Ever since we were featured in TechCrunch, twice, with what the journalist described as a “party round, with no obvious lead investor, though it’s hard to argue that this is anything other than an impressive list of entrepreneur-backers from the ecommerce, retail and SaaS worlds”, I regularly get asked to give some guidance to startups just starting their seed fundraising journey. At Ometria, our group of investors is something that we are extremely proud of – each one is “smart money”, each one regularly brings value to the business, and each one is someone that I personally admire for their achievements. But this didn’t happen by luck. This was the outcome of a carefully planned and executed strategy, and the culmination of many years of work.
Raising $2m dollars from angels is not easy. Rounds of this size are typically VC rounds, with a few additional angels involved on the side. So the very first question to consider, before even starting out, is whether you can, and want to, raise your seed round from a VC firm. And note that the two are entirely separate questions which require their own independent analysis.
Many factors can affect your ability to raise from a VC firm. The obvious ones have been discussed many times, by many VCs, in many blog posts. But in reality it comes down to something much more personal, to something much more subjective. I know some founders who have raised seed rounds of our size from a VC with nothing – just an idea. Quite a few actually. They’ve all had successes before, and those successes generated returns for those specific VCs. They were a known entity, a de-risked opportunity, and hence other variables were irrelevant. And I’ve also known some first-time founders raise a huge pre-revenue VC seed round, based on a massive vision and a great experienced team around them. So it’s certainly possible to raise your seed round from a VC firm, however early you are, but you have to be highly objective yourself, compare yourself to other teams out there, consider your risk profile in the subjective eyes of the people making the decisions, and decide whether it is worth carrying on pitching to them.
On top of this, you have the question of whether you actually want to raise your seed round from a VC. One of my friends, a CEO of a much larger SaaS startup, told me very clearly over breakfast before I started fundraising, that if we could avoid it, we should. The signaling risk was too much. While you’re still early stage, there is a chance of needing a pivot, and there is a chance that your projections were not accurate so actual revenues won’t match predicted ones. If the VC takes this the wrong way and doesn’t follow on, your chances of raising the next round drop dramatically. In addition, the VC will inevitably have terms which are against the interests of the founders – a board seat with veto rights, monitoring and legal fees, the list is long..
Having considered these two points at length, we decided that a VC round wasn’t right for us. We already knew the person we wanted to have as investor director. She had amazing experience and a very sharp understanding of the industry and what we were doing, and I already had a good professional relationship with her. We knew what terms we were and were not comfortable with for the investment, and had written up a term sheet ourselves. And we were pre-revenue, with a great team of four founders who had built businesses before, but not in this particular space. It would have been too hard to get the buy-in for a large VC seed round, and if we did manage that, the terms on us would have been too onerous.
So that meant that the right approach for us was an angel round. I was expecting this to be the case, well before we actually started the fundraising process. We are building a SaaS company, with a complex product which requires lengthy research and development, and a high-touch sales process which requires significant organised sales and marketing. And what that really means, is that we will need capital, regularly, for a long time, and most importantly, always ahead of the next target, not after it. Before starting out, before building the team, I needed to know that I could get that capital, that I wouldn’t just end up wasting my time, and the time of the amazing people who believed in me.
One of the things that people worry about with angel rounds is “managing investors”. When people find out how many angel investors I have in Ometria, they typically make a horrified face and ask whether I spend all day every day responding to irrelevant questions. And for me, that was actually the original bar for choosing which angels to work with. As soon as one would ask an irrelevant question, a question that would make it seem like there were more such questions to come, I would politely tell them that we had different points of view on angel investing, and that Ometria would not be a good fit for their portfolio. This happened many times, and was absolutely the right thing to do. It has left me with a group of people who will not ask me irrelevant questions – they will ask me hard questions, and that’s something that every founder needs. I need to be pushed past my comfort zone, I need to reconfirm that our strategy is correct, that what we are doing is right. Of my shareholders, a number have built billion-dollar businesses, more than half are founders, many are experienced VCs investing as individuals. They know what they’re doing, and I’m always glad to receive any questions, or advice, that they have for me.
