have another source of income. Have a backup plan. Businesses all fail for only one reason: They run out of cash.

It’s hard to describe how scary it can be when you are facing running out of money in the company and having to lay everyone off and go job hunting yourself. ZenLedger has been in that place three times now. We’ve made it through each time, raising the necessary funds to keep going and build out the business and customer base. But failure was staring me in the face each time.

Know that, as the CEO, you are generally the person solely tasked with managing the capital raise, pitching, and closing investments (the legal process). It can feel lonely.

When you find yourself short on funding, you have to be clear-headed about alternatives. You have to reduce your burn rate or find a quick revenue or funding source. These periods can be very stressful, and most companies do die in these rough patches.

My job as the CEO is to make sure I’m finding the resources necessary to keep the team together and productive. Maybe it helps to think of the role as Chief Survival Officer or Chief Capital Officer. Of course I also need to do everything else, but if the team isn’t provided for, we are in more trouble than if we don’t get a blog post out. In this way, I don’t feel like other people aren’t “pulling their weight” in fundraising. The building is the point of the fundraising.

Don’t develop a martyr complex, which is easy to do when you feel stressed and isolated. Fortunately, my CTO and co-founder, Bryan Starbuck, has raised capital himself and is excellent in demos. We pitch well together, and I only bring him in on a few pitches or when we are in technical due diligence.

If you have cofounders, figure out in what circumstances you will pitch together. Practice together. Give each other encouragement and feedback. Some investors will want to speak to the CTO, but many do not.

Remember, this is an art, not a science. Your effectiveness and success in fundraising will depend much more on soft skills and your ability to use tone, body language, and personal networks; earn trust; make and keep promises; and craft a narrative as much as it is about creating financial projections, market projections, and business plans.

There are tons of resources about building a business model, so I won’t address that. However, I thought this was great advice (video start at 8:45 minutes in) from Justin Kan of Justin.tv/Twitch, and Atrium. In deciding what kind of business idea to run with, Justin Kan recommends you consider:

Market Risk: If you are young and have no skills, and no relevant experience, then take on market risk. Do something where no one is there yet, and see if you can create a market. Justin.tv (24-hour streaming POV) became Twitch (watch gamers play). There was no market for streaming media consumption at the time.

Execution Risk: If you are experienced and well networked, then take execution risk. Compete on how well you can build, market, sell, hire, and iterate. Atrium is execution risk on making legal services better, a well established market.

At the core, your goal is to assemble a team and create a business that are worth investing in. You will be tempted to lie, oversell, or overpromise. Don’t do that. Your pitch must be clear. You must make the complex simple and understandable. You must show that the novel thing you are attempting to do is within your capability to do.

Be aggressive but realistic in your assertions, projections, goals, etc. No one wants to hear baseless claims like “I’m the next Steve Jobs, Facebook, etc. This is the next Unicorn in three years. We will definitely IPO in five years.”

Your pitch gets better with iteration and feedback. It is a process, and the end goal is a refined strategy and business model that convinces investors to sign up. You have to be committed to the process of sprinting hard up a mountain in the dark, not knowing what progress you are making at any one time. It’s a highly rewarding path to take, but a very hard one.

Your life can easily swing between extremes and be a mess of contradictions.

I try to balance only a few priorities. Work, personal health, and my family — realizing that I’m not going to be perfect with any of them. A startup is a tremendous amount of work, but you have to have fun with it.

I don’t intend for this article to glorify 18-hour days for years, but I also know that the whole ZenLedger team had to just keep working extremely hard and doing things that most people just wouldn’t. I think friends, foul language, joking, vacations, hobbies, and fun are important parts of being successful in business and life. Sometimes, these things run together. Sometimes, you work much more than you play.

In late December 2017, we opened up our seed round hoping to raise a few hundred thousand dollars on a convertible note. We modestly wanted to raise enough money to fund the startup through April 2018, when we planned to raise more on better terms. This was refreshingly humble and “Aw, shucks” naive, as the crypto initial coin offering (ICO) bubble raged.

We put together an ugly deck and started pitching angel investors who understood crypto, and were getting fantastically wealthier every day, as Bitcoin raced to its all-time high. They knew they were going to have crypto tax problems, as they were avid angel/crypto/ICO investors.

Here’s an ugly attempt to convey good market timing and micro/macro forces going in our favor

We didn’t have to explain the industry or the problem. We only had to talk about the team and the solution. This was great timing. Ironically, it can sometimes be easier to raise funds when you only have a pitch deck then when you have a live product that only has a few users and is kinda buggy in the first few months. Investors have an easier time imagining a great product when none exists than imaging the great product that will emerge from your MVP.

