Fundraising – Avoid becoming the biggest scaling problem.
Fundraising – How to avoid becoming your company’s biggest scaling problem.
Francis Pedraza, a serial entrepreneur, sits down with Marzena Kmiecik at the Yerba Buena Park in San Francisco to talk about a startup he co-Founded – Everest and his fundraising experience.
Fundraising is art. I learned it on the job.
I’m not sure I fully learned it. It’s different at different stages. The hard part is that it’s not a science, it’s an art. There’s no answer, necessarily. I think an interesting point to start with before I talk about, tactically, what I learned about fundraising is if you’re the CEO, if you’re responsible for fundraising, you are the company’s biggest scaling problem.
Startups have number of scaling problems. But the founding team as a whole, but particularly you. The question is, even before you launched, the startup is either growing or dying, and if you’re not growing, you’re dying. And it is accelerating. And it’s maturing. It is encountering problems at an increasing rate by definition as it scales. Even before it launches, it’s scaling, in a way. And if you can’t solve problems faster than it encounters them, you are the limiting factor. You are the choke point. If you haven’t already learned these skills, your ability to learn quickly, rapidly about how to solve whatever problems you have is the number one asset of the business. And number one thing you should be focused on. One of the things that I loved about the job is that it’s so challenging. The problems are different at every stage. I’m constantly dealing with a new type of problem that I haven’t solved before. If I’ve solved it before, then it’s easier. It’s like, ah! I remember you. Here are the three ways I can go about this.
In the very beginning, you are so random person in the universe with an idea. The question is what is the next step? And the next step could be trying to raise money right away, or trying to find cofounders. Let’s just say you find cofounders and then you raise money, and then you get to what milestone? And then you raise more money. And then you get to what milestone? And then you raise more! There’s some process there, and there’s a lot of variables. And it depends on the startup, what makes most sense. I think there’s so many ways I can go in this conversation. There’s no way I can possibly give a comprehensive download about everything I’ve learned about fundraising in just one go. So that’s actually why it’s really important for you to have advisers—people who’ve done this before. There are a lot of startup founders in Silicon Valley that you can connect with, and even in any other major technology city, like New York, LA. Get their time. They will be empathetic. I find it so hard to turn down an email from a young founder who needs advice and knows how to ask for it the right way. Even if I don’t have time, even if I’m fighting for my survival, I still make the time, because I get it. I feel for them.
The process for us went like this. I graduated from college. I was staying in this play in Palo Alto. I was living off in my own, on some money that I had saved up, and whatever I could borrow from my parents. And I had this vision, I had this idea. I knew I needed money, and a team, and advisors, in whatever order I could get them. And most importantly was forward motion. And so, my typical day was like two coffees before breakfast, two breakfasts, two more coffees, two lunches, three afternoon meetings, two dinners, two drinks. Try to just pack it all in and build a network. I think the art of building a network is really important. I have a whole elaborate process for doing it. The wonderful thing about the San Francisco bay area as opposed to New York or Los Angeles is that the culture here is nobody’s gatekeeper. If you find someone who becomes passionate about your idea and likes you… I’ve had so many people who just whip open their laptop, and while I’m sitting next to them, jaw dropped, they’d be like, “let me make some interest for you!” ba-boom, ba-boom. And 10 intros later, they’re like, “have a nice day! All right! See you!” and these people are not slouches; they’re introducing you to legit people.
Let’s think about some basic math. If you meet only five new people a week, new high quality people a week, over a year, that’s 250 people. Over a decade, that’s 2500 people. Over a 40 year career, that’s 10 thousand people. That’s a lot of people. And most people just aren’t organized enough to stay in touch with those people and cultivate them to the level which is possible. I think Keith Fraze was recently introduced to me, and I’ve been reading his book, and I read alone. And one of the things he’s very wise about is generosity. You should try to create as much as value for these people as possible before asking, if you can. You don’t want to be a taker. And you don’t need to have any wealth to be generous. I remember my first three months in Silicon Valley. I tried to make as many intros as I received. Which was so weird and bizarre, but people really appreciated it. In your own ways, you can show generosity by helping people. And also having the integrity to know that even if you can help somebody back now for something they’ve received—people don’t necessarily want to immediately be helped in return because then they feel like there’s a transaction. But knowing that you in the long run will make sure that you pay them back or express your gratitude. It’s important.
Your network should expand non-linearly. You shouldn’t be meeting 5 new people a week. You should be meeting 5 new people a day. And at that rate, what’s the math? Do the math. You should be working six days a week, so five times six times four times twelve ends up being a lot of people. So here’s an interesting story. I had an intern, John, who is amazing. Who sort of landed at our doorstep, basically. His university was paying for him to do an internship at Silicon Valley. And he was as green as can get. But he was humble and motivated. This is sort of one of his first major work experiences. So I said, look, here’s your job: figure out all the people I know that know people I want to know. And as a result of that, we ended up getting some three ridiculous investors on the board. I wish I could say who they are, because that would make the story that much cooler. And so, there’s that.
