The Fundraising Fieldguide
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About this ebook
Note on the Second Edition: The first version of The Fundraising Field Guide was written and published via Reedsy in 2015 and has been used by many to help navigate their fund raise. However, a lot has evolved since then, so this updated version 2.0 has been written with new content, ideas, and strategies to help early-stage tech startup founders decipher and navigate the fundraising process.
As a founder, It's easy to get lost while trekking through the fundraising process. The dynamics of speaking to someone who has the capital you need, while discussing terms you've never heard of, can all be quite daunting. This book deciphers the secrets to raising capital from investors for early-stage, high-growth startups. Learn about communicating with investors, shareholders and lawyers. We will go over the materials you will need to prepare, the basics of how to understand your deal, and the mindset you will need to approach this journey successfully. The aim is to provide you, the ambitious early-stage founder with the right information to take your company to the next level.
This new and updated version provides an overview of the soft and not-so-soft challenges you will need to prepare for as part of your fundraising journey, including things like reaching out to investors, dealing with rejections constructively, preparing materials and financials, understanding valuations and deal terms, how to manage the legal process and a crowdfunding chapter with statistics from crowdfunding platform Seedrs (who kindly helped in providing advice on how to best navigate). I sincerely hope you enjoy the book and get lots of use from it.
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The Fundraising Fieldguide - Carlos Espinal
Carlos Espinal
Fundraising Field Guide
A Startup Founder’s Handbook
First published by Reedsy 2021
Copyright © 2021 by Carlos Espinal
All rights reserved. No part of this publication may be reproduced, stored or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without written permission from the publisher. It is illegal to copy this book, post it to a website, or distribute it by any other means without permission.
Second edition
Proofreading by Kate McGinn & David Ola
This book was professionally typeset on Reedsy
Find out more at reedsy.com
Contents
Donation Cause
Foreword
Introduction to the Second Edition
I. PART 1 — LOOKING FOR INVESTMENT
1. Planning for Fundraising
2. Preparing your Company for Fundraising
3. Your Fundraising Materials
4. The Fundraising Process
5. The Human Element
6. The Search for an Investor
7. Managing Your Fundraising Process
II. PART 2 - CLOSING YOUR INVESTMENT
8. Understanding your Deal
9. Understanding Valuation
10. Toxic Rounds
11. Managing the Legal Process
12. Conclusion
III. APPENDIX — ADDITIONS TO THE FIRST EDITION
13. Get your Elephant in the Room under Control!
14. Deciphering Crowdfunding
15. Weatherproofing your Startup for any Financial Climate
16. Additional Resources
How This Book Was Made
Donation
Acknowledgments
About the Author
Donation Cause
I believe that everyone who has ambition, drive, and a desire to change their life for the better should have that opportunity. In that spirit, I’ve been working with Resurgo Spear, on supporting their Spear Programme.
To learn more about them and to make a donation to support their efforts, please check out the book’s website here:
http://www.fundraisingfieldguide.com/
Or visit Resurgo’s website directly:
https://resurgo.org.uk/spear-programme/the-spear-programme/
I’m counting on your generosity to jointly become a catalyst for change!
Foreword
Yes, the sweetest monies a startup can ever see on their bank account are those paid by their customers. Alas, few brand new companies (especially in tech) bootstrap to this moment on founder’s own capital alone. You need investors to front the bills before you can take care of it yourself.
We’ve seen many fellow founders get stuck on the most obvious, yet not the most important, things about fundraising, like, say, valuation. In reality, much more innocent-looking nuances, such as board composition or liquidation preferences, might dictate more on your company’s eventual outcome.
The fact that Carlos gets to talking about the alphabet soup of specialized term sheet legal buzzwords only about 100 pages into the book shows you how thoughtful and systematic he is, unpacking the entire logic and lifecycle of funding companies across many years, understanding the philosophy and incentives of people involved, and avoiding common pitfalls.
If you are not lucky enough to have Carlos and Seedcamp as your partners yet (you should!) reading this book is the next best thing to calling him up for advice.