We got one investor early, and that made a huge difference. Still, I had no idea if we would be able to raise enough money to fund the development and marketing of our minimum viable product (MVP). I asked for warm intros and made pitches to anyone I could, anytime I could.

My wife works for a Japanese airline, so we were in Osaka for Christmas, taking our kids to Universal Studios and Harry Potter. I was jet lagged out of my mind (I’m a terrible sleeper), so I was going to bed around 10 p.m. and waking up at 2 a.m. (Japan time). This just happens to be 9 a.m. Pacific Time, so I was scheduling calls when I knew I’d be awake, but I wasn’t taking away from family time.

While the family slept, I could try to breathe life into the startup. At the same time, my co-founders were trying to find investment leads and building the software products.

However, one of my co-founders took great exception to working over the holidays. There was some real agitation, as I was working full days consistently through Christmas and New Year’s, and he went completely silent without saying why.

We sorted it out later, but it was a clear sign that we weren’t communicating well and weren’t on the same page. I had no problem with anyone taking a break over the holidays, but I also made it clear that I was working and closing key investments during this time. So, it was a mix of fun family time, elation at closing angel investors, uncertainty about the venture, and some early strife with a cofounder.

I was able to close several investments with one or two 30- to 45-minute calls. I would then quickly prepare the investment documents and send those over along with wire instructions or my crypto wallet address. At one point, I noticed that the names of the three investors I closed one day were likely Jewish. I checked the date and realized it was December 25th, Christmas in the United States, but December 26th in Japan. Not many people were working that day, but some people were. It was altogether absurd, and I knew it.

So I captured a moment of me sitting on the floor of my sister-in-law’s bathroom at 3 a.m. making video calls in a semi-hushed tone so as not to wake anyone:

Maybe it gets worse. During the summer of 2018, I was reviewing a $1 million term sheet while my wife was in early labor with our third child. Without this term sheet, we’d run out of cash. Don’t worry, I put down the laptop, and everything went well that evening as we welcomed our third child into the world. But, again, I found myself in a ridiculous situation, pulling my family into the vortex a bit as well, and just slogged through it.

Corporate Structure and Governance

You should set up your company so that it can take equity investments from accredited investors and is governed by current best practices. That generally means a Delaware C-Corporation, as all lawyers and investors are familiar with this structure.

You are trying to minimize the cost of mistakes without losing momentum. This is where startup lawyers can be helpful. They know what current best practice is and can keep things moving.

Vesting. You and your co-founders should probably be on a vesting schedule. You will lose team members along the way. This is natural. Get used to the idea and be realistic about it.

If you have a co-founder, do not have 100% upfront vesting for anyone. Everyone should probably vest over time with a 12-month cliff. You don’t want someone who quit the company after six months owning 50% of the company. Don’t have a 50/50 arrangement because if one of you leaves, the company dies. If you disagree, the company hits an impasse and dies. You have no way of resolving disagreements and moving ahead if it’s 50/50.

Board of Directors. For seed round(s), you shouldn’t give up a board seat. Your articles of incorporation will lay out the powers of the board, and this can change with each round of financing. In later rounds, a new lead can shape/dictate new terms and powers.

Advisors, Advisory Board. Finding knowledgeable and credible advisors is a strong signal to investors. Two or three is generally sufficient. Too many advisors is actually a sign of weakness or a poorly conceived business. If you grant your advisors equity, they should be on something like a two-year vesting schedule with a one-year cliff, and they should earn (with advice, introductions) all that equity in that first year or be fired before vesting. Generally, the compensation is less than 1% equity.

Pay To Pitch, Pay For Intros. It is generally a terrible idea to give out equity to people who will “help you raise capital.” Again, if you do engage these types- they need to vest their shares and you only “pay” if their intros result in capital coming in. You will meet a lot of hangers on and people who want to get paid up front or paid for doing nothing. Anyone offering this kind of help almost never delivers.

Decide When to Pitch

Should you bootstrap to an MVP before asking for seed investors? Should you get letters of intent from potential customers? Pre-sale your product? Have a waiting list?

The answer is “Yes.” The more traction you can get before asking for funding, the less perceived risk there will be in the business and the team. But don’t spend too long before funding if market dynamics and personal finances dictate moving more quickly. The market will tell you if you are worth investing in at your current stage of traction. So, you can make pitches along the way as you make progress. You may not be the best judge of “when you are ready” so err on the side of too early- because fund raising always takes longer than you expect anyway.

You can ask for investment before you have built anything. But in that case you will lean heavily on your past experience, passion for the idea, and preparation. If you have a great team, you can basically say, “This team and idea are great. We are experts and have done this before. As such, we are fundraising now, and you will see a live MVP eight weeks after the first $100,000 is invested.”

