Lenny’s newsletter: the Cadence edit

Newsletter Challenge, v. 8

Quick note: I recently wrapped up a writing coach arrangement with Ari Lewis, host of the Mastering the Attention Economy podcast. We enjoyed working together (see Ari’s ROI here), and he proposed I take on a newsletter editing challenge.

The challenge: Twenty edits by 22 September.

My primary goal: add clarity, concision, and cadence to the newsletters, and sharpen up my own editing process.

For details on my process, click here, a Google doc. Leave suggestions as you see fit. Thanks!

A Playbook for Fundraising,” Sept 1

@ https://www.lennyrachitsky.com/p/a-playbook-for-fundraising by Marc McCabe (guest writer)

Between the “~~~~~~~~”:

–Grey typeface: Marc.

Normal typeface: me.

Key metrics (original -> edit)
–reading level: 10 -> 8.
–word count: 1831 -> 1630 (12%)
–median sentence length: 22 -> 17 words.
–sentence length, standard deviation (basically, a measure of the variety of sentence lengths): 12.4 -> 12.7.


“Playbook”: the Cadence edit

For an early stage founder, fundraising is one of the most nerve-racking parts of the job. It’s incredibly opaque, asymmetrical, and is often the difference between having a company and not. Even the most experienced founder may have only fundraised 5-10 times in their life, while VCs engage in this process daily.

Nonetheless, it’s also a very exciting time for a founder. Very few people ever get the chance to raise millions of dollars from top tier VCs. As a result, I often see founders rush into the process, setting up investor meetings before they’re truly prepared and end up with a bad outcome. This is a missed opportunity because the fundraising process is a great forcing-function for getting you to think deeply about your business and where it’s going.

For an early stage founder, fundraising is one of the most nerve-racking and exciting parts of the job. It’s incredibly opaque: which part of my message is taking hold? It’s radically asymmetric: you might do this dance five, maybe 10 times across your lifetime. Venture capitalists (VCs) judge these dances on a daily basis. (So, as I note below, practice, practice, practice.) And, it’s often the difference between owning your own company and life as a cog in a machine.

Still, it’s an exciting opportunity — so exciting that founders often rush into the process, meet with investors prematurely and, not surprisingly, end up with a bad outcome. This outcome, too, is bad in multiple ways: you didn’t get funded, of course, but you also missed the opportunity to think deeply about your business and where it’s going.

~~~~~~~~

Over the last decade I have personally helped dozens of companies raise capital, from pre-seed to Series C rounds, and through these experiences I’ve seen a lot of effective, and also counterproductive, fundraising patterns. I shared many of these learnings in a lengthy podcast interview a year ago in, but with a prod from Lenny I felt like now was a good time to revisit this topic.

This guide is for founders of technology businesses who have raised their seed round, and are thinking forward to their next fundraise. It’s most relevant for Series A, but a lot of the same concepts apply for seed rounds, Series B and to a certain extent Series C. While most tech businesses can benefit from this guide, there are plenty of exceptions, especially companies with products which take a long time to get to market, and companies raising capital outside the US. Consider yourself caveated.

Over the last decade, I have helped dozens of companies raise capital, from pre-seed to Series C rounds. So, I’ve seen a lot of effective, well-prepared pitches and, well, other stuff. I I’m delighted Lenny invited me to share a few of those lessons here on his newsletter.

This guide is for founders of technology businesses who have raised their seed round, and are thinking forward to their next fundraise. It’s most relevant for Series A, but most of these ideas apply for seed rounds, Series B and, to a certain extent, Series C. I figure most tech businesses can benefit from my counsel here. Likely exceptions include:

● companies with products which take a long time to get to market, and

● companies raising capital outside the US.

Consider yourself caveated.

~~~~~~

Ultimately, fundraising is an exercise in building trust. Every week we read about new Series A, B and C rounds. We hear about pre-emptive offers and blank check term sheets from prominent investors. All of this can lull us into thinking raising capital is easy. Yet, each partner at a fund generally only makes 1-3 early-stage investments per year, and their career is ultimately staked to how successful these investments are. Each investment is incredibly significant to each fund and in order to convince a fund that you are worthy of that big check, you need them to feel incredibly confident that you will take the money and use it to take your business to a new level, whereby you could raise future funding and ultimately build a huge business. With that in mind, let’s get started with how I like to manage the various steps from thinking about fundraising to closing.

