Marc McCabe: A Deep Dive Into Startup Fundraising – Below the Line

Key Takeaways (the fundraising cheat sheet)

  • When should you start fundraising?
    • “I think if you can have 8 months [of runway left], that’s really ideal. 10 months is great. 6 months is fine. 4 months you’re cutting it very, very tight.”
    • Make sure that in the 6 months leading up to when you start fundraising, you begin to form an amazing 1-2 line story about your company
  • What kind of growth is needed to fundraise?
    • YC has a growth metric startups should aim for: 6% week over week is great growth, 8% is world-class, and 10% is outrageous
    • But know – There’s no magic number you need to hit in order to qualify for series A fundraising
  • When’s the best time to fundraise?
    • It’s probably best to avoid doing so in the summer (many VCs are on holiday)
    • One of the easiest times to get on a VC’s calendar – schedule meetings in December for January
  • How long does it take to fundraise?
    • As a general rule, allot 3 months from starting to ideate the pitch to getting a term sheet
    • The time it takes to fundraise tends to triple with each additional round
  • The 4 Phases of Fundraising
    • Phase #1 | Build Your Pitch
      • “Knowledge is confidence” – In general, know 3x more than you’re going to share
      • EVERY pitch deck needs to answer the following:
        • Why us? Why this? Why now? (at the seed stage)
        • How have we performed? (add for series A, B, and C)
      • Graphs >>> tables
      • Spend 3-4 weeks creating your pitch 
      • Practice your pitch on existing investors and other founders in your space (Marc calls this “hardening” the pitch)
      • Have a shorter (3-5 slides) deck you can send to a VC pre-meeting and a longer (12-18 slides) deck you use for your presentation
        • Never send the longer deck pre-meeting
    • Phase #2 | Structure Your Process
      • Line up 40-60 target funds you think might be good candidates in a spreadsheet (ideally include specific partners you want to meet with as well)
      • If you don’t know a specific partner at the fund, start thinking about where your introduction will come from (as Marc Andreessen said in these Podcast Notes, a warm referral >>>> a cold email)
        • The strongest referral source is a well-performing founder within a target fund’s portfolio
      • PACK your first two weeks of pitching with as many meetings as you can (but not more than ~4-5/day)
    • Phase #3 | Navigate the Process
      • Manage your meetings like a project. After each, ask:
        • What do your next steps look like?
        • What do you still need to understand?
        • What’s going to happen next?
        • What are the action items?
        • (All the above facilitate further communication between you and the VC, thus helping you move the process forward)
      • A key point to remember – you want every one of the funds you’re dealing with to be working along a similar timeline
        • Always be managing the pace to try and prevent any particular fund from getting too far ahead in the process
    • Phase #4 | Get the Term Sheet
      • “I always tell founders the same advice… NEVER talk about valuation”
        • It should be something the market is going to decide
      • Your priorities as a founder should be:
        • 1) Finding the right partner
        • 2) Getting the right amount of money to scale your business
      • Do NOT start negotiating before you have a term sheet in hand
  • Practical advice:
    • “The best founders overcommunicate and overprepare” – James
      • “You can do everything else wrong, but if you do those two things, they will help correct everything else”
    • VCs are VERY good at detecting bullshit
      • It’s okay to say – “We don’t know that yet”
    • How you do anything is how you do everything
      • EVERY interaction you have with a fund matters – from a 2-line email to the way you organize an Excel document

Intro

  • This episode is a deep dive into all things startup fundraising
  • Marc McCabe (@mccabe) is an expert on the topic – he’s quite literally a “fundraising coach”
    • He’s been helping companies full-time for a year and has closed 10 rounds, raising over $100 million
  • This episode’s drink of choice – Coors Light tallboys
  • Let’s set the stage with this quote:
    • “When you think about the fundraising process, it’s like an exercise in project management. It’s almost like planning a wedding. You need a million details to go right and come together all at the same time.”

Why is the fundraising process so opaque?