If you have no track record as a team, or the idea is very cutting-edge, you may have to prototype or execute a successful marketing campaign for the thing you want to build.

If you want to avoid dilution, build as much as you can beforehand. You will have to make some trade-off between speed, risk, and dilution.

Decide Who to Pitch

You should make a list of investors who have invested in companies like yours (your business model, your stage of development). You can map out how to reach those people (directly or through introductions).

Make sure that you know what they are looking for and speak to that. If this investor only invests in B2C fintech companies that have the potential to get to $100M in revenue in five years and you are not that, don’t expect the pitch to go well.

But inject a little serendipity into your process. If you get an introduction to someone who doesn’t seem like a likely investor, still pitch them. It helps if you like pitching and you have your pitch down (less effort required). Don’t make too many assumptions going in about the investor, but feel free to ask qualifying questions.

Ask qualifying questions of your potential investors so you know they are for real. Do your homework. Ask them if they have conflicts. See if they have deal flow, and estimate how much capital they have left to invest, or just ask them. Look at their portfolio and bios to see if there is a fit.

Some investors will waste your time. Be cognizant of this. They will take your pitch with zero intention of investing because they need to show that they are “active” or they are simply curious. They will have conflicts of interest they do not disclose. They will have no money to invest. They will not know anything about your industry.

Secrecy and non-disclosure agreements (NDAs) are overrated. No file sharing software protects from a smartphone taking pictures of the computer screen. Any documents you send out, can be forwarded to others. Investors never sign NDAs, and it simply signals to them that you are naive or overly paranoid.

Your idea is not as unique as you think it is. If your idea truly needs that secrecy, you are in the vast minority of startups. Most people could not give away their idea even if they tried. You don’t have to divulge all your secrets in a pitch, so just tell potential investors only what you are comfortable with the whole world knowing and politely decline to divulge your trade secrets.

Investor Fit

Find investors that already like your industry, your background, etc. It’s really hard to convince people of something they are 100% against or even skeptical of. You need to find people who are 100% looking for investments in companies just like yours already.

Try to see things from the investor’s perspective. What are their incentives? What are they afraid of? What are they trying to accomplish, and in what time frame?

Investors already know they are highly likely to lose 100% of their investment in you. What they are trying to avoid is feeling really stupid about it later. They want to avoid embarrassment among their peers. So, the first low bar you have to get over is that you have to show you are not an obviously bad bet.

Then they have to believe that you have some chance of getting the company to the next step (i.e., more funding and revenue, then an exit). You have to show some chance of a very good return on their investment. Each investor thinks about this differently and most founders do too. If you are looking for a $50M exit after 5 years, make sure you are not pitching investors who only want to invest in companies that can IPO in 7–10 years. Your desired outcomes need to be aligned with your investors.

Investors are human. They may run into a cash crunch themselves in their own fund. They may be having trouble finding good investments. They may be getting pressure from their limited partners. There may be arguments going on inside the fund between the partners. They may have their own personal or financial problems. Treat them as real people, and try to understand what their competing motivations are.

Some successful founders assert that it doesn’t matter who you get money from, just get the money. As a first-time founder, I disagree (I may change my mind later) because I think you need mentorship, introductions, and trust.

Find the right types of investors for you and then talk to as many of them as you can. If you have the good fortune to be a little picky about your investors, pick the ones that you think will support you with time, introductions, advice, and follow-on capital. You are entering into a multi-year relationship with your investors, so act accordingly.

When you research potential investors, look for when things went wrong. When you ask for references, you will naturally get a positively biased story, so make sure you dig deeper. Talk to executives of failed portfolio companies. Talk to partners that have left the firm. Talk to other board members of portfolio companies. I know it’s not easy getting ahold of these people, but it is worth a try.

Craft Your Pitch

You’ll want to prepare several different length pitches, and perhaps different pitches for different audiences (more technical, less technical). Refine your pitch into a few sentences for emails or quick intros. Figure out what are standard metrics and pitch practice in your industry. SaaS, Bio-Tech, and Consumer Products all vary wildly in the audience you are pitching to and the relevant details and narrative arc.

Moreover, have a good 15-minute story to tell about the startup, team, opportunity, market, etc. Take a video of yourself, share it, and get notes.

Having smart people challenge your strategy and offering advice is helpful. You don’t have to listen to all of it, but it would be foolish not to have an open mind. Listen to the feedback of smart people with domain expertise, evaluate it, decide if the feedback is valid, and then incorporate it as needed.

It’s really easy to get tunnel vision. For me, it was really helpful to get advice from our investors as they had a much broader sense of the market and our team’s performance. You have to be willing to tell an advisor what is really on your mind and not just put up a tough front. That is when you will get the advice you really need.