So back to the fundraising process. Approximately a year before I started the company, and two years before we raised the round, I started building relationships within the investment community here in London. I went to as many events as I could, met many people for many coffees, and became a known entity. I started making my own angel investments, and wrote a blog post about my reasons for doing it – I made it very clear that I was only investing because I wanted to build a network of exceptional people with whom I could build businesses. The fact that I was going to start Ometria was known well in advance. The first dot was set. The line started to be drawn.
But I knew that it would be extremely hard to raise money for just an idea, so after I built the founding team (and that deserves its own blog post), the four of us came up with a plan and did a founder investment round which gave us runway for the first year. The key was to get a product out there, and get a sufficient amount of data to confirm that people were going to like it enough to pay for it. This was the goal that we set for ourselves, and the one that we needed to hit before we even considered going out for external funding.
To us that meant not revenues, but engagement metrics. The line in the sand was for people to use the product once a day. When we discovered that the actual number was typically up to 5-10 times a day, we knew we were ready. We had the evidence we set out to get during our first year, and now it was time to get some capital, expand the team, develop the product further, and bring it to market. We had the founding team, minimum viable product and initial traction that we needed to get investors excited, and we had a clear plan for what we were going to do over the next year.
We set a valuation that was reasonable. I still think that this was by far the best decision we made. We could have raised at a much higher valuation – I see seed rounds happening at £4m pre-money these days – but we knew that the calibre of people we would get would be much lower. Instead we slightly underplayed it, we went in at a valuation which was “hot”, because we were not just some wannabe company, but below the median for hot companies, so it was never an issue in the decision process. We never had a single bit of push-back on the valuation, because there was genuinely no need.
The second decision we made was to have the absolute best due diligence pack a seed stage investment has ever had. A pack that would get past a Series B VC due diligence process. We had monthly board meetings since the launch of the company, and I wrote up shareholder reports after each one and sent them round to the shareholders. Who were the same four founders who were in the board meeting. While this may have seemed pointless, my vision was that I wanted everything about the company documented, so I could present it to any potential investors, and they would immediately see the high bar that we set for everything we do. Almost every single investor commented on how detailed and impressive the due diligence pack was. It had all of the monthly board reports and summaries, monthly financial accounts, all of the relevant incorporation documents, agreements, contracts, IP assignment. Every single thing that I’ve ever seen asked in a due diligence process, I anticipated, and ensured was included in the pack.
We started out with a plan to raise $1m. A nice easy seed round that we could close without spending a long time on it. This would have been enough to expand the team and last us for 12 months, with a clear plan to get to a revenue target and then go out for a bigger round. Having spent the previous two years getting to know many investors, it was not a case of reaching out with an investment deck, but rather catching up for a coffee, explaining that we had reached the target we had set for ourselves ahead of opening up a public funding round, and asking whether they would be interested in getting involved with the company.
Within a week, we had approximately half the round confirmed. With previous knowledge of both me and the company, with the engagement metrics we had, with a reasonable valuation, and with the ultimate due diligence pack, there was simply no reason for an investor in the market not to invest in us. The only reason was if they were not currently investing, which was completely understandable.
Having half of the round confirmed, from intelligent and experienced individuals, made it much easier to have conversations with people with whom I did not have a relationship. I tried some cold approaches, something I’ve analysed previously, but these did not work very well at all. So instead I identified specific high value-add individuals and worked out the best path to get a warm introduction to them. Founders who they had previously invested in, employees who were my friends, investors in their business – I asked many different people for introductions. And then I explained what were doing, with a typical short paragraph in an e-mail which contained a deck and an executive summary, and asked for a coffee or a Skype.
Many were too busy, but would ask some questions over e-mail, which I would respond to in detail. A number wanted some additional social proof. A few introduced me to retailers, so they would use our product and provide feedback. All of these became paying customers during the fundraising process, and so all of those investors agreed to invest. Some introduced me to other investors, who had more experience in our specific area, and then when those ones agreed to invest, so did the original ones. The key was, our product was good, and retailers wanted to use it, and our plan was solid so we had all of the answers to any investor questions.
