How to win term sheets and influence investors: Notes from founders of NewCampus, Snapask and Flickstree
Fundraising can be a daunting task for most first-time founders. Unlike running the startup, which is oftentimes based on the founders’ expertise on a subject matter or an unfair advantage they may possess, fundraising is not a skill and requires a lot of work.
Any founder who has gone through the process of fundraising can vouch for how arduous a task it is. A quick Google search can tell you all about the process of fundraising, but this article talks about actionable steps that startup founders — first-timers and seasoned — have taken to raise funds themselves.
Stop fixating on the “Idea”
“Ideas are like a**holes, everyone has one. Execution is what matters,” says William Bao Bean, General Partner at SOSV and Managing Director at Chinaccelerator and MOX.
One of the biggest myths in fundraising is the founders’ belief that they have a million-dollar idea. However, that is not always the case, as Saurabh Singh, Co-founder and CEO of Flickstree, explains. Flickstree is an AI-powered video publisher network that enables content websites and apps to maximise their revenues and has raised Series A of US$3 million in 2019.
Ideas are useful only in the very early stages of the business to strike conversations with angel investors. Talking from his experience, Singh explains that the idea only helped Flickstree in the early stages of the business when they were starting out. Early investors invest in the pedigree of the founders and the idea, but over time, the pitch needs to evolve, and the idea cannot be the central theme anymore.
“If you are not embarrassed by looking at your first business plan and pitch deck after six months or one year of execution, there is something wrong,” he says.
Also Read: Term sheets: What you need to know
Take the road less traveled
NewCampus co-founder and CEO, Will Fan, shares a very interesting and unique approach to fundraising. NewCampus, a modern business school that offers live masterclasses needed to build future careers, has raised over US$1.2 million in seed money.
Having a VC that understands the business is more important than having just a popular VC. Big and prominent VCs get thousands of investment proposals and invest in hundreds of those businesses.
In the long run, it is important to find investors who bring not only financial resources but also other strategic resources.
Hence, instead of following a herd mentality, do your own due diligence and look for the diamonds in the rough: investors who understand your vision for the company and believe in you. This approach has allowed NewCampus to evolve, pivot, rebrand, and expand to several markets.
There is always smart money out there but as a founder, you must find the right people that are synergistic to you and smart for the business.
Look beyond the superficial numbers
Timothy Yu is the Founder and CEO, of Snapask, an on-demand tutoring startup. He raised US$35 million in a Series B round in early 2020 and an impressive US$56-plus million over the edutech startup’s lifetime.
Having pitched to numerous investors, Yu explains that market size is often an overrated aspect of fundraising. Investors care about the long-term sustainability and the opportunities that exist in the industry that the business operates in. Founders tend to inflate market sizes and potential opportunities to legitimise the investment.
Eventually, investors are only looking into how much of the total addressable market the startup can tap into or successfully acquire. Simply claiming that a market is worth billions makes little sense if you are not servicing a significant chunk of it. What matters is your achievement and what you can practically achieve in the future.
Yu added that Snapask has always emphasised on being sustainable, looking beyond the market potential, and having a clear roadmap to profitability.
Singh echoes Yu’s thoughts and adds, “During fundraising, founders need to be clear on the scalability of their startups, the problems they’re solving, the market size, competitors, and exit plans for investors. Investors love founders who’ve done their homework.”
Be specific with investment needs
A common mistake that most founders make is being vague about the sum of money they need. Fundraising can be intimidating as the fear of rejection or the investment coming short of expectations looms over.
Hence, it is important to be able to justify to investors that the company needs the exactly what the founder is trying to raise. Timothy believes that founders should not fundraise just because they need a longer runway. Instead, they should go into the fundraising round knowing how the money they’re trying to raise will help the business grow.
This exercise not only shows the investors that you’re prepared, but also helps to build long-term trust with investors, which may be useful in subsequent fundraising rounds. And while this does not guarantee funding, it eases concerns and instills confidence that leads to a higher probability of fundraising success.
“Fundraising is not a milestone; it’s not an achievement. It’s just a necessary evil,” says Yu. Founders must understand that the long-term viability of the company depends on the sustainability of the business than on its valuation.
Founders’ pedigree matters
This point holds more truth to early-stage startups than it does to startups who have operated for a relatively longer period. Early-stage startups must make it a point to focus on their founders’ experience when pitching to investors.
Talking from his own experience building Flickstree, Singh talks about how they managed to establish authority with their background. He and his cofounder started a media company and were trying to build a content platform, where they could leverage their background of working in media and marketing.
This helped them build credibility with early investors as they could then answer any questions posed by the investors without being second-guessed, allowing them to raise the seed round, as well as subsequent rounds.
Don’t bank on a single investor
Like investors looking to minimise risk by diversifying their portfolio, founders must also diversify their risk in fundraising by talking to multiple investors and not basing everything on a single investor.
One of the mistakes that Singh said he made early-on with fundraising was basing the round around one investor. While raising an angel round, the company received a deal from an investor who was meant to be the lead investor.
They made the mistake of announcing the lead investor and started collecting follow-on commitments from other investors. However, after negotiations with the lead investor fell through, the round went bust as all other investors pulled out of the deal.
“Once the lead investor pulls out, others start thinking that there must be something wrong with the company,” recalls Singh. This is when they realised that that banking on a single investor can be risky. “The round is never over until the money is actually in the bank account”, he adds.
Follow your own playbook
“There is no rulebook for startups operating in a blue ocean market,” says Fan. With billions of dollars being poured into the edtech industry today, edtech startups may be the hottest commodity in 2021 but it was not the case in 2015 when NewCampus was founded.
Attracting investors was challenging and so he says that founders must be willing to challenge the status quo and write their own playbook.
If it takes US$5,000 each from 50 investors to raise their angel round, they must be willing to do that. Founders must be willing to do what is right for the company. Especially in situations where the market is new.
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