I had a couple things wrong as I was going into the current round of funding.

First, I thought our first year revenue should be higher. But Matt Walsh (Castle Island Ventures) pointed out that we should be proud of what we had accomplished, as many successful companies have started out with similar Year 1 and Year 2 revenues.

Second, I hadn’t realized that simply surviving is an accomplishment. Many blockchain startups went bust in the 2018 to 2019 “crypto winter,” and ZenLedger was actually doing well. We had survived the downturn through good management of expenses and were poised to grow fast in a recovery. That would be seen as a positive by potential investors in our next round.

I had tunnel vision on my own expectations and did not have a broader perspective of how our performance would be perceived by investors. Naturally, I incorporated this feedback into my pitch.

Of course, it is very hard to determine what is good advice because this is an art, and the effectiveness of a pitch is in the eye of the beholder. Take advice from people who have successfully raised money in your industry before, investors in your industry, or people who see a lot of pitches in your industry (e.g. lawyers, graphic designers). The more numerous, recent, and relevant their expertise, the higher the chances their feedback is valid.

If you are not getting traction in your pitches, get feedback. Sure, you might be the only person in the world who gets it and are under-appreciated genius, but really, how likely is that? You can learn and adapt your pitch and your business model as you go if you are coachable and open-minded. Pitching is a learnable skill. You need feedback and practice. If everyone “doesn’t get it,” then that means you are failing to convey the idea properly, or you have a flawed business and you can’t see it.

Raising capital is basically a full-time job. You won’t really be able to build your business at the same time you are raising capital. So you will have to alternate between these activities. Or, while you are building an MVP, start to reach out and promise to show the investors something tangible in X weeks — then deliver on that promise. Making and keeping promises is the best way to win over investors.

Stay fresh for pitches. Don’t schedule them back to back. Get honest feedback on the pitch and materials. Don’t over-react to any one piece of advice.

It’s okay to have flaws or weaknesses in your founding team or in your business model. You just need to be aware of them. It’s also okay to not have the answers. You can say, “this may change” or “here is how we will run experiments to find out X.” You want to have a plan to fix these things as you go. You want to show that you know what you don’t know.

At ZenLedger, before we had raised any money or built anything, the pitch was simply, “You are aware of the problem we want to solve, and we have a great team. Here is how we will use the investment funds and what we intend to accomplish.”

Here’s our January 2018 Ugly Deck-ling:

https://www.slideshare.net/ZenLedger/zenledgerio-early-seed-deck.

Our deck was ugly. We did not have live code. We did not have any customers. That didn’t stop us. We were pitching angel investors who intimately knew the problem and believed there needed to be a software solution to the problem. We were pitching at all-time highs for cryptocurrency asset values (December 2017-January 2018). We had a team with relevant experience. Our startup also stood out as obviously beneficial and simple to execute in an industry/time full of delusional business plans and unrealistic valuations.

In more recent pitches, I talk about Team, Problem/Solution, Traction, Strategy, Competitors, Financials, and then Deal Terms — in that order.

We simplified the visual clutter in the deck over time. This is Jan 2018 to Aug 2018

Make sure your business or strategy stands out. What are your unfair advantages? How are you going to do things differently and more effectively than the competition or against the expectations of your customers? For ZenLedger, it was about placing a huge emphasis on the human touch in tech.

Tech in general, and crypto in particular, is known for terrible user experience and non-existent customer service. So in January 2018, we said we were going to have the best customer service and user experience so that our customers would feel relieved during tax time rather than stressed. In October 2019, I was highlighting our testimonials and fast-growing customer base that we had earned because of this customer-centric approach.

Our testimonials range from invitations to go drinking to some profanity laced tirades against the State :)

Think through the common questions and objections you will hear and have an answer. Think through common concerns of investors and address them. Think about common failure modes of startups and address those, too.

You can start off each pitch with, “Can you tell me a little about yourself and your interest in Industry X so I can have some context?” That gets the other person comfortable and lets you talk more about what interests them.

I actually prefer to send a quick email to arrange a phone call and then follow up with a pitch deck after. I do this because I think I’m a better salesman than the deck, so I want to get that person on the phone. Then I can build rapport and I can hear their reactions, questions, ideas, and insights. I want the dialogue. If I send a deck and never hear back, I’ve learned nothing. But if I have a conversation, then there are any number of things I can learn about the investor, the pitch, and the business.

Your Story

Every deck and pitch is a narrative. In that narrative, you need to point out your strengths and address your weaknesses.

I’m 39. I’m married with three kids. I grew up in Southern California. I earned a BS in chemistry from the US Air Force Academy, and then went on to fly search and rescue helicopters for the Navy. I then earned an MBA from the University of Chicago Booth School of Business. I worked as an M&A investment banking associate, a retail business manager at Amazon, and then in a couple of startups.

