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The adage “you never get a second chance to make a first impression” has endured because it’s true. That’s why it’s crucial to diligently prepare ahead of investor meetings, especially in these three areas.
Think about how much money you truly need
The cost of building startups has dropped dramatically over the past few years. I often see first-time entrepreneurs seeking to raise larger-than-required sums of money for their pre-seed or seed rounds, which decreases the number of investors likely to invest. In other words, they’re trying to satisfy what could be multiple rounds of financing in one fell swoop. Or, they’re accounting for roles in their plan that aren’t suitable for their current phase — such as hiring assistants or salespeople during product development.
Angel investors don’t like to be first. If you’re raising $2 million, an investor seeking to invest $50-$100K is likely to ask how much you’ve raised so far. If the answer is low, they’ll probably tell you they’re interested but ask you to come back when you have $1.5 million raised. As you drop the amount you’re seeking, this becomes easier.
For most first-time entrepreneurs, your story should read something like this:
I’m seeking to raise $X to fund product development and the formation of essential parts of the business, including the website and initial go-to-market infrastructure.
I’ll start once I receive $X but will continue fundraising.
As we approach the fulfillment of our initial milestones, we’ll begin raising money to commercialize the business.
Research investors, and then research them again
Because investors will want to know how much you’ve already raised, you’re going to want to go after investors in rapid succession. You want term sheets queued up so you don’t have to tell an investor you’re waiting on other term sheets to come in.
You don’t want to focus solely on investor quantity though. It’s equally important to have a high number of philosophically matched investors, too. Before you reach out, read their blog and tweets and anything else that might help you understand how they think.
You’ll also want to get an idea of what stage they invest in and if your company is a good fit. If they show a preference for companies with network effects or product-led growth, make sure you’re aligned there as well.
Once you have meetings with appropriate investors set up, continue to do your homework. I suggest you spend at least 30-60 minutes researching an investor before each pitch. Try to anticipate their questions, intuit what they’re going to want to hear and think of answers to their objections. In short, do everything you can to manage any possible reason someone would not want to invest. Leave nothing to chance.
Even if you realize an investor isn’t right for you, learn as much from the conversation as you can. Within your first 10 meetings, you should have a better grasp of what changes you’ll need to make your pitch.
Prepare a SAFE agreement
I recommend you come into investor meetings with a predefined structure. These days that’s a Simple Agreement for Future Equity (SAFE), which was developed at Y Combinator (you can download a copy here.)
SAFEs let you delay your valuation until a future date while still raising capital. They allow you to take investor subscriptions as they come in, rather than having a defined closing as would be dictated by a priced round.
With a SAFE, your investors will receive stock in your company at a later date. This happens in conjunction with a specific, contractually agreed-upon financing event. It’s generally the sale of preferred shares by your company, typically as part of a priced round.
Before we proceed further, here are some SAFE terminologies you should know (if you don’t already):
- Valuation cap: Lets investors obtain a more favorable price per share in the future by setting a maximum convertible price. Valuation caps reward investors for taking on risk.
- Discounts: Discounts require investors to take on risk. They’re used if an investor’s money converts in future financing rounds and the valuation was at or below the valuation cap.
- Pre-money or post-money: Pre-money is the valuation before new investor money. Post-money is a valuation that includes capital raised in that round.
- Most-favored nations provision: Prior investors receive the same terms when SAFEs or convertible securities are issued to future investors at better terms. Essentially all investors enjoy the same privileges.
Unlike a straight-up equity purchase, shares have no value when the SAFE is signed. Instead, you and your investors negotiate a valuation cap for the company and/or a discount to the share valuation. In this way, a SAFE investor profits from company growth between the time the SAFE is signed and the trigger event.
A SAFE is not a loan though. There’s no interest paid and no maturity date, which means SAFEs are not subject to the same regulations as convertible notes. According to Y Combinator, it was their intention for SAFEs to work just like convertible notes — but with fewer complications.
While you certainly can adjust the predetermined terms of a SAFE, I’d advise against it. Just put in your valuation cap and leave the discount at 20%. The minute you start to mess with a SAFE, you’re changing what it is and inviting further negotiations — and perhaps legal expenses. The SAFE is a standard document, and thus, understood by both sides without having to get lawyers involved.
If an investor puts in a large amount of money and negotiates a better deal, you can always go back to your early investors and offer them the same terms. For what it’s worth, I’ve done this on several occasions and investors are always thrilled.
Other ways to set yourself up for success
If possible, try to have a few “ringers” who become your first investors and seed your first round. This will show momentum and create FOMO for other investors. If any of these investors are experts in your space, then you can leverage their “star power” as an additional point of validation for your venture.
If you can’t attract big names, don’t let that affect your swagger. No one wants to fund an entrepreneur that doesn’t project passion, so be sure to exude confidence while demonstrating competence. You’re selling yourself in these early stages as much as you’re selling your company.