So, you have kicked off your startup funding with a small raise from friends and family. What next?
If you are in academia, you may also have received research grants to support your work. Your technology commercialization office, or your entrepreneurship center, may have supported you with in-kind efforts along the way.
You are now at a stage where you can foresee the need for $1 to 2 million to support critical activities in the next two years or so, and get you ready for a Series A and maybe product launch.
However, your regional VCs, or VCs specializing in your field, are telling you that “you are just too early for us.” If they are particularly nice, they will add something along the lines of “Come back to use when you have …” Moreover, this kind of feedback is not unique to VCs. More and more, economic development organizations, accelerators and incubators are waiting a little more time, waiting for you to further de-risk the company and the deal.
It’s time to tap your wider professional network. These are folks that know you relatively well, and hold high respect for your work, both in science and in business. You are going to systematically approach them, and gauge their interest in helping you out, or at least helping you contact other folks that might be willing to help. Who are these folks? They include:
- Your board of directors
- Your board of advisors
- Your executive team, if you have one.
- Your scientific advisors
- Your mentors and coaches
- Your high level contacts in industry
- Your investment banker or advisor
- Your corporate attorneys
- Any high net worth individuals in your network
Basically, we are looking for people who can write you a $25,000 to $50,000 check based on their respect for you, and your reputation with them. I call this the plus one round. This is a round where you raise anywhere from $250,000 to $500,000 to carry you through the next 18 months or so, and achieve many critical and specific technical and business milestones.
These are the steps to take in this round:
- To approach potential investors, we now need an investment memorandum, or a mini business plan, or a super executive summary. Call it whatever you want, it needs to be powerful, passionate, and convincing. You can use your current PowerPoint pitch as a high level table of contents, but the purpose of the new document is to clearly outline fundable milestones in the next 18 months or so. The main message is going to be: Fund us to further de-risk this company, so that our value goes up, and our opportunities for later funding increase. What is important here is that this document be short enough, and impactful enough, that a contact will be willing to read it, and get excited about the company and the opportunity.
- You probably know folks who fall into the list above. Start thinking, and listing in an Excel spreadsheet, about 30 to 50 people around the country that you think might be receptive to reading your document. We are looking for folks who can write $25,000 to $50,000 checks. Close 10 of them in the next few months, and you have a start. (I used a CRM system to do this, giving me the advantage to easily track the status of a prospective investor, and the next steps that I needed to take to close them.)
- Pick up the phone! Ask them for 10 minutes. Do not ask them for money. Ask them for feedback and reaction to your plans. If they get excited, then proceed the financial discussion. (Remember, this is a sales process: you close the deal by getting a series of advances!)
- If they get excited, regardless of whether they invest or not, ask them for names. Get five names out of each contact that shows interest, and soon enough you will have a whole database of potential angel investors.
- At the same time, get your current network to help make introductions to other regional players. In Pittsburgh, they include Innovation Works, LifeX, Mountain State Capital, 412 Venture Fund, BlueTree Venture Fund, Idea Foundry, Next Act Fund, Magarac Venture Partners and others.
- Know that, yes, investors will hope that you contribute your own money to this round.
- Most importantly, be patient. This will take time, your time.
In the last few years, I have seen less need for a classical business plan. Investors seem to be happy with an executive summary and a PowerPoint pitch. They use these tools to get to know you, and to get to know your team and your deal. Remember, this is about risk reduction and making the investor comfortable.
I see the whole document as less than five pages. Since there is no one more expert in the subject, or more in love with the deal, than you, I strongly suggest that you sit down and let the words flow out of your fingers. Write it as if you are writing your teenage child: Make it simple enough for anyone to understand, but technical enough to communicate your domain expertise. Here is a high level outline of your teaser document:
- Current solutions/why they do not work
- Proposed solution/why there is hope
- Brief discussion of the markets and competition
- Status of the product commercialization process/milestones achieved/intellectual property
- Eighteen to 24 months of plans, including key milestones
- Management and advisors
- Financial projections
- Funding requirements and suggested terms of investment
- Longer-term plans
Each step is short. Limit it to one or two paragraphs. Do not give into the temptation of overloading the reader with your knowledge of the field!
The milestones of Step 6 will be presented also in the form of a chart, showing timing for each of the milestones, and timing for the funding required: We will basically not tap into any funding until the previous milestone has been completed. (Investors love this kind of approach because it screams “I will be careful with the cash!”
It is understood that you are an extremely early deal, so you do not need super-sophisticated financial projections for Step 8. You just need to demonstrate that you have an idea of how the company might make money someday.
Finally, note that a likely investment vehicle for Step 9 is a convertible note with tiered discounts. The earliest investors get the steepest discount. Another vehicle could be a SAFE note.-30-