Being a former combat pilot who did well at top schools and in challenging work environments is part of my core story. In a few sentences talking about my background (and the team’s) I can take off the table any doubts about intellect, decision making, grit, leadership, and relevant experience. What’s your core story?

My Advantages: I received a good education. I have a solid career track record with an interesting background. I’m reasonably personable and engaging. I have general mental flexibility/curiosity with broad experience in business and with people. Access to risk capital is relatively easy right now (2017 to 2019).

My Disadvantages: The startup has exposure to cryptocurrency, so there is a lot of uncertainty and volatility. I’m a first-time founder. The market we are entering is very early and volatile. Our business model does not scream unicorn IPO!!!

Think through the boxes you have to check with each particular investor. See where the investor takes you. If you are talking to a more technical person, lean that way and feel free to geek out. If you are talking to someone less technical, you may want to focus more high-level.

Business items to address:

• Idea, Business Model — Does it fit the investor’s investment thesis? Will the business work? What is the timing of revenue and profits? Is the burn rate realistic? Is more or less capital required?
• Market, Industry — Is this an attractive market to start a company in? Does the investor and the founding team have experience here? How much competition exists? What are the barriers to entry? Barriers to success? What is the size or market? What is the maturity of the market?
• Team — Has this team worked together before? Will they stay together? What are the team’s strengths and weaknesses? Can the team pivot, if needed?
• Timing — Are the market conditions favorable for this startup? Or in one, two, or three years? Is it early, too early, fast follower, or too late? What is the capital environment now and what is it likely to be in the future?
• Traction — What has the team done so far? Given what resources? What will the team do with more resources?
• Edge, Moat, Advantage — How do they win? Who would they lose to? What makes them special?

Personal traits to convey:

• Smart, Decision-Making, Shrewd, Creative — Will you find solutions to problems? What is your career progression, and what have you learned or accomplished? Can you learn? Are you coachable? Are you introspective? How effective have you been in the past? What have you learned from your failures?
• Hardworking — Will you put in the hours? Have you been in demanding work environments before?
• Gritty — Can you survive tough times? Can you bounce back from defeats?
• Leader — Can you hire and inspire? Can you build a team? Can you keep it together through tough times?
• Humble/Arrogant — Is your confidence justified? Will you listen to others? Will you shrink away from the moment? Everyone is somewhere on this spectrum, and it shifts depending on context.
• Sales — Can you earn revenue? For partnerships? Can you raise further capital? Can you be charming? Convincing? Can you make promises to customers and keep them?
• Integrity — Will you cut and run? Do you keep your word? Will you look at a situation honestly and ask for help, or cover things up? Will you steal the money? Will you turn on your cofounders or investors?
• Subject matter expertise — What is the relevant experience? What transfers well from other domains? What are the unique insights?

You can define yourself and your company by what you are not, as well. Highlight useful contrasts. We stated that we were not an ICO scam, just SaaS. We were a pretty simple business to conceptualize: We quickly generate accurate tax accounting reports. We are a play on the whole crypto market and the obvious interest that tax authorities will have in that market.

Many businesses pitching the exact opposite were also very successful in fundraising: “We are an ICO. We are super complex and cutting-edge. We will disrupt existing regulations.” So, to each their own.

You will be surprised how you can simply weave in all these elements in a 15-minute talk. Some of these are simply covered by one slide in a deck, and you don’t really have to mention it. Some of these can simply be in your bio, so you don’t have to address that either.

https://youtu.be/EtjaK8HKZ6E

Here’s our 80 second Product Hunt commercial made with powerpoint and screenflow. And maybe Comic Sans.

Our pitch in one sentence: ZenLedger helps cryptocurrency investors and accountants with their taxes.

You should always highlight how you got into this industry, how you came up with the idea, and why you are excited about it. Talk about the journey. Tell a good story.

You can learn to pitch better. There are plenty of videos, books, and articles about this. Make it a habit to continually learn how to be a better communicator of your ideas and business. You also have to learn to be a better listener. And to follow up. There is a long process to closing investments, and it’s much more complex than just, “Sell me this pen.”

Just Listen by Mark Goulston and Flip the Script by Oren Klaff are some excellent books.

If there are cofounders, it is likely that the technical cofounder will need to demo or pitch some, as well. Practice together.

Practice Your Pitch and Get Feedback

As I mentioned before, you can start by asking your immediate friends and colleagues to hear your pitch and give feedback, or to review your pitch deck. I would recommend you only ask people who have relevant experience about pitching, investing, or your business/industry. Your current investors are a great source of feedback, as well.