You’re a Builder of Trust, Relationships, and Market Share

Every week we read about new Series A, B and C rounds. We read about pre-emptive offers. And we read about blank-check term sheets from prominent investors. So, raising capital must be easy, right?

No. Understand that each partner at a fund makes one to three early-stage investments per year, and that their career is tied to the success of these investments. So, each investment is a significant component of each fund. In order to convince a VC that your company is a sound investment, you need to persuade them that you (and your company):

● have a great product or service

● will use their money to upscale your business

● will be in a good position for another round of successful funding, and

● will capture real market share.

So, how do you get from first steps to closing?

Let’s think of the four phases of fundraising over the course of a year (yes, a year):

● Preparation

● Outreach

● Navigating the process

● Partner meetings + closing

~~~~~~

Phase 1: Preparation

First, you need to figure out why and when you should raise a round. Maybe this seems obvious, but rather than looking at new investment as an opportunity, many founders only start fundraising when they are running out of money. VC’s don’t invest because you’re running out of money – they invest because they believe their equity stake will be worth a lot more in the future.

When you should raise a Series A round is a blog post unto itself, and I’m not going to go in depth here. The truth is that there isn’t just one factor that will say you’re ready to raise Series A. For example, in SaaS, it’s common that companies that have achieved $1M ARR are told they are ready, but growth rate is a factor as well, and ARR doesn’t always apply for consumer focused businesses.

Tap into your inner Simon Sinek: start with why, then move to when. Seriously: don’t ignore the obvious. Look at a new investment as an opportunity. If you only begin to fundraise when you’re running out of money, you look more like a charity than a business. VC invest because you’ve convinced them that equity purchased today will be worth a lot more in the future.

The matter of when is a big question, and likely a newsletter unto itself. In brief: there isn’t just one factor that indicates you’re ready to raise Series A. In SaaS, companies that have achieved $1M annual recurring revenue (ARR) may be ready, but don’t discount growth rate. ARR isn’t always the best metric for consumer-focused businesses.

~~~~~~

Generally the way to think about whether you are ready for a Series A is whether you’ve proven a credible value hypothesis. This is a combination of factors including the market you’re attacking, the features you’ve built to exploit the opportunity, and how well your product is finding its fit in the market. I often describe Series A as the “Product-Market Fit Round”: You want to show that you’ve convinced a slice of your market that your product is valuable enough to pay for (or if it’s free, use very regularly), and that this user base is growing. While seed rounds are intended to explore an idea and find some fit in the market, raising a Series A helps you pour more fuel on the fire.

Instead, assess the metrics that you’ve confirmed a credible value hypothesis. This hypothesis tests a number of factors, including:

● the market you’re attacking

● the features you’ve built to exploit the opportunity, and

● how well your product fits in this market.

Think of Series A as the “Product-Market Fit Round”: you want to show that you’ve convinced a key market segment that your product is valuable enough to pay for (or, if it’s free, use regularly), and that your user base is growing. While seed rounds are intended to explore an idea and find some fit in the market, raising a Series A helps you sharpen that idea and secure that fit.

~~~~~~~~~

Investors ultimately want to invest in growth. If a company is growing fast relative to its peers, this can make up for lower ARR especially if the business seems defensible and sustainable. It’s often helpful to speak with your seed investors early on about it, especially if they have experience raising capital themselves, to understand what milestones would make most sense to support a new round in the future.

At this point, investors are a key buyer persona, and you need to know their desires. Ultimately, of course, investors desire growth. If a company is growing fast relative to its peers, this can make up for lower ARR, especially if the business seems defensible and sustainable. Talk to your seed investors — especially if they have experience raising capital — about which milestones are most attractive for a successive round of funding.

~~~~~~~

When you think that you’re ready, the first step is to start pulling together your key metrics and wins, such as your growth rates, revenue numbers, customer testimonials, user feedback, and achievements. As mentioned, what makes you ready for Series A varies greatly, so find data points that will get investors excited about your business.

