First time fund-raisers often approach the process of raising capital in an unplanned manner. In this article, the founder of ChargeBee, a subscription billing SaaS startup, draws lessons from his experience of raising angel and series-A rounds for his venture
When I quit my corporate job, a wise man told me “figure a way to stay in business for 36 months. That is like a magic number to stay relevant and if you see through that period, you will have a business to build”. Thinking back after close to three years, those words were very wise indeed.
Four of us, who are also friends, quit our well-paying jobs in mid-2011 and started ChargeBee, a SAAS-based subscription billing company. The best way to build any business is to bootstrap it with customer revenue, provided you get enough revenue to invest quickly and grab the market opportunity. And we did just that. We bootstrapped through the first 15 months, making some mistakes and taking several right decisions while building our early customer base. We decided to keep our nest egg for later and wanted to raise some funds from our friends to ensure we had sufficient buffer.
What started off with a US $40,000 “friends” angel investment, turned into a US $370,000 convertible debt round with professional angel investors. We also soon raised a Series-A round from a prestigious venture capital firm, Accel Partners.
Funding is a key milestone for most startups, as it is a great validation that someone other than your wife, parents and father-in-law is willing to bet on it. The future of a start-up is decided basis the decisions taken during the fund-raising stage. This article, in a nutshell is the story of how we built ChargeBee, and more importantly, key lessons on fund raising we learnt along the way.
The funding lifecycle
Deciding how much money to raise is a tricky one. A Rule of Thumb is to ensure that you raise enough to get to the next stage of your venture.
Expect fund raising rounds to take 3-5 months. Engage an accountant from the early days to keep all the basic housekeeping clean; The due diligence process gets easier. Keep track of all pre-incorporation expenses in a spreadsheet, as all that can be optionally converted into debt/sweat equity (preferably without interest).
Additionally, do not sweat too much about valuation in the early stages especially Series-A. If you extrapolate outcome scenarios, you will realise how little difference a US $3 million vs. US $4 million valuation makes. It is a different scenario if you can raise at US $7 million pre at Series-A stage like YC companies.
Talk to as many investors and get multiple term sheets, if possible. But choose wisely not just based on valuation. You should put higher value for a clean term sheet than a higher valuation.
Hat-tip: Just like employee references, you should discreetly talk to past and present portfolio companies of every investor. You will be surprised what candid feedback you can get through these.
Our angel investors and advisors were very helpful in constantly pushing us to build a team. Rather than trying to do most things in-house to conserve cash, they encouraged us to start building a viable business and build a team (very common trait of a bootstrapper).
Do not underestimate the network effect. Consider every discussion a sale:
When we decided to raise a convertible debt round, we reached out to our friends and received a commitment for US $40,000. One of them mentioned about this investment to his angel investor friend in San Jose. One conversation led to another and we raised US $370,000 as angel round. The lead investor committed to invest US $100,000 in just 3 skype calls, truly an angel. They were most helpful as a sounding board through the early decisions.
Look for expertise in investor team that complements your strengths
Simplify the fund raising process and have parallel conversations
Do not overcomplicate terms
Be ready to walk away from deals, if there is lot of work involved that keeps you away from product development.
Fund raising is a distraction
Fund raising is a distraction, which could keep you away from serving customers or making your product better. Get it to a closure as fast as you can. One thing we did right during our fund raising mode was that, I was the only one who was doing it and rest of the team was shielded from the everyday updates. We had weekly updates.
Find your ‘angel’ or super connector who can help you with introductions and vouch for you and your team. This makes a huge difference.
Talk to as many folks as you can and short list them so that you spend quality time.
When should you raise an angel round? We are in an era when it costs so less to build a product but costs a lot more to reach your target market. Having a working product, with traction, is essential to raise an angel round. This is a pre-requisite for most product startups if you need your investors to take you seriously.
Leverage customer testimonials – find what your customers love about your product and craft your messaging around that. Our customers absolutely love our customer support and responsiveness.
Find adjacent markets but be clear about the ones you are focusing on.
Acknowledge competitors’ strengths and study their weaknesses carefully. There is nothing more compelling you could say than winning a customer from a competitor even with a MVP. Just focus on what is lacking and sharpen your message around that.
Remember, you are “selling” the vision of product and team to investors.
Experience, domain expertise
Assembling a great team with proven capabilities is a great validation of product vision and belief. There is no substitute for that. Understanding your market is a necessity. In our case, we knew SAAS as a segment extremely well because we are developers ourselves and we learnt more about payments and billing from customers and carefully studied the competitors as well.
You need at least one person in your team to be the champion when it comes to domain knowledge. It is very hard to convince an investor when he knows more about your market and domain than you do.
Investors always look for leaders within your group who will at least initially take responsibility for technology, sales, marketing and customer support. One person can hold multiple roles, but be sure he knows enough to validate that.
Term sheets, negotiation, equity
Before starting off, we knew nothing on these subjects. While you don’t need to know any of this to build a great product, you should, however, spend enough time reading all the good blogs on startup equity compensation and term sheets to know enough to have a sensible conversation.
Read Paul Graham’s blogs, bothsidesofthetable.com and venture beat’s dummies guide for raising angel investment.
Learn from the videos of learn startup canvas model, on how to prepare a business plan.
Closing a fund raising round
When we raised the angel round, we kept getting introduced to new people, which is a great situation to be in because of the quality of team. We have to draw a line somewhere to artificially create a deadline and close the fund raise. It is otherwise very easy to stay distracted by talking to a lot of people. Your time is best spent on writing a blog that will help get more traction and not in meetings.
Decide on an 8-12 week cycle to close your funding round completely and work towards it.
If any investor is not sure even after two meetings, ask them directly what would help them make a decision and move on quickly.
Do not compromise on good legal counsel. Get introduced to a good lawyer and consult.
We did not go into a full-fledged fund raising mode while raising our Series-A. But many of our customers raised the question about our background and wanted to know if we will be around. Having a great VC name would take away many of those questions. So we started networking with many investors, but without going into fund raising mode.
Eventually, we were talking only to investors who were helping us shape product vision and with the readiness for a Series-A, more as a discovery for themselves and us. It takes a long time for any VC to commit to a team, so it makes sense to start talking to them on an informal basis and meet whenever possible to build relationships.
Learn the VC side of the equation and what makes them want to invest.
Collaborate than trying to figure answers yourselves. It is okay to ask questions to investors about market size and we received plenty of help. They have tons of data points.
Treat these conversations as discovery phase and opportunity for you to learn about VCs.
In my experience, these are practical yet essential steps to a successful fund raising process. Being prepared is half the battle won. Do not hesitate to reach out for help. After all, we, as entrepreneurs, have to cover for each other. Happy building!