Sten Tamkivi (Skype, Teleport) & Taavet Hinrikus (Skype, Transferwise)
* * *
As founders, we’ve experienced the difficulties of the fundraising process first-hand.
As investors, having participated in more than two hundred deals via LocalGlobe, we have experienced close up many of the challenges that early-stage founders go through, and observed many of the patterns of what it takes to succeed as well.
The purpose of this book is to help founders streamline their learning process around how fundraising works. While fundraising isn’t rocket science, it does involve its own vocabulary, and relies heavily on relationships, careful preparation, courage and lots of patience.
Through his experience at Seedcamp and his previous role as a venture capitalist (VC), Carlos has highlighted many of the important points to consider while fundraising.
Robin & Saul Klein, LocalGlobe
Introduction to the Second Edition
Since 2007, I’ve been fortunate to participate and invest in over three hundred startup journeys at every stage of development, from generating an idea to finding product-market-fit to raising investor money, and finally to scaling operations and exits. Over this same time period, I’ve reviewed hundreds of cap tables, countless financial growth plans and hiring plans, and lived through some tough emotional discussions with founders, ranging from their very personal health and family issues to intra-founder disputes due to the stress of startup life.
These cumulative experiences have given me a certain viewpoint on startup life—a perspective on the bravery and courage many founders have when embarking on their entrepreneurial journeys, and the seemingly uncertain and almost random way growth events can unfold during the lifetime of a company. Many of the chapters in this book are based on real-life stories of founders I’ve worked with, and how they overcame key challenges in various steps of their journey. The chapters originally started as posts on my blog, The Drawing Board¹, created in an attempt to help new founders avoid the pitfalls I witnessed others struggle through.
I approach the effort of observing and reproducing the lessons I’ve learned over the years with the humility of a student. I believe it takes a beginner’s mindset and an ever-learning ethos to successfully tackle the constantly and rapidly evolving nature of startup life. In that spirit, when this book was originally published in 2016 it contained the core ideas that I had developed to date on fundraising. However, as with most things in life, things and ideas evolve with time. This edition brings things up to speed on how things are evolving at the time of writing in 2021. Naturally, lots of things have happened during Covid that I could talk about, but I’ve decided to try and focus on what will persist post-Covid, rather than just what is happening now. I suspect, either way, I could easily re-write this book every three to five years and have updates to add!
I also don’t think it is possible for any one way or framework to contain the myriad of challenges a founder encounters during their journey. As such, I encourage you to approach what I’ve written in this book with the same mentality: taking it as a direction, if you will, but not a fixed one. There is so much I have learned from the founders I’ve worked with; I hope you find this book as useful and interesting as my work with them has been. It’s their stories that enabled this book to happen.
With that in mind, I also encourage you to review what you get out of this book with other founders, because it is in the spirit of communal discussion that I’ve seen the best ideas surface.
Lastly, throughout this book, I will use examples that include numbers/figures that aren’t designed to be recommendations or representations of what’s market standard
for investors or founders to expect. As we will cover in the section on milestones and valuations, so much depends on the type of business you are creating, where you are fundraising, and the current macro-economic climate. I also do not set out to comprehensively cover all forms of fundraising instruments, which can include traditional debt instruments, just to name one. Rather, it focuses on financings typical of early-stage, high-growth companies, and as such, covers mainly fixed and variable price structures.
¹ http://www.thedrawingboard.me
I
Part 1 — Looking for Investment
Perseverance is not a long race; it is many short races one after the other.
– Walter Elliot
1
Planning for Fundraising
The Tao of Fundraising
There is a Taoist story of an old farmer who had worked his crops for many years.
One day, his only horse ran away. Upon hearing the news, his neighbors came to share his sorrow. Such bad luck,
they said. The farmer replied, Good news, bad news—just the same.
The next morning, the horse returned, bringing with it three other wild horses. How wonderful,
the neighbors exclaimed. Good news, bad news—just the same,
replied the old man.