After you get advice, ask them for intros to people who are closer to the right investors for you. You may have to talk to two or three people in a chain before you are speaking to someone who can write a check. Ask those people for advice and feedback, too. You need to be in conversations so that you can learn, connect, and expose yourself to some good luck. You can make friends, mentors, customers, or early hires in this process too.

Feel free to shoot a video walking through your business that you can share and get feedback on. If anything, it’s good for self-evaluation. You can also use videos to deliver your pitch so that you don’t have to schedule calls. However, I really like to get people on the phone or video conference with them so I can also practice reading them as I pitch and answer questions.

This is where you see if a joke works; if a point is impressive or clear. This is where you can catch pauses or hear a skeptical tone, which tells you a weak point in the pitch. And it’s easier to ask for follow on introductions at the end of a practice pitch in person than over email.

If people consistently decline to make introductions for you, that is a huge warning sign. You need to reassess yourself, your pitch, your business, or who you are asking. If you are doing things right, you should be earning trust and getting introductions.

Remember that people like to reciprocate. You need to at least offer help in some way as you are asking for help in the form of introductions or feedback. You can offer introductions to founders who fit a profile the investor is looking for. You can offer your industry expertise should they need some advice. You can offer your product for free to them.

As you get the ball rolling here, your pitch will get better, and you will be presented with opportunities you could not have anticipated when you started. So it’s important to get in there and mix it up. “Opportunities multiply as they are seized”- Sun Tzu.

Have a folder you can share a link to, with your most current deck or materials in it. That way, you don’t have old copies of your deck floating around. This also prevents you from sending out 10MB+ pdfs that get bounced. I also share a recent investor update and some sample outputs.

You can practice pitching by going to incubators, hackathons, pitch parties, and things like that. You can watch pitches on YouTube and look up successful early pitch decks on SlideShare.

You can hire a graphic designer to help with your deck and make some graphics. You can massively improve the look and feel of your deck by spending a few hundred dollars. Do not spend thousands of dollars, and do not give out equity for deck design.

You can do the same for screen mock-ups of your software, which will generally cost a bit more.

Naturally, live demo’s are even better if you decide to get something up and running before you start fundraising.

Reaching Out to Investors, Delivering Pitches

You can create a list of ideal and potential investors (PitchBook, Crunchbase) and work back from there through your networks (LinkedIn, Twitter, Facebook) to map out a networking plan.

So, practice your pitch, and then start pitching for real.

To scale your outreach, you can send cold emails, as well. LinkedIn and Twitter are great for this. Pick people who have two or three strong things in common with you like education, work history, hometown, or demographics. Reach out to them. If the chat goes well and you can ask for introductions or next steps. You are seeking to network to people that really can help you, and you probably don’t know those people yet (also known as the Weak Tie Hypothesis).

Networking density — you will find more investors in traditional startup finance hubs like Silicon Valley. In the US, cities like Boston, Los Angeles, and New York are also fairly dense. Try to network with people who live and work there. Connect to connectors; it really works.

Generally, it is a terrible idea to pay to pitch. Most of the organizations that promise to “get you in front of a room full of angels” in exchange for payment are full of it.

Generally, non-operators don’t know anything about operating a business. You should assume unless proven otherwise that hedge fund investors, investment bankers, management consultants, large corporate execs, and wealthy people in general are not knowledgeable about your business and idea. You will have to educate them. You should take their advice with a grain of salt. But, these people will generally know someone more relevant to talk to.

So you should resolve to make them earn your trust with relevant expertise and insight. These people are smart — or think they are — and their overconfidence won’t harm them, but it could kill your startup. Be polite and professional to everyone. Be fooled by no one (including yourself).

Valuation, Terms of Investment

Hopefully, you have gotten through a week- or month-long cycle of pitching and you have interested investors. The next step is to send them a term sheet with your investment terms. You can look at example convertible notes of equity agreements. You should become well versed in what are founder-friendly terms, what are investor-friendly terms, and what are standard market terms at the time.

Sample documents are available from the National Venture Capital Association. Please note that these documents are generally more favorable to investors — it’s not called the National Startup Founders Association.

Best Practices, Market Conditions. It’s really important to find advisors with current market information. Startup lawyers or active investors for your company’s stage usually have the pulse of the market. You need advice from people with deal flow, meaning those who are seeing what investment valuations and terms are happening right now. What is the current deal structure that most of your cohorts are closing deals with? What are the common pitfalls?

Governance. Worry a lot about who has power in the company and why. What can they do without your consent, when, and why? Your investors will act differently in the “dating” phase — when they first invest in you — and later when things are going badly at your company, in your industry, or with the investor (failing to raise a fund, liquidity, taxes, divorce, declining health, etc).

