On this episode of the podcast, I interview Michael Cardamone and we discuss fundraising tips for founders.
Michael Cardamone is the CEO/Managing Partner at Forum Ventures (formerly Accleprise) which is a B2B SaaS focused seed fund & pre-seed accelerator with locations in SF, NYC & Toronto
The type of companies that will benefit from raising rounds
Raising money and venture capital is not for most businesses. It makes the most sense when you think there is an opportunity to build a massive business such as a $1 billion type of business. If you have the ambition and desire to build that kind of business, often times you are going to need funding.
If you are also in a market where the dynamics is winner takes all or winner takes most and it is competitive, oftentimes raising money can allow you to move faster than other companies in the space and therefore can be a big benefit for you.
It depends on your personal ambition, the kind of company you want to build, how big the market opportunity is and the market dynamics.
The next steps for a SaaS Company that has product-market fit, lots of paying customers and is ready to raise a seed round
Every company does not need to be at that level before they raise seed round because we see everything from zero revenue to what you described raising seed rounds. It is less about a specific customer number or a specific amount of revenue rather it is more about if you can talk about how your market is evolving with clarity and conviction, how you can win in that evolving market and why if you win it is going to be a massive company.
You also need to think of the risks associated with your business or perceived risks that investors might conjure up in the conversation and the data points you have to make investors comfortable around those risks. Sometimes customers and revenue might be a big part of that but it doesn’t have to be that as it could be other data points or signals that get investors comfortable underwriting certain risks that they perceive around your business.
It also depends on the background of the founder, their execution in whatever they were in as well as the experience and connections they have in their industry.
Concerning tactical steps on how you go about it, you need to know how much you want to raise and why you want to raise that amount as this will determine the kind of investments and funds you go after.
You basically want to run it like a sales process. We have found on average that companies that want to raise a seed round have to do about 40+ intro meetings to get to a term sheet.
Then you can start to find investors that are a potential fit for your stage and company through your AngelList or Signal or Crunchbase so that you can figure out how to navigate to those investors.
I don’t recommend mass outbound emails because I find that they don’t get good response rates. Increasingly especially with COVID, I find that investors are more open to receiving cold emails but I think it needs to be a very direct and personalized cold email that is tailored to that investor. I think you will have a lot more success if it is a one to one email or you can navigate through an intro from someone in your network.
How to raise funds at a faster rate
We recommend a lot of our companies to put together a data room which has the things investors typically ask for such as customer contracts and pipeline reports. The more information you can share on demand, the quicker the process will go.
You can also condense the meetings in a shorter amount of time so that will inherently create urgency and momentum in the fundraising because you are having a lot of conversations.
Take time after each conversation to think about the questions they asked, the things they seemed hung up on and the risks they are worried about. If you don’t think you nailed the answers, go back and write your answers down and run it by other people and get feedback so that you are constantly iterating and improving on the pitch as you go through the meetings.
How to come up with the amount to raise
One of the things I see a lot of founders do which is a good way to think about it but not the right way to portray or narrate it when you are talking to investors is, what do you want to accomplish over the next 24 months and what do you think you are going to need from a resource team, your marketing spend standpoint to get to those milestones and how much will it cost.
That is hard to do for an early stage company that is still figuring out its ICP (Ideal Customer Profile) and you don’t really know what the sales funnels metrics look like.
A lot of times it is more of how much momentum do you have as a company, how big is the market opportunity and how fast do you need to move. You want to make sure you are raising enough to get you to the milestone for whatever that next step is such as Series A or it could be to get profitable.
The amount you are going to raise is going to dictate valuation more than almost anything at this stage. It sounds ridiculous that valuation is based on that at seed stage.
It is really like all of these rounds get done at basically 15% – 25%, on average it is about 19% – 20%.
If you are raising $2million, it will often get done at 8% – 12% on average around 10% (consider deleting). (11.31 – 11.47)
The more you raise the higher the valuation which has its own implications coupled with its pros and cons. The lower you raise, the ownership starts to break down a little bit because you are going after smaller funds and angels care less about ownership targets but institutional seed rounds and the funds that meet those rounds tend to care a lot about ownership and so a lot of the valuation is driven on the amount you are raising.
Ways to raise a seed round
There are multiple ways to raise a seed round, the most common way is you go out and pitch a bunch of firms and try to find a lead investor who is going to be the one setting the terms, oftentimes writing the biggest check and sometimes taking a board sit if it is a priced round and you can fill in around the lead investor.
If you are raising a $2million round, the lead investor might come in with $1million – $1.5million and you can fill in around with smaller funds or angels. That is the most common way to raise an institutional seed round.
A lot of times you can just raise what a lot of people call party rounds without having an official lead investor.
Fundraising mistakes most founders make and how to avoid them
It is an interesting time right now in early stage and you read about all these crazy rounds on TechCrunch and founders often get fixated on how did that company raise that with that revenue and I don’t understand, I have more revenue than them.
They need to realize that it is not a specific revenue number and you will be able to magically fundraise, it is more nuanced than that. Founders need to think about the narrative, every investor says they want to invest in a great founder but what does that really mean.
The way I think about it and the way I a lot of investors think about it is would you like to work for this person, would this person be really good at recruiting great people around them and a lot of that comes down to can you talk with clarity and conviction around how your market is evolving, why you are going to win and so on in a way that gets people excited about what you are building and how big it can get.
They also want to look for someone who is obsessed with the business and that doesn’t necessarily mean you are working 90 hours a week but it means you think about the business a lot and can answer questions related to the business.
A lot of founders think that because they have a certain number of customers and revenue that they would be able to fundraise so they don’t put enough effort and energy into all the other things that investors care about and will judge them and their companies on.
Another mistake they make is they go in and say we are raising X amount to get 24 months of runway but they haven’t really thought of the milestones you can get to with that money and how you are going to get there and frame it in that way versus saying it would cover our cost for 2 years without any clarity around here is what we want to proof out with this money and how we are going to get there.
How his company helps SaaS founders with raising funds
We have a pre-seed program where we basically act like an extension of your founding team. It is a four-month program and we do an initial $100k investment and then we work really closely with you on your go-to market strategy, pipeline reviews, ICP and we bring a lot of mentors to talk about different topics. We work closely with you on your fundraising strategy and the narrative around that, getting your dataroom ready and getting prepared for those meetings.
We will also do an investor week where we will line up about 30 – 60 meetings with investors when we feel like you are ready to fundraise. We also have seed funds that allows us to invest in companies that are coming out from our program and also outside our program.
Forum Ventures (formerly Accleprise) – Early Stage Fund & B2B SaaS Startup Accelerator
AngelList – Invest deal-by-deal in world-changing startups
Crunchbase – Discover innovative companies and the people behind them
Signal – The investing network for Founders, VCs, Scouts, and Angels
TechCrunch – Startup and Technology News
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