I attended Chris Dixon’s Skillshare class “How to Raise Your First Round” earlier this week. It was my first time meeting the entrepreneur and investor. I learned a lot from his class. Here’s a summary.
Whether to Raise Money
Avoid taking money if you can. Some businesses are not suitable for VC funding. This includes mom and pop stores and companies that can’t scale up to have revenue in at least the hundreds of millions.
I asked whether our current culture of celebrating fundraising as a mark of success is a recent trend or had existed before. A former journalist sitting in front of me quipped that congratulating someone on raising money is like saying “Congrats on your student loan.” Dixon liked this analogy.
How Much to Raise
Raise enough money to reach the company’s next milestone. Then add fifty percent for a margin of error. The type of milestone depends on the type of startup. Potential milestones for technology security, B2B software, and consumer Internet companies are building the technology itself, closing five customers, and hitting 100,000 users, respectively. Running out of money puts companies in an awkward position of having to raise a bridge round. Raising too much dilutes the team’s equity and inflates investors’ expectations.
Dixon thought it was “unfortunate” that the amount raised is often heavily influenced by the external early stage investing market.
The Right Way to Pitch an Early Stage Company
For the first round, pitch the upside of your business not the average scenario. Pitch with showmanship and bravado. Frame the product in a compelling narrative that answers questions like “why now?” Appeal to investors’ emotions as much as their rationality if your company is at an early stage.
The pitch deck should have about eight slides. Show how the team has extensive knowledge and experience in the industries related to its product.
When I asked him how the early state investing climate is correlated with the macroeconomy, Dixon said he thought it was weird how right now the two seem to have “decoupled.” He added that he didn’t know how much longer it would last. “You can’t keep selling iPads to people who don’t have jobs.”
Personal Career Development
Some people in the packed room asked about personal career decisions. One woman wondered if her friends’ advice to break into the startup world by first working in larger corporations was right. Dixon answered that the most direct path to working in a startup or becoming an entrepreneur is to just go for it without taking detours through tangentially related fields.
- Bring bankers or lawyers to the VC meeting.
- Mention your law firm in your deck
- “Come back in a month” = not interested
- “It’s a small idea” = not interested
- Investors often ask “who else is investing?” because the opinions of other investors counts a lot.
How to Save Money on Legal Services
Use boilerplate legal documents to save money on legal fees. Law firms often discount their fees for young companies in the hopes of return business and market rates in the future. Stipulate a cap on legal fees because lawyers will always max it out.