Here are some of the data points that are likely to get investors excited about your business: growth rates, revenue numbers, customer testimonials, user feedback, and achievements.

~~~~~~~

In terms of materials, I advise founders to prepare the following at a minimum:

A short blurb about your business, including a couple of headline numbers that indicate the business is doing well

A short teaser deck (3-7 slides)

A longer presentation deck (12-15 slides)

A 2-3 year forecast with assumed fundraise secured

Optional: Metrics deck or a data room. Sometimes you will get asked for this at Series A, sometimes not. It helps if you ask your prospective VCs in the first meeting whether they’ll ask for it.

You can find some good references for building pitches here, here and here.

Founders should prepare the following materials:

● a short blurb about your business, including a couple of headline numbers that indicate the business is doing well

● a teaser deck (3-7 slides)

● a longer presentation deck (12-15 slides)

● a 2-3 year forecast with assumed fundraise secured

Optional: Metrics deck or a data room. Some VCs will ask for one or the other at Series A. To find out if that’s the case, ask them.

Check out these ideas on how to assemble these materials here, here, and here.

~~~~~~~

The key is that your materials tell a compelling story. They need to explain what you’re building, why you’re building it, and how your strategy will capture considerable revenue in the future. The better this story ties everything together, the more your business will seem insightful. Ultimately we’re all human, and strong narratives that help explain the world around us are more compelling than a selection of disparate, albeit impressive, data points.

Beyond growth, though, investors desire a compelling story. You need to offer a crystal-clear explanation of what you’re building, why you’re building it, and how your strategy will capture considerable revenue in the future. Humans love stories, and a strong narrative will beat a disparate set of data points — no matter how impressive — nearly every time.

“If you can’t tell a credible and compelling story about your vision and how your plans will capitalize on broader societal, market, cultural, economic or other trends, you’re dead in the water. I believe my own secret to fundraising success was that I always spoke to the broader changes I saw happening in the world and my conviction about the opportunities they presented.”

— Eoghan McCabe, co-founder Intercom

As an early investor in Intercom, it always impressed me how consistent the narrative stayed from when the company started up until today.

Eoghan’s a smart guy, and I remain impressed by how consistent Intercom’s narrative has been since the early days.

~~~~~~~

The shorter teaser deck is for sharing over email but be mindful that you don’t want to share everything with VCs ahead of meeting your lead partner. Hence the longer deck for your in-person (or Zoom meetings). Remember, it’s a trust building exercise. In a relationship, trust is built over many interactions over a long period of time. You want to show some positive elements to get investors interested, but leave good content in reserve.

Share the teaser deck over email. The longer deck is for face-to-face or Zoom meetings. Remember, your responsibility is to build trust, which is going to take time, over the course of many interactions. You want to show some positive elements to pique your investors’ interest, but you also want to keep some good content in reserve. We call it a teaser for a reason.

~~~~~~~

One thing that Covid has changed is that building a relationship with a VC, with fewer in-person meetings, is now harder. Think about this with respect to your materials. To make up for the lack of in-person face time, you need to find more digital approaches to building this relationship than before. Caitlin Bolnick recently had an excellent thread about this  so consider preparing some of the following extra materials:

A Loom of your product flow explaining how you made key design decisions and how these relate to the use case or market

An appendix of interesting information you yourself have read or viewed that inspired your approach

A compilation of customer testimonials

Covid makes this part of your job especially difficult. Building a relationship with a VC, with fewer in-person meetings, is tough. Think about this with respect to your materials, and figure how which digital solutions will allow you to seed and grow that trust. Caitlin Bolnick has an excellent thread on this topic, which advises you prepare some of the following extra materials:

● a Loom video of your product flow explaining how you made key design decisions and how these relate to the use case or market

● an appendix of information that inspired your approach

● a compilation of customer testimonials

~~~~~~~

You will need more content than ever to help build a shared belief in what you’re doing and why. I typically recommend spending at least 4 weeks building the deck and supporting materials. I find founders realize there are stronger elements they should have included 1-2 weeks into the pitch process. Taking time to get the narrative right and letting your points crystallize will likely result in a stronger deck from the start.

You will need more content than ever to help build a shared belief in what you’re doing and why. Spend at least four weeks building the deck and supporting materials. In the midst of the pitch process, founders often realize which elements not originally included help them make the best pitch. Take the time to get the narrative right. If you build in the time to let your points crystallize, you will have a stronger pitch deck.

