In the world of start-ups, ideas are the starting point… but only the starting point. The age-old maxim applies: execution is everything. And usually, execution requires capital. That means knowing how and where to raise cash is a major barrier to entry—this is the most common way startup ideas fail.
Knowing how to raise money and understanding the nuances of funding, negotiating, and interacting with investors is critical to your company’s success in getting off the runway. Here is some advice I wish someone had told me when I was just starting my company, Vungle:
Go Talk to Your Customers
One of the best pieces of advice I got early on in the development of Vungle was to go and talk to my potential customers. These conversations catapulted our company into being; they gave us critical information about the market, provided proof to investors that there was tangible demand for the concept, and helped us tailor the rest of our journey to better suit their needs.
Through a great deal of persistence, my team and I were able to participate in an incubator program called AngelPad. But when we arrived, we found a constant pressure to pivot from our original idea. When you’re in the process of creating something new, it can be hard for others to see what you see. Without degrees from MIT or Stanford to back our crazy assertions, we became the joke of our class. We had to prove ourselves. But in those beginning days, we didn’t have an engineered product to sell—no prototype, no working program. All we had was an original idea, a vision of how things could work, and a concept for how our potential customers could increase their revenue.
There’s a saying that goes, “You can have everything you want in life if you help enough people get what they want.” The core idea behind Vungle was to help developers get more users, and therefore more profit, by building a platform to show video ads in mobile games. In our early conversations with our first soon-to-be client, we explained how the platform would work and asked, “If we can help you get users, how valuable would that be for you? Would you be willing to pay us per user? If so, how much?”
They said they would pay us one dollar per user. We asked “If we can show your ad to 5,000 users, you would pay us $5,000? Okay, great.
There’s a saying that goes, “You can have everything you want in life if you help enough people get what they want.”
The core idea behind Vungle was to help developers get more users, and therefore more profit, by building a platform to show video ads in mobile games. In our early conversations with our first soon-to-be client, we explained how the platform would work and asked, “If we can help you get users, how valuable would that be for you? Would you be willing to pay us per user? If so, how much?”
They said they would pay us one dollar per user. We asked “If we can show your ad to 5,000 users, you would pay us $5,000? Okay, great. Are you willing to put that in a Letter of Intent?” They agreed.
We continued to ask for letters of intent to many other potential clients. Before we knew it, we had several hundred thousand dollars in pre-orders, even in the absence of a working product. By connecting with our target audience, discussing their problems, and explaining how we might solve them, we were really able to see what they needed, and what the market would bear in terms of pricing.
Pre-Orders are Paramount
With pre-orders in hands, our conversations with investors drastically changed. We even got the former founder of a major competitor to invest in us. He introduced us to a few other investors, and we very quickly gained traction and raised the rest of the money we felt we needed to get started.
Raise More Money Than You Think You Need
All of this happened before AngelPad’s scheduled “Demo Day.” At the end of our presentation on that day, I explained to attendees that we weren’t actually accepting any more money from investors. We had finished our first round of funding. People were understandably upset, so I said, “If there’s anyone that feels they can add strategic value to our efforts, we’re open to exploring how we could possible work together. We might be able to increase the round size.” The moment we stepped off the stage, we were swarmed. Investors were approaching us with checks in hand, ready to go. $300,000 turned to $500,000, which then turned into $1M and finally $2M. At the time, this was an unprecedentedly large seed round. We called it a ‘party round’. These days, early-stage funding more commonly reaches that level, but at the time, it was completely unheard of.
Although there were downfalls (the round was diluted), raising that much money at the very beginning changed our story. I don’t think we would have survived our first year had we not had such a large cushion of capital to see us through.
Raise Money When You Don’t Need It
Momentum is a very real, dynamic and driving force in the startup world. Even without pressing expenses, payroll, or immediate need, it’s important to continue your raise efforts. By the time we were ready for our Series A round, we only had a few months of cash left in the bank. If we’d only raised $1.5M, we probably wouldn’t have been able to make the moves we made. Cash is king when you’re trying to build a company—it’s the kind of need you’ll never be without.
Understand What You Are Giving Away
At the time of our seed round, I had a big idea but no money, so I was grateful to partner with these investors. However, there were some terms that were not standard-a 3X liquidation preference and quite a high interest rate that was accruing. Looking back, I wish I had a better understanding of some of the detrimental terms buried in those agreements. My story worked out in the end, but I’ve become a strong advocate for standard terms to protect budding entrepreneurs. I advise any founder to slow down and make sure they understand in depth the term sheet they’re signing.
Obsess Over Prospects
Don’t be afraid to ask for introductions, build a referral system, and network your way to more customers. As a founder with an idea that could completely disrupt your industry, it’s your job to obsess over getting your product in new hands. If you are in the B2B space, check out the portfolio of your investors. Look to see if there is anyone on their list who might be a target customer. Your investors have a financial interest in your success—it’s completely appropriate for you to ask for an introduction to their connections or portfolio companies.
Those conversations can have endless benefits. At the least, it will generate feedback from the connection regarding the product or service offered. Hopefully, there’s a win in it for the portfolio company, who gets introduced to a new technology on the ground floor level. And ultimately, going out on a limb like this can lead to more leads, more consumers, and more revenue for your investors.
Build Relationships With Other Founders
It is common for founders to introduce investors they know to other founders, but it’s important to respect a founders’ community and the position they hold in that community. It’s a big ask; they are not going to introduce anyone right away. Founders like helping each other, and they know first-hand the power of relationships in the early stages. But if founders introduced every entrepreneur, without regard for the quality of their business idea, it would dilute the meaning of the connection, and investors would lose their trust in the founder’s judgement.
If you’re a founder who is looking for investors, make sure you’re looking for a true fit. The best way to do that is to build an authentic relationship with the people you meet along the way. Be upfront about your idea, transparent in your enthusiasm, and honest about the way you want the interaction to proceed—the investor can discover for themselves whether or not they’ve found the right fit.
Stay close to your customers; they should be the most prominent guiding force in your journey to success. Build relationships with investors but understand the details of the formal relationship you are establishing with them. Leverage relationships with your investors and other founders judiciously and you should be able to raise the funds you need to get your great idea off the ground.