The following day, the farmer’s son tried to ride one of the untamed horses, was thrown, and broke his leg. The neighbors again came to offer their sympathies at his misfortune. Good news, bad news—just the same,
came the familiar reply.
The day after that, military officials came to the village to draft young men into the army. Seeing that the farmer’s son’s leg was broken, they passed him by. The neighbors congratulated the farmer on how well things had turned out.
Good news, bad news,
said the farmer, just the same.
All fundraising efforts and meetings have an element of good news and bad news. How you deal with them and learn from them is what really matters.
The Fundraising Mindset
Fundraising is not easy. In fact, it is one of the most frustrating and time-draining activities you as a founder will have to undertake as part of your company’s growth strategy. Early on, when you are a small team, fundraising efforts will likely consume far more time than you’d like them to. Unfortunately, there is no shortcut to the process.
Unless you are really lucky and investors come to you, fundraising will likely involve taking many meetings with investors of all kinds, both good and bad, before you ultimately succeed in finding someone who believes in you. You will meet many types of investors along the way, including:
Investors who doubt you as a founder/CEO, and your ability to execute
Investors who are meeting with you because they want to invest in your competitor
Investors who don’t have the money to invest but want to appear active in the ecosystem (never hesitate to ask other founders for references on people you will reach out to!)
Investors who will want every inch of detail about what you will be doing for the next five years, when you both know your projections will be speculative at best and hogwash at worst
Investors who don’t get what you do at all, but will have an opinion about your product because their child or spouse has a view
Investors who are amazing and give you insanely poignant advice, but would want to see more traction before they can consider investing
Investors who provide you with great feedback and would help you greatly if they were involved, but will only invest if someone else leads the round.
And then there is the one investor who ultimately believes in you and backs you. That’s all it takes. Just one.
The earlier the stage your company is in, the more fundraising is about your ability to develop personal relationships and articulate your ambitions as a coherent story (aka. storytelling).
In effect, there are two main drivers behind why an investor will be drawn to you in the early days: FOMO (fear of missing out) and/or your growth metrics.
Early on, as much as some investors will want to know your projected numbers (revenues, traction, etc.), the conversation will always come back to your inherent abilities and vision as a founder since there’s little else to go on. This is where your ability to weave a congruent narrative about your vision and ability to deliver it will increase the likelihood of generating FOMO.
As such, fundraising meetings in the early phases of company development have two primary functions: they allow the investor to see how the founders think through their assumptions and if they can work together, and for the founders to assess whether they think the investor will add value to their startup.
This quirky dynamic of imperfect information early on leads to the frequent use of an apt analogy that describes the fundraising process: dating. As funny as it may seem, there are more similarities than differences.
In fundraising, as in dating…
You have to be willing to put yourself out there to meet anyone in the first place.
It’s a numbers game. You have to meet many people, either in-person at networking events or parties, or online.
Rejections tend to hurt quite a bit.
Connections usually happen in the least likely of places and are strongest when they come through a trusted third party.
Being a good storyteller gets people to laugh, open up, and remember you.
Chemistry matters.
Sometimes it’s just plain luck—being at the right place at the right time.
The better you prepare yourself, the better your odds get.
Being too eager to get back to someone or waiting too long can end things prematurely.
You have to go on several dates with several people before you ultimately feel someone is the right one for you.
Case in point: one of our founders (let’s call him Bruno), who I have the pleasure of working with to this day, was rejected 88 times before finally getting a yes from an investor. Reasons for nos ranged from the usual this won’t ever be a big thing
to there’s someone already doing this.
When Bruno had one month’s worth of cash left in his account, he took an expensive flight and car ride to another country to meet with an investor who, upon the founder’s arrival, admitted to having entirely forgotten about their meeting. The investor invited Bruno to take a ride with him to his next meeting, and it was during this thirty-minute car ride that Bruno finally got his yes
.
Developing a fundraising mindset centers around four core ideas:
Plan ahead. Fundraising is a process that can take time and is rarely quick or painless (with the