Sales, which is what fundraising is, is more about process than it is about persuasion. A good formula in your mind is sales equals process plus persuasion. The persuasion side of it—there’s a lot of tactics. You can learn about how to be more persuasive. I think the one lesson that is more than all of them combined is if you can truly believe that given everything you know about the other person, if you were the other person, you would do this thing that you’re asking them to do? Its called integrity selling, which is book by Ron Willingham by that title. Do that. Sell with integrity, because I know if I were you, I would do this. It’s in your interests. That works. Because people are so good at picking up if you’re just in your mind about what you want and if you’re scamming them or you don’t truly believe it makes sense for them. So that’s on the persuasion side. Most people try to improve—they try to look for all the gains on the persuasion sides, and that’s a massive mistake, because there’s just probably not that much room for you to improve. Let’s just say you can be twice as persuasive. I think it is harder to be twice as persuasive as it is to be ten more organized and ten times more process driven. You’re trying to exact these little gains here, when there are huge gains on the other side. What I mean by that is, let’s just say you were twice as persuasive as you are now and you’re trying to ask me for money. You could still fail and get nothing, right? But if you talk to ten people, maybe you get one. And if you talk to a hundred, maybe you get ten. And most people just don’t do enough prospecting. There’s so many stories that I’ve heard about people seeking venture capital, where they’ve been to forty firms. And the fourth third gives them the check. Seriously! Hotmail is a great example of that. A friend’s company I can’t disclose just did it. They were shocked. And it happened! And I think realizing that there’s—startups have this Van Gogh problem. Van Gogh created art. At the time, nobody thought it was art. They thought it was just paint on canvas. Nobody appreciated it. Literally—just some random dude, just creating this stuff and it’s not valuable. This is shit, all right? And then he died, and then at some point, everyone realized, this is great work. That is the problem a lot of startups deal with. The question of what evaluation should you get is totally depending on whether the world understands what you’re building is art yet or not. And whether you can convince them that it is art. Value is subjective. The nice thing about fundraising is that success is inherently always around the corner. There’s always one person who can give you 10 million dollars. There’s plenty of liquidity in the world. There’s plenty of capital in the world. It’s just, can you find that person? And realizing that progress is so nonlinear. For every meeting, you don’t get x dollars. You don’t get x dollars, you get 0 dollars for a hundred meetings, and then you get all the dollars in one meeting. It’s maddening, actually. I could just keep going about fundraising. I think I should, before shutting up, walk though a basic process.
The seed fundraising landscaped is so effed up, and nobody is talking about it, I think. I just heard a blog post. I stayed up, busy day, crazy week. It was midnight on Wednesday and inspiration struck me and I didn’t sleep. At 8 am I published this post, it’s a 30 minute long read, so it’s long. You can find it on medium.com, and just type my name. And it got 25,000 views in the first 32 hours! No promotion, it’s just on a blog, because I said stuff that people had been afraid to say. There’s some history. I think that basically—I’m using the word basically a lot. That’s basically messed up. Over the last couple of years, since I came to Silicon Valley to today, has been a giant education in the capital markets, in the risk capital markets, the venture capital markets. Markets are not efficient. Efficient market theory is a good way of understanding basic economics, but when you’re actually in them, they’re not efficient. There are startups that are getting irrationally high evaluations and getting funding that I think shouldn’t, and again that is my opinion. And then there are startups that should be getting funding, or should be getting reasonable amounts of funding, and they aren’t. And I think that’s because there are very few investors, like most people, most investors operate on flocking behavior. There’s a round coming together, and so and so and so and so is in it. Do you want it? Yeah, definitely. There’s an opportunity that is disappearing on Friday, and this could be the next Twitter. It’s fine if you pass on the deal, but if you do and it is, then your firm is going to hate you and you’re going to get fired. And then fear, boom. They come in. I think there’s a lot of psychology in fundraising.
The capital markets have structure and need to be understood. In the past, venture capitals firms used to fund startups right at the beginning, or almost right at the beginning. There’d be a small friends and family around of 100 to 300 thousand and then you could get Kleiner Perkins to give you a million bucks or three million bucks. They would take a board seat and there would be an equity round. You’d perform, and probably get to the next level. That’s not happening. It hasn’t been happening for seven or so years at least. Because costs went down to start businesses and all of sudden it costs only five hundred thousand dollars to get a product to market, and about a million dollars to build a business model around the product. There’s a lot of wins. So Angel investors came in and started making lots of bets. This huge market of Angels, all this seed capital came flooding in. And these seeds were fine with that, because they can raise bigger funds and take later stage bets. These seeds went out of the seed game and went into the A round game. And then mobile came along, and also quality in general has to go up because you have to build such a better product today than you had to build seven years ago to be good enough. I think it costs a million dollars to launch something interesting. And probably another one to two million dollars to build a business model around it, build business. Because a lot of this stuff is happening on mobile, there haven’t been a lot of winds on mobile. So Angels is trying to get burnt out, and what happens is that Angels are funding up to a million dollars and then it’s really hard to get Angel funding beyond that. But that’s still too early to raise the A round. So you hear about the series they crunch? That is the series they crunch, you haven’t built the business yet, you’ve launched an interesting project, and Angels funded you, now you’re screwed.
Angel app tightening in general is low right now. Markets, when I say they’re irrational, right now, there’s a lot investing in enterprise, software and services businesses. Non consumer businesses. Everyone’s leaving one space and going into another because that’s space is perceived as safer. And markets go through these cycles. Eventually, enterprise won’t be hot. The consumer will be hot. If you’re an entrepreneur and you’re entering into this chaos, and you don’t understand it, you’re going to make mistakes. And that’s okay! But do your best to bring people around you to help you navigate this chaos. If you’re Mark Zuckerberg, find Sean Parker. Find Matt Cohler. Find these people who can help you navigate it, put you on a trajectory, and groom you. And think about company development or company building as distinct from product development, or product building, or business building, or business development. There’s an art to grooming a company for success, navigating all this, and getting through. In my experience, through my observations of my last network over the last 2 years and what has worked and what has not, companies don’t fail because they build a bad product that nobody wants. Companies don’t fail because they don’t have an amazing idea, and companies don’t fail because they don’t have really amazing competent founders who are capable of getting the business the next milestone. They fail because they can’t navigate all this craziness. This craziness is really complicated and most people don’t realize that they’re playing in this game. They don’t even realize the game that they’re playing in. They’re not getting adequate feedback.