If you raise a couple rounds of financing, you are going to lose board control and voting control at some point. That is not the end of the world, and is a very common occurrence. Learn to recruit great board members, and learn how to work with them and grow as a founder.

I was really annoyed at having a 15% reduction in our valuation proposed from one VC during our latest round. But I listened to Mark Casady (GP of Vestigo Ventures), who talked me down, and I accepted the lower valuation because in the end, it’s all just make-believe. I wasn’t going to let pride stand in the way, and I knew that my previous investors would still approve of the deal, as it was going to give us another solid VC (and an intro to another) while also give us two to three years of cash.

But it wasn’t pleasant, and I let the issue bounce around for a whole weekend while I was camping before agreeing to the new valuation for the round. In the end, I just decided to trust Mark’s advice more than any other factor, and pressed ahead. It took several more weeks of pitching, negotiation, and due diligence to fill up the round, and I was happy to simply be moving forward.

How To Create Leverage

The best way to create leverage in the deal is to get more than one offer to invest in your company — often called a term sheet. This means that investors are now competing over you.

You earn these term sheets as a natural outcome of building a great business, and then effectively pitching to the right investors for you. Getting one term sheet that you can live with ensures that your business survives. That is a huge accomplishment, and you should be really happy.

Zero term sheets is bad. One term sheet is okay. Two or more term sheets is amazing.

If you get multiple term sheets to lead a round, you have successfully shifted the power from the investor to the founder. Don’t get too greedy, but a second bidder allows you to push back and negotiate terms that are friendlier to the founders (deal terms or valuation) or to speed up the pace of the deal for a fast close.

Here is how I try to determine what is a good term sheet and who is a good investor for my company:

1. Governance, Deal Terms. Are they fair or extractive? Who has control in the most likely future scenarios? What are the implications for the next round and the next few years?
2. Quality of Investor Fit (multifaceted). How badly do you want to work with this investor? How will they accelerate the growth of the team and the company? Can you do better? Could you do worse?
3. Valuation. What is the company worth now? What will it need to be worth in the next round? How does this affect your previous investors?
4. Timing. When can this round close? How long will it take? Can you wait and find better terms from another investor to create leverage?

Should you find your round oversubscribed (e.g. you wanted to raise $500,000, but you have commitments from investors for $600,000), you have the following options:

1. Improve the terms for yourself (e.g., raise the valuation on the convertible note from $2M cap to $3M cap) and see who is still interested in investing on those terms.
2. Simply take in more money than you had intended on the same terms (make sure your term sheet allows you to raise more than you intend to).
3. Ask some investors to invest less so that you can get a higher number of investors in the round under the theory that this means more people will help you with advice and introductions.
4. Turn down some investors as you have run out of allocation.

FOMO (fear of missing out) cuts both ways. As a founder, you fear missing out on capital and great investors. But as an investor, they fear missing out on great teams and businesses. You can use that to your advantage. If you have built a great company and are communicating that well, you can create leverage for yourself. You are not powerless.

Exits, Valuation, Equity Splits, F*ck You (FU) Money

I see many founders get stuck on being angry that such and such employee is getting 3% equity or that the valuation is going to be $11M versus $12M, etc. The way I look at this, so that I don’t worry too much, is that there is some bar that I have to get the company over in order to have a liquidity event.

Most likely, there will be no liquidity event, and your equity stake at the X valuation won’t ever matter. This is one reason not to stress too much about this. It hurts to admit but it is clarifying.

So there is some minimum amount that you need to exit at to get FU Money. Below that amount, you keep working. Above that amount, you no longer have to work, but you can choose to work. This is a personal number for you do determine.

Exit Math. If you do the quick math, your necessary outcome to attain FU money isn’t that sensitive to a particular valuation or what other people own. You were locked into that when you chose a co-founder and your seed funding terms, and now you just need to keep going.

For rough numbers, say after a seed round and a VC round, you end up owning 15% of the company, because you have a cofounder, as well. Let’s also say you want to make $3 million to comfortably retire today. So, you need a $20 million liquidity event. Above that, you are retired. Below that, you keep working but you can be picky in your next job.

Say your equity stake is decreased by 10% relative terms, 1.5% absolute terms to 13.5% equity in the company. Your exit now needs to be $20.9 million to hit your target outcome, barely a 5% relative increase.

There are so many factors out of your control here. Founders try to optimize for outcomes, but you are basing everything off of survivorship bias. All the deals that happen in this range are undisclosed. They are opaque. You only hear about the splashiest exits, so your mind overweights them.

Don’t Be Greedy. Many deals die because a founder won’t accept a valuation that is 15% lower than what they wanted, and then the company runs out of money, which means the valuation is now 100% lower than what they wanted! The company goes to Zero value because the founder was angry about the difference between $20M and $23M.