So slowly, the round started getting filled, and the individuals getting involved became more and more experienced and well-known. And at this point, we experienced the angel round equivalent of a hockey stick revenue curve. The existing investors started introducing new ones as they saw the momentum in the round build. There were some people who I simply couldn’t get to invest, but I really wanted to. Seriously relevant, seriously value add. So I e-mailed them, and I attached a list of our confirmed investors, carefully put together by me with a one-sentence summary of their greatest achievements, and a link to their LinkedIn profile. And one by one, each of those other people agreed, so I added them to the list, and sent it on. We smashed our target of $1m and got up to $1.5m, and even then we continued to have more interest.
It was the end of the tax year, early April, and certain investors wanted their EIS exemption to be in that specific year, so we had to put a hard-stop date on the round. I emailed everyone to explain this, but I was still getting introductions. I remember having a Skype call with someone I’d never spoken to before, someone whose experience overshadows mine by such a crazy amount, and having to tell him that I needed an answer by the end of the call. He said he’d get back to me tomorrow, and I said we needed to close now. He said he’d email me back in the afternoon, and, hands shaking, I told him that I needed to know now, before the call was done, because the paperwork was being sent out to investors immediately afterwards. Because it really was.. But saying that just seemed ridiculous. He agreed.
So our round was bigger than anticipated, and we closed it, excited to take the next step in building a great SaaS business. But momentum is not something that simply dissipates. The whole point is that it continues until a force is applied in the other direction. So even after we closed, the introductions continued. People were disappointed not to have been able to participate. We ended up with another $500k on the table, from people who were just as relevant, from people who I really wanted to work with. So once again, we thought hard, and made the right decision. If your company is capital-intensive, and people are offering you money, and they are people you want to work with, it is literally ridiculous to say no. So we extended the round once again, and took a further $500k taking us to a total of $2m.
We’ve now got quite a long time before our next raise. Potentially end of next year, but more likely early 2016. We gave away the typical 20%-30% of the company for the round, which is absolutely fine with us. Our board has some amazing people on it, with one director and three advisors together with the four founders. Our investors have helped us with everything from introductions to customers, to modeling our future financials, to perfecting our product-market fit, to working out what potential acquirers are looking for so we can keep that in mind. I organise investor events every few months, and I try to arrange to see each investor for a breakfast or coffee regularly as well. Our board meetings now run every six weeks, but I still spend half a day afterwards putting together a detailed shareholder report, sending it to each of the investors, and asking for their thoughts and feedback. I’ve never been annoyed by this process, or thought it was a waste of time. And I’ve never been annoyed by their questions – instead I know that I am maximising our chances of success by leveraging the collective experience of this amazing group of people.
Chances are, our next round will be an institutional one. We’ll need a lot of money to scale Ometria up. And at that point things will change. The board will change, our ability to direct the company will change. That will be a separate decision – one we will spend a long time analysing to make sure that we do the right thing. But with our seed round, I cannot imagine things having worked out better.
I’m aware that this is quite a long blog post. So here’s a summary of my main learnings, and the main takeaways if you want to raise an angel seed round for your tech startup.
1. Work out whether you can raise from VCs, and whether you want to. If you can’t, or don’t, then don’t waste your time.
2. Build relationships with angel investors well before you start raising, and preferably before you even start the company. Get their input. They are smart.
3. Keep a high culture bar for your investors, in the same way as you do with employees. Don’t accept someone who will waste your time. It’s not worth it.
4. Work out what metric will provide sufficient proof that you have initial traction, validate it early with investors, then put the line in the sand and only start raising after you hit it.
5. Don’t go out with a high valuation just because you can. Go out with a valuation which is acceptable to the most important person you want as an investor.
6. Put together the ultimate due diligence pack before you even start. This means documenting everything you do. Don’t leave this until you are asked for it – send it in advance.
7. Build momentum. Once you get hard commitments, and make sure this is explicit and that you’re not guessing, leverage the names of those investors to get others to commit.
8. Put a hard-stop date on the round, for any reason. Tell everyone about this, and use it to bring the round to a close.
9. If you are offered more money, by smart people, always take it. You’ll need it.
10. Leverage the experience of the amazing investors you get. That’s the main benefit, not the money. But it’s up to you to make the most of it.