Funding

6 Tips for Raising Your First Round of Funding

6 Tips for Raising Your First Round of Funding
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As the founder of a new startup, you’ll face countless hurdles -- from developing a business plan to building a team -- to acquiring customers and so on. One challenge, however, stands out among the rest: raising money.

As CEO of Placester, I’ve been through a few funding rounds, and I’ve experienced firsthand how difficult the process can be. While I’ve certainly learned a lot along the way, there are more than a few things I wish I’d known beforehand. With that in mind, here are my top pieces of advice for raising your first (or next) round of funding.

Related: The Top 4 Wrong Reasons to Seek Investors

1. Gut check.

Before you take the plunge, double, triple and quadruple check that this is what you want. If you’re not ready to be in it for the long haul, raising money could be a major misstep for your business. The first question to ask yourself shouldn’t be, “Do I need money to take the next step?” That may be true, but raising money isn’t just about funding your business -- it also means making commitments to investors, employees and customers. Instead, ask yourself, “Am I ready to grow or possibly even force growth unnaturally? And am I ready to commit to this growth for the foreseeable future?”

2. Seek advisers, not investors.

Once you commit to raising, it’s typically all you can focus on. When raising, It’s easy to become shortsighted and only cultivate relationships that will directly lead to a check. In reality, it’s important to remember that there are more indirect paths to money than direct ones. There’s a wide variety of potential seed investors out there, and very few of them hang a sign broadcasting it. Because of this, it’s important to think about fundraising not in terms of pure cash but rather in terms of relationships and value.

With that in mind, set your sights on finding advisers, not investors. There are two reasons for this. First, once you choose an investor, he or she is inevitably going to be weighing in on your business decisions. By implementing this person’s advice before their investment, you can test out your relationship and get a sense of what he or she brings to the table as a business partner.

Second, finding investors often means playing the long game. Most non-professional investors (i.e., those who don’t do it for a living) won’t open up until they’ve built a working relationship with you. By asking for advice, you can start building that relationship quickly. Plus, just because someone isn’t prepared to invest in your business now doesn’t mean they won’t invest down the line (or introduce you to someone who will). By seeking advisors, you can cultivate long-term relationships that blossom into something more.

When seeking out these advisers, don’t just pursue CEOs. Instead, look for experienced professionals in operational roles like head of engineering, sales or marketing. These people have a wealth of knowledge to help you with the particulars of running a business. Plus, in many cases, such folks have money to invest or are just as engaged and connected with investors as CEOs. Finally, endorsements from expert advisers will signal other, established investors that you know what you’re doing.

3. Talk to founders who have done it before.

As you’re building your network of advisers, be sure to include other founders who have not only been through the process, but have done so recently. When it comes to startups and fundraising, every city is different, so concentrate on finding folks in your community -- or the community you want to be in. Above all, get to know founders who are just one step ahead of you (about 9 to18 months).

Trying to raise a seed round? Talk to someone who just did it. Looking for a chief technology officer? Try to find someone who just made a similar C-suite hire. The players, the environment, the market -- all of it will be fresh in their mind. Don’t talk to your uncle who raised money 10 years ago in a different city or the guy who just raised an eight-figure Series D.

Finally, be transparent about what you want and where you are, and don’t be afraid to say that you don’t know what you’re doing. We’ve all felt the same way at some point.

Related: How Thought-Leadership Content Can Help Your Company Attract Funding

4. Choose the right type of investor for your business.

Founders looking to raise money tend to focus on the biggest and richest sources of funding. But there are actually many different kinds of seed investors, each with its pros and cons. While there are tons different definitions out there (and some will disagree with mine), I’ve distilled seed investors into three basic categories.

Angels are individuals who invest their own money. Their investments are typically relatively small, anywhere from a few thousand to a couple hundred thousand dollars.

  • Pros: It’s possible to raise angel investments in as little as a few weeks -- far faster than other investor types. Angels also tend to be collaborative, forgiving, and flexible, and like advisers, they provide guidance, adding value beyond the cash.

  • Cons: Angels often want to be heavily involved in a company’s business decisions. If you’re scraping together investments from several angels, that may mean a lot of cooks in the kitchen. This isn’t always the case, however. Some angels may be completely disengaged, making lots of modest investments and paying attention to very few of them.

Super angels are similar to angels but typically have a fund with anywhere from a million to 50 million dollars. They’re often investing other people’s money and treat this as a full-time job -- two factors which make for a slightly more formal relationship.

  • Pros: Like angels, super angels often want to spend time with you and provide guidance. Plus, because they offer more money, you can get away with having fewer investors and thus fewer voices to listen to.

  • Cons: A super angel may expect involvement in your company in proportion to the amount of money they contribute, which can be just as disruptive as having several angel investors.

Venture Capitalists (VCs) have the most cash in the venture community and come from firms that may invest in dozens of companies in markets all over the world.

  • Pros: Deep pockets aside, VCs can bring brand-name prestige that will help you attract great talent and add some external hype to your company. Plus, if you’re doing well, a VC will likely lead your next round of funding. Unlike angels, most VCs aren’t interested in getting deeply involved in your business operations, with the bulk of their contribution devoted to serving on your board. (The exception is a VC who has experience in operations and, as a bonus, can be a great resource for operational advice.) Finally, VCs bring more formality to the negotiating table. While this may not sound like a benefit, formality is a good thing because it forces you to develop and codify the processes that drive your business -- a crucial step for any company getting ready to grow.

  • Cons: VCs typically take the longest to win over -- we’re talking months, not weeks. There are always exceptions, and those exceptions are frequently written about, but expect at least a month or two of work to go from zero relationship to term sheet.

5. Ignore the naysayers, but watch out for the “yes” men.

In your quest to grow your company and raise money, you’re going to hear the word “no” over and over again, in countless ways. Dozens of people, if not hundreds, will simply ignore you. Others will tell you, as politely as possible, that your idea sucks. I had one investor tell me that literally all of our customers -- namely, real-estate professionals -- would be out of business within five years. Listen to their concerns and thank them for their time, then do your best to ignore the negativity and persevere. Even the best ideas face rejection.

While a “no” is certainly disheartening, potential investors who never say “no” are even worse. These are people who string you along for months with assurances that they love what you’re doing and are interested in investing in your business, only to change their minds at the last minute or disappear without warning. “Yes men” can be especially disastrous if you allow them to dictate how you spend money you already have (or don’t have, as the case may be) in hopes of winning their investment. If you’ve asked someone to invest multiple times, and they still haven’t given a firm “yes” or “no,” it may be time to draw the line.

6. Be prepared to give yourself over to the process.

Once you start raising money, you’re effectively on your investors’ schedules, which means you need to be ready to relinquish control of your own. I call this the wrecking ball effect. At some point, for instance, you’ll have an important meeting that was scheduled weeks in advance. An investor will call you and say, “I’m booked for the next two months. I can only meet tomorrow at 2 p.m. Is that okay?” Naturally, you’ll say yes. Then, once you’ve rescheduled everything else around that meeting, the investor will come back and say, “Actually, can you do 9 a.m.?”

Apart from its mental and emotional toll, the wrecking ball effect can be a serious obstacle to running a team and getting things done. To mitigate its impact on your business, make sure that the people around you understand that this may happen often, and that you’ve built a team you can trust to pick up the slack in your absence.

While it’s certainly no picnic, raising funding can be a game-changing moment for your company as long as you’re ready for it. Be sure to stay positive, surround yourself with the right people, and remember: It only takes one yes.

Related: 7 Seed-Stage Funding Sources That Might Finance Your Startup