~~~~~~~

An important component in building this content is a part of the process I like to call “Hardening the Pitch”. Typically I recommend founders prepare their materials to about 70% completeness and then test them before going into battle. Put together a coherent story with great supporting data (not necessarily heavily designed). Find 4-6 people in your network, who have either fundraised at Series A for their own startup (ideally in the same or similar space), are friendly investors who know the space (perhaps from your seed investors), or even growth stage investors. Practice your pitch with them. Testing your materials and thesis before you hit the full pitch gauntlet will build your confidence and reps on the pitch. It will also provide you with helpful feedback and, potentially, warm introductions to relevant funds. I’ve seen this be immensely helpful in securing strong investment leads.

Batter Up: Get on the Mound and Pitch

You’re a pitcher and, in this stage, you get to “Harden the Pitch.” I recommend founders prepare their materials to about 70% completeness and then test them with live hitters. Put together a coherent story with great supporting data and some modest design elements. Find 4-6 people in your network who have either fundraised at Series A for their own startup (ideally in the same or similar space), are friendly investors who know the space (perhaps from your seed investors), or even growth stage investors. Practice your pitch. Fine tune your content and your delivery. The more reps you take, the greater your confidence. Plus, it’s not just the feedback: it may result in warm introductions to relevant funds. And warm leads can be immensely helpful.

~~~~~~~

“Fundraising can be a lonely experience, especially as you will want to protect those in the company from the highs and lows during your round. Finding some good external people to lean on for vetting your pitch or providing introductions can really help relieve some of the burden on founders.”

— Jonathan Golden, NEA

I generally think you should plan to spend somewhere between 8-16 weeks working on your fundraise from start to term-sheet. You’ll be ideally speaking to 50-60 funds for your Series A. Starting early in the year makes sense, but if you’re in July and contemplating raising, it might make sense to wait for late August or early September to begin your outreach to funds. There are a lot of great jokes I could share about VC vacations in August, but the truth is that plenty of VCs work through August. Just maybe not enough to run a tight process with every fund.

Plan to spend eight to 16 weeks working on your fundraise from start to term-sheet. You should speak to 50-60 funds for your Series A. Start early in the year. If it’s summertime, though, you may want to wait until late August or early September to begin your outreach. VCs, like therapists, often vacation in August.

~~~~~~~

Another factor to consider when you go out to raise is runway. Generally I recommend having at least 8 months of runway when going out to raise. The most important thing is that your business is showing the signs that you should raise Series A. If you only have 4-6 months of runway, it might make sense to raise a bridge round from inside investors to gain leverage in the fundraising process. You will want to continue to show traction during the fundraising process as often investors ask for updated numbers as you get close to the end and a downturn can shake their confidence. It’s really helpful to think about fundraising at least 12 months before you need it so you can time things well. I pulled together a quick fundraising calendar below to help you think about the overall timing of the different elements of your round.

Consider, too, the length of your runway: I recommend no fewer than eight months for a Series A runway, and only if your business is showing the signs noted above. If you only have four to six months of runway, consider a bridge round with inside investors to gain leverage in the fundraising process. Be prepared to show traction during the fundraising process, too. Investors often ask for updated numbers as you get close to the end, and a downturn can shake their confidence. Ideally, you’re thinking about fundraising at least 12 months before you need it, in order to optimize the timing of each phase. Check out the fundraising calendar below, which outlines the overall timing of the different elements of your round.

https://cdn.substack.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F9c45e391-60ea-4a07-949e-5e909cd28a18_1600x621.png

# # #


And that’s a wrap. If you like what you see, drop me a line over here.

Thanks!

Happy writing!

Published by Randal Doane

Living the good life in NE Ohio. I dig science and the written word. Let's build something amazing together.

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