  • Y Combinator (YC) recently released a stat – their series A companies tend to speak to 30 funds before receiving a term sheet
  • “Imagine going through a month-long process where most of the time you don’t know what the funds you’re speaking to are thinking. You hear ‘no’ dozens of times. If you’re talking to 40 funds and you hear ‘no’ 37 times, that’s a successful process.”
    • And you’re getting those ‘no’s’ on a daily basis… as you’re walking into more meetings
  • “All the way through this process you don’t necessarily know what’s happening, you don’t know how well you’re doing, and you don’t know how likely you are to close a round”
  • As a founder, requiring outside capital to execute on your vision can leave you in a very stressful place
    • This is related to a quote from Victor Frankl in Man’s Search for Meaning – “When you live in a world where you have this provisional existence, where someone else provides your existence or can cut it off, it’s extremely tormenting”

When should you start fundraising?

  • Approach this question by considering:
    • How much runway do you have? (this is important!)
    • What traction have you achieved to this point?
    • What milestones do you have within your runway that still leave you with enough runway to fundraise?
  • In general, 6 months of runway is a good threshold (so if you have less than 6 months of runway left – time to get out there)
    • “I think if you can have 8 months, that’s really ideal. 10 months is great. 6 months is fine. 4 months you’re cutting it very, very tight.”
  • James has some advice:
    • Make sure that in the 6 months leading up to when you start fundraising, you begin to form an amazing 1-2 line story about your company
      • Tilt‘s was “crazy traction”
    • For this reason, James likes to say – “90% of the fundraise happens before you meet with the investor”

How much growth do you need to start fundraising?

  • YC has a growth metric startups should aim for: 6% week over week is great growth, 8% is world-class, and 10% is outrageous
    • “Those numbers are helpful, but there’s no magic number you need to hit in order to qualify for series A fundraising

When is the best time to fundraise?

  • You probably shouldn’t fundraise in the summer as many VCs are on holiday making it hard to land meetings
    • “If you’re in May, June, or July – you might want to think about waiting until September if you have the runway”
      • But if you have 4-6 months of cash left, start ASAP
  • One of the easiest times to get on a VCs calendar – schedule meetings in December for January
    • Why? – Many VCs are ready to get a jump on the new year

How long does the fundraising process take?

  • As a general rule, allot 3 months from starting to ideate the pitch to getting a term sheet
  • And know:
    • You’ll typically have to meet each fund until they pass or 3-4 times until they give you a term sheet
      • These 3-4 meetings might consist of presenting your pitch deck, the VC trying to get to know you & your team, a meeting which dives deeper into the industry/economics/or tech
  • The law of triples:
    • Generally, the time it takes to fundraise tends to triple with each additional round
      • In addition – the time you need to put into preparing your pitch and data room (see below) will triple with each successive round

The Data Room

  • As part of the fundraising process, you’ll often have to prepare a “data room” from which a fund will do a considerable analysis of your business/metrics/performance
    • A data room is a collection of documents about your business which shows your historical financials, your operating plan for the next couple of years, etc.
    • Marc prefers using Onehub for this (but you could also use something like Dropbox)
  • Data rooms are more common for series B and Cs

Something to Keep in Mind

  • “The best founders overcommunicate and overprepare” 
    • This was something Ron Conway once told James, and it’s always stuck with him
    • “You can do everything else wrong, but if you do those two things, they will help correct everything else”

You Don’t Have to Have All the Answers

  • “VCs are really good at analyzing businesses. They’re very good at analyzing trends and forecasting those trends into the future. But what a lot of VCs are incredibly good at, what they have to be good at, is bullshit detection.”
  • It’s okay to say:
    • “We don’t know that yet”
    • “These are the big questions we still have to answer” 

How You Do Anything is How You Do Everything

  • “Every interaction with a fund matters. You need to be on your game in how you’re communicating and how you’re following up all the way through the process.”    
  • EVERYTHING matters – from the 2-line emails you send to the way you organize an Excel document
  • One strange interaction or comment will taint your reputation with a certain VC

