From $100k -> $75M - this week's fundraising lessons

Good morning!

Welcome to another edition of the Product in Public newsletter, where I give you an inside look at how I help companies attract capital and build better products.

Today I'm sharing some lessons from working with two companies that were fundraising vastly different sums of money.

If you want the short version, check out the summary below. Otherwise, scroll down for the TLDR version.

As always, thanks for being a subscriber!

Summary of today’s post

  • The amount of money you can raise is dependent on the phase of growth. Ex. seed stage startups should not be attempting to raise more than a few million dollars.
  • Storytelling is critical to designing an attention grabbing pitch deck. If you aren’t versed at storytelling, you need to outsource your design efforts.
  • Passing on revenue opportunities can be hard. But, it becomes easier when you recognize the likelihood of earning the revenue you are envisioning.

A tale of two fundraisings

This week I had the opportunity to look at two different fundraising opportunities totaling $75,100,000 in capital.

That is a whole bunch of moneHere are!

What’s interesting about that total is the disparity in the size of each deal. One founder was looking for $75,000,000 for their startup and the other was looking for a mere $100,000 for their startup.

In working through each of those opportunities, I noted a few lessons that I want to share with you.

Although there are some unique points, today’s lessons can apply to just about any startup looking to raise capital. So, make sure to take notes.

Fundraising opportunity #1 - $75,000,000 in equity funding (investors)

This was a startup in a space where I have not seen a lot of requests for fundraising - agtech, or agricultural technology.

This particular company was making a play in the mineral space. Here are a few things I noted with this opportunity that might prove helpful for you to note.

  1. Their ask was way too big for an initial round of funding.

The average seed round, based on my direct experience, caps out at around $1M-$2M. This ask isn’t off by just a 10x factor of that, they are off by a 35x factor. Few investors are going to give a company $75M at the seed stage.

  1. Understand your target investor.

This point is similar to #1, but I wanted to drill deeper into one aspect.

I was honored to be asked to help this startup fundraise, but looking back I was the wrong consultant to ask. Why? Because all of my investor contacts are angel investors. I have venture capitalists and private equity contacts, but I focus on deals that angel investors would be interested in. First, because I am an angel investor myself, and second because that is where I feel like I can add the most value.

When you are fundraising, you need to be very targeted with the type(s) of investors you are seeking. By showing your deal to the wrong investors, and consultants who have the wrong investor contacts for your type of deal, you are wasting everyone’s time including your own.

  1. More startups are terrible at storytelling.

Although I’m focused on these two deals, I looked at a third deal this week that had the same challenge - the founders were terrible at telling the story of their startup.

For this larger opportunity I received 5-10 documents, each outlining various aspects of the opportunity. Every single one of them was far from concise and efficient in their storytelling. The biggest issue this large opportunity had was that they used super generic language. So much so that I had a hard time understanding what they were building.

I often see this with startups where the founder(s) have science backgrounds rather than business.

If you don’t have someone on your team who is great at storytelling, both orally and visually, hire someone to help you craft the story.

After testing the waters with a few investors, I eventually decided to pass on this opportunity. The chances of them successfully closing a round of funding were low in general and I didn’t feel like my investor network was right for this opportunity.

Some people might struggle with the idea of passing on a $75M deal. After all, such a deal could be worth upwards of $1.5M to my business.

But, it wasn’t a hard decision, because I know my target market and when I can/can’t add value. This was one of those instances where I was going to put in a lot of work with a super low probability of gain.

Fundraising opportunity #2 - $100,000 line of credit

Opportunity number two came via referral from a banker. His financial institution was not able to help this startup because of their limited length of time (the business was less than one year old).

While it’s common for a traditional bank to want to see two years of experience in business, I still believed that getting approved for a line of credit, with other lenders, was viable.

There were a few reasons why:

  • The founder had successfully exited a prior business.
  • They had a ton of experience in their industry.
  • There was already close to $1M in revenue, in less than one year.
  • Multiple contracts for additional revenue had recently been executed.
  • The industry the business was in, government contracting, is one that the SBA likes.
  • The founder was a veteran and the SBA has programs specifically for veterans.

With all of that going for the business, I thought there was a real chance to help this startup.

However, I eventually had to pass on this opportunity as well.

Here’s why:

  1. the opportunity is smaller than my typical deal size.

I only work on deals that are $500k or larger. I did put some time into trying to source this deal, but only because it was a referral from a new referral source (thanks Michael!) and I wanted to try to be helpful.

  1. the founders weren't open to the most viable loan type(s) for their situation.

Since the business was so new and the business had multiple contracts signed, the vast majority of lenders leaned towards invoice factoring. This is a more expensive type of financing that the founder was not open to exploring.

I completely understood his stance. Again, factoring can be expensive. But, when a business is so new, it's one of the only forms of capital that is readily available.

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