Of course, there are many founders much more successful than me who would give you the exact opposite advice, telling to value every share like the most precious and scarce resource in the world.

The only proper response to a valuation you don’t like is get a different investor who will invest at the valuation you do like. If you do not go out and create your own leverage and offers, you can’t complain about the ones that your funding process has created for you.

Every day, you earn the right to make revenue, make deals, make hires, or raise more capital. You do that in your business execution, the favors you do for others, where and how you show up, and your communication with current and prospective investors.

Follow up. Follow up with every lead. Follow up with people who ghost you. Follow up in a disciplined and regular fashion. Whatever you promise during your pitch — sending over some additional materials, answering a question, or making an intro — make sure you do it.

Thank everyone who makes an intro for you, and pay it back or pay it forward. Let them know what came of the introduction. Pay them back by pitching well. Pay them back by learning and getting getter. Be a professional.

Create a simple spreadsheet that keeps track of the last time you pinged someone. Generally, I like to follow up after a week if someone sounded really excited and I’m in the middle of fundraising. I’ll send updates to potential investors in the next round every three to six months when I am not currently fundraising so that they can see that we are making progress. You build trust over time with consistent action and communication. Make promises, then deliver.

Here’s a sample tracking spreadsheet. There is CRM SaaS for this too.

https://docs.google.com/spreadsheets/d/1me2mJ1f3t9fFhO6I_4MKqk_Gu6zl7b3Kj71QYSUId1o/edit?usp=sharing

I write monthly investor updates that go over our progress in product development, sales and marketing, business development, and anything we need help with. You can forward these to potential investors for your next round, as well.

I made it a point to keep lists of potential investors and send them updates as we made progress. Just very lightweight emails. I talked to my investors often and would ask them questions when I was working through an issue. It’s OK to say, “Hey, I’ve done my research, and here is my tentative decision on this issue. Based on your experience, do you have any feedback or know anyone I should talk to about this?”

Sometimes, I write up longer strategy documents and share those. They get incorporated into my next round of funding pitches, as do my investor updates. I will basically write the deal memo for the investor. This memo is basically just your pitch, but in prose.

I made it a point to build up trust with thoughtful, consistent communication and solid business execution. It sounds obvious, but it’s difficult in practice. Mark Casady of Vestigo Ventures offered to lead our next round because he was impressed with our progress and our prospects, but also liked how we communicated with him and other investors.

The lead term sheet I got in October 2019 was the direct result of 14 months of communication and execution made possible by the August 2018 round, which was the direct result of an effective pitch and traction made possible from our December 2017 seed round.

Miko Matsumura of Gumi Cryptos and I built a relationship over two years before Gumi decided to invest in ZenLedger. I always felt they would be a great partner, and I really liked and respected Miko. So I kept sending updates, relevant articles, and having interesting conversations, as we’d run into each other from time to time. Gumi makes it a point to observe executive decision-making and ability to execute over time when considering investments.

After Gumi decided to invest, they made an introduction to Sabrina Tachdjian of Unblock VC (Line Messenger), who also decided to invest. So this two-year relationship has worked out well for everyone. At no point did I feel the need to make a hard sell or invent FOMO with Miko.

Our October 2019 round was not easy per se, but it was much less difficult as we had our lead and we had both VCs from the last round participating, which is a strong signal to potential investors. Vestigo and Castle Island believed in our product, and more importantly, in us.

Play the Long Game with Fundraising

The investor that turns you down today may still make introductions for you anyway to potential customers, partners, or investors in the future. Or they may invest in your next round. Be gracious when they turn you down. Many will just cut off communications, ghosting you. Roll with the punches. Send them updates anyway. This highlights that you are a professional and value the relationship you are building over time with this person or team.

Play the longer game.

I realize this is not my last startup. Regardless of outcome, I’m going to do another one. Make your decisions based on the fact that you are going to found or work on several startups over the next five, 10, 15 years. Treat yourself and others accordingly.

I truly wish you the best of luck. I respect and support anyone trying to start a company.

Thank you to all our investors and advisors including:

Vestigo Ventures, Castle Island Ventures, gumi Cryptos, Unblock Ventures, Migration Capital, Ben Davenport, Luke Riddle, Tamir Avital, Patri Friedman, Matt McKibbin, Kumar Thangudu, and Greg Brown.

Some Additional Resources:

TechCrunch, CrunchBase, Pitchbook for valuations, deals, and investors

SlideShare for early funding decks

Flip the Script by Oren Klaff

Venture Deals by Brad Feld

Influence by Robert Cialdini

Just Listen by Mark Goulston

What You Do Is Who You Are by Ben Horowitz

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