The 4 Phases of Fundraising

Phase #1 | Build Your Pitch

  • Understand your data (especially better than the people you’re pitching it to) and know what it says about your business
    • Remember – how you do anything is how you do everything
    • Revenue is best, but if you’re pre-revenue focus on active customers/retention of active users/intensity of users
    • Obviously, know your growth rate
    • BUT – “Looking at your data gives you some of the building blocks of the pitch, but it’s not the pitch itself. It’s really – ‘Here are some strong elements of our business that we will want to weave into our narrative about where our business is and where it’s going.'”
  • Make the pitch, especially around your data, very easy to consume
    • You want the VC you’re pitching to easily be able to reiterate your pitch to the firm’s other partners
  • Understand the space and how you fit into the market
  • Know the strengths of your business
  • “Knowledge is confidence” – this MATTERS, especially when you get push back
    • In general, know 3x more than you’re going to share – you never know what’s going to be asked
  • Be able to explain (in the first part of the pitch):
    • Why your solution is important
    • How/why your solution is differentiated
    • The context as to why you’ve launched the business
    • Why now? Why has this solution not been possible previously?
    • Why you and your team are perfectly set up to attack this market opportunity
  • Be able to explain (in the second part of the pitch):
    • What the size is of the opportunity you’re attacking
    • How you’re gaining ground in the market
    • What the future of the business looks like (not just 5-10 years out, but 1-2 years out as well)
    • What are the most important things you can do with the capital to grow your position in the market?
  • EVERY pitch deck needs to answer the following:
    • Why us? Why this? Why now? (at the seed stage)
    • How have we performed? (add for series A, B, and C)
  • Actionable tips:
    • Write a short sentence for each slide
    • Have a shorter (3-5 slides) deck you can send to VCs which quickly allows them to understand if they want to meet you or not
    • Have a longer version of your deck (12-18 slides when you’re raising a series A, it should be a little longer for the B and C rounds)
      • With this, aim to surprise the VC with a few powerful facts that weren’t in the shorter version
      • Consider adding an appendix which might allow you to better respond to questions after the pitch
    • Graphs >>> Tables
    • Spend 3-4 weeks creating the pitch 
    • Practice your pitch on existing investors and other founders in your space (Marc calls this “hardening” the pitch)
  • On sending slide decks over email:
    • Know that there’s a good chance it’s going to be shared, even if it says “confidential”
    • Use DocSend if you want – this allows you to see if the file has been opened
    • “The vast majority of investors expect to see a deck up front”
    • James has a rule:
      • Send the shorter deck pre-meeting, but NEVER send the longer deck… why?
        • This allows you to craft and manage the conversation when you’re presenting (you know you’re presenting information they haven’t read)
        • “It’s so powerful to have this amount of information asymmetry where they NEED to listen to every word”
        • This allows YOU to manage the meeting, as opposed to the meeting managing you
      • What about sending the longer deck after the meeting?
        • James advises not to (partly because the deck is most likely to be shared among the various Partners at the firm)
          • Don’t share the deck until after the General Partner (GP) meeting (this is typically one of the last steps in the fundraising process when the VC you’ve been interacting with invites you to present to the firm’s GPs). If you do it prior, you lose the leverage of having them hear your story for the first time from YOU.
  • Realize:
    • “Fundraising is an exercise in building trust. To get someone to feel confident enough to say, ‘I’m going to give you $10 million,’ is without a doubt an exercise in trust-building”
    • “No one wants to give you $20 million and say, ‘I’m sure you’ll figure out how to spend it. They want to know you have a PLAN.

Phase #2 | Structure Your Process 

  • Line up 40-60 target funds in a spreadsheet you think might be good candidates (ideally include specific partners you want to meet with as well)
    • Perhaps you already have investors who’ve reached out
    • Consider – Who’s invested in similar companies?
    • Consider for each fund – Are they able to write a check at the size you’re looking for?
    • If you don’t know a specific partner at the fund, start thinking about where your introduction will come from (as Marc Andreessen said in these Podcast Notes, a warm referral >>>> a cold email)
      • Go through your LinkedIn – Who do you know that knows someone at one of these funds?
      • (This is another strong argument for why YC is such a powerful group to be a part of. There are ~2000 alumni and they’ve had investors from pretty much every fund. You can easily find the strongest referral source – a well-performing founder within a target fund’s portfolio.)
    • When should you start building this list?
      • When you’re a couple of weeks away from thinking your pitch is finalized
  • When the list is finalized, THEN start reaching out
  • PACK your first two weeks of pitching with as many meetings as you can (but not more than ~4-5/day)
    • You don’t want to get too fatigued and you should leave a little wiggle room in case a meeting runs long
    • “It’s meaningless how the meeting feels” – James
      • This is kind of similar to what they say about job interviews – “If it goes well, it didn’t go well. If it doesn’t go well, it might have gone really well.”
      • Some investors intentionally make the meeting awkward to see how you handle science/other situations
    • “Follow up is the ultimate language of VC interest”
      • If you get an email later that day, that’s a great sign
    • Always ask about the fund in your meeting (just like in a job interview, you want to like the people you’re going to work with)
    • Go into each meeting with the mindset:
      • “I am the most knowledgeable person about what I’m doing and I’m going to bring this person along and get them excited. If they come on board, great. If they don’t, no problem.”
  • Throughout the fundraising/meeting process, ask yourself:
    • What is it this fund wants to understand about my business?
    • What are there diligence checkboxes?
    • How far through those checkboxes are they?
    • How does that compare to the other funds on my list?
  • In the early meetings, consider asking what the Partner did/didn’t like about your pitch
  • In summary:
    • The ultimate goal is to have multiple bidders at the table, at the same time, ready to make an offer
    • It’s like dating – you need OPTIONS

Phase #3 | Navigate the Process

  • The main goal of this phase: move investors along while keeping an understanding of their stance
    • It’s kind of like herding sheep
  • This involves a few things:
    • Nudging funds
    • Keeping track of which funds respond within a certain timeline
    • Making sure the funds are getting the information they need
  • Manage your meetings like a project. After each, ask:
    • What do your next steps look like?
    • What do you still need to understand?
    • What’s going to happen next?
    • What are the action items?
    • (All the above facilitate further communication between you and the VC, thus helping you move the process forward)
  • On managing stress:
    • Be aware of the facts – You’re going to hear “no” CONSTANTLY
  • On managing pace:
    • What if you receive an early term sheet?
      • The best funds give you 2-5 days before you have to accept/decline
      • It’s tricky – an early term sheet is usually a sign of a fund thinking the round you’re raising is going to be quite competitive (and they want to end it)
      • One of the ways to better take control: If a VC asks you in for a General Partner meeting, ask beforehand if it’s the final step in the process
        • If they say yes, try to delay the meeting (remember – you want every one of the funds you’re dealing with to be working along a similar timeline)
    • Always be managing the pace to try and prevent any particular fund from getting too far ahead in the process

Phase #4 | Get the Term Sheet

  • Once you get your first term sheet, the game is changed – inform the other firms
    • Say – “Hey, we got out first term sheet. We now have a limited clock. Would love to know where you guys are at.”
    • This lets other firms know it’s game time – they can either move quickly or get lost
  • Comparing between term sheets:
    • For the most part, as a founder, you want to optimize for getting the best fund/partner – this is priority #1
    • Dilution comes second
    • Terms are third
  • Do NOT start negotiating before you have a term sheet in hand
  • Do NOT lie about getting a term sheet to hurry other funds along
    • You might speed them up and there’s a chance they never find out you were lying – “But you’ve managed to orchestrate yourself to this position. Don’t rely on bullshit to get you through this last phase. Have a little more patience.”
    • This might actually speed them up to a “no”

Other Tips

  • Know that if the Partner you’re working with sets up a General Partner meeting – they WANT the deal to go through
    • They are your sherpa for convincing the rest of the fund
  • “I always tell founders the same advice… NEVER talk about valuation”
    • It should be something the market is going to decide
    • Your priorities as a founder should be:
      • 1. Finding the right partner
      • 2. Getting the right amount of money to scale your business
    • Valuation will work itself out
    • Ron Conway has always said – “Success in startup land is binary”
      • Whether you have 15% or 22% of your company when it goes public… it doesn’t matter

Who is Marc’s ideal client?

  • At the end of the day, there’s only so much a fundraising coach can do
    • If you don’t have traction… you’re done
  • Maybe someone who’s had negative experiences pitching VCs in the past/is uncomfortable doing so
  • Marc tends to work through referrals, so if you know James – hit him up!

Wrapping Up

  • “Be prepared, be confident, and be structured”
  • Build up a BIG pipeline of potential firms (James and Marc really stress this one)

Additional Notes

  • “Every round is really just a stepping stone. You should think about how this money will be able to transform your business to where you’ll be able to raise capital again”
  • “One of the best stress reducers I’ve ever come across is making lists” – James
    • At night, make a list of everything you want to accomplish the next day
      • This gets everything out of your head and puts it on paper
  • Don’t sweat the small things
    • More often than not, whatever you’re worrying about won’t make a difference as to you raising/not raising the funds
  • Investors usually have 3 buckets after seeing a pitch
    • I NEED to invest in this company (~5%)
    • Clear pass 
    • Unsure – this is the largest bucket
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