Last week, my business, Phrasee, announced a £1m seed investment. Awesome! Champagne all round! But, getting there wasn’t easy.
See, I’ve never run a fast-growing martech business before. Luckily, I’m a quick learner – and here’s 10 things I’ve learned about startup fundraising since launching 18 months ago.
This article is not about “why we fundraised”. If you want to understand more about what led us to raise the funds, you can read about Phrasee’s funding here.
Instead, this article will offer you some free advice and tips. If I was cool, we’d call them “hacks”, but I’m not cool. So let’s go with “advice and tips”.
By no means am I a fundraising expert – in fact, quite the opposite. But for anyone else who’s trying to raise funds – or anyone who’s curious what startups go through to drive investment – then read on.
1. Learn how to say what your business does in one sentence.
The tech we’ve built is awesome… and by virtue of being awesome, it’s mega complicated. We could spend hours explaining how everything works.
But – and here’s the thing – most people don’t want to hear about all the intricacies. And me, I’m a wordy guy (probably fitting for a guy who runs an AI-powered language company). So to whittle down everything I want to say to a sentence is, for all intents and purposes… hard.
So when we started, and someone asked me, “So what is it your company does?” my answer would range anywhere from one to five minutes. And the lucky person listening would stare at me blankly.
This was a problem.
See, investors get pitched on ideas a lot. And they don’t have time to listen to longwinded descriptions of stuff. So, after a while, I came up with this little chestnut: “Phrasee uses artificial intelligence to generate better subject lines than humans.”
By focusing on a simple talking point, further conversations were much more focused.
2. Bootstrapping is awesome, so don’t rush raising.
We launched Phrasee in February, 2015, and closed our seed round about 18 months after launch. For many tech firms, this is an eternity. And it wasn’t easy. But here’s why we did it.
First, earlier on, we didn’t have enough market traction to raise at a level that would mitigate founder dilution. Surely this doesn’t require explanation – less dilution is better than more.
Second, not having huge cash reserves, while at times stressful, forces you to be pragmatic AF. And this is huge. We were forced to be nimble, responsive to customer requirements, and ultimately focused on core product development.
Third, while bootstrapping, you have to be laser-focused on immediate success. Whilst it’s great to have a bunch of money so you can do a bunch of stuff, most stuff has a 50% failure rate. Whilst bootstrapping, we couldn’t afford failures.
I’ve seen many companies raise too much, too soon, and it results in either targets not being hit, over-dilution, or down rounds. These are three things we intend to avoid – and had we not delayed our seed round as long as was reasonable, we’d have become too unfocused, too quickly… and likely not be where we are today.
3. Get your business model sorted, and everything else will work out.
Sounds obvious, right? Well, it’s not. And here’s why.
Your business model (that is, how you charge, and how it translates into cost base) is hugely important. Obvious, right?
But, until you have actual experience in running your business, you’re only guessing what your business model is. And, it can change, dependent on market requirements.
Anytime you look at ProductHunt or some site like that, a normal strapline/business model is something like “Uber for X”, or “Tinder for X”, or “Snapchat for X”. But that’s not a business model. That’s a reference point.
A business model is not one sentence. It’s a fully reasoned revenue and cost plan based upon actual market feedback – and preferably actual revenue and cost.
It took us a while to figure out our business model, which is why we weren’t raise-ready until now.
Our first model, well, if we knew then what we knew now, was never going to work. But how were we supposed to know that?
The first model went into Beta in Feb 2015, and we were sure we were going to be INSTANT BILLIONAIRES.
We tried a bunch of stuff, and failed hard numerous times, before figuring out what worked. And now that it works, the sky is the limit.
4. Your pitch deck matters. A lot. So make it look dope as $%!&.
“What’s a pitch deck,” you ask? It’s 10-15 slides that you present to investors. It’s key, because it’s the information upon which they’ll decide whether or not to speak to you.
Here’s something I learned – make your pitch deck awesome. Spend time on it. Spend money on it. Make it memorable. Because it’s the most important presentation you’ll make for your business.
So, how do you make a pitch deck awesome? There’s no hard-and-fast rule to it. There’s many formats you can follow. I know what worked for us, but that doesn’t mean it will work for you.
Get all of your key information in one place – ie product description, core intellectual property, customer traction, business model, financials, exit strategy, etc. etc. – and put it in a sensible order. And – bear this in mind – expect to iterate it about a million and one times.
Next, find someone who is AWESOME at design. If you don’t have someone on your team, then outsource it. But, there’s nothing worse than a deck on powerpoint that looks like Fisher Price My First Pitch Deck. It doesn’t show how awesome your company is.
We’re fortunate, as we have an in-house designer who specialises in making things look dope AF.
*SIDE NOTE* His job title is “Junior Vice President of Product”. We don’t have a President, or a Vice President for that matter. But, he thought “Junior Vice President” sounded more senior than Vice President. I agree. Here’s why. *END SIDE NOTE*
Your pitch deck is what investors will first see about you, and it’ll get passed around. So don’t skimp on it, and don’t be lazy.
Make sure it tells your company’s story – and outlines very simply why your business is a can’t-miss investment opportunity.
5. Finding “smart money” takes longer, but is worth the wait.
OK, so here’s a phrase that I learned recently – “Smart Money”. It refers to investors who are expert in the industry in which you operate.
Why is this important? For some businesses, it’s not. They simply need money to cover their burn, and want to go it alone.
But for some businesses, smart money is critical – because what you’re getting is not just money, but also expertise, advice, and connections. Our investors – Next15 and Galvanise – are smart money, and this is one of the big reasons we chose to work with them.
*SIDE NOTE* Remember, you don’t have to work with a particular investor, so it’s not just them choosing you. It’s also about you choosing them. Their personalities, cultures, and business model matter just as much as yours do! *END SIDE NOTE*
It’s ultimately a choice you have to make for your business. Do you just want money to scale, or do you want money to scale alongside people who are digital industry experts? We chose the latter.
6. Honesty actually is the best policy.
Go give your mum a hug, because she was right all along – honesty really is the best policy, and I’m not just saying that.
See, every company, large or small, has warts. No business is perfect – and if they were, then striving to maintain perfection would render them imperfect.
Early on in your conversations, be up front about your uncertainties, risk points, and future challenges. Because chances are your prospective investors will ask about them anyway… so beat them to it.
Now, with that said, also be honest about the awesome points! If you get a meeting with an investor, there’s a reason for it. So don’t be afraid to shout about what you’re doing well… just remember, whilst they’re investing in your awesomeness, they’re also investing in your shortcomings. So it’s best to be honest and avoid surprises in the future.
7. Find awesome advisors, lawyers and accountants.
Here’s the glamourous part of seeking investment that no one tells you – you’ll be spending more time than ever with your advisors, lawyers and accountants.
And I mean loads of time. It’s unavoidable – because we’re talking about a substantial chunk of change involved in your transaction… so all parties need to protect their interests.
And, if you’re like my co-founders and me, you’ll be doing a lot of things for the first time. There’s going to be a lot of things you don’t know about. For example: I didn’t know what a “disclosure letter” was. Now I do. But, when asked if we had started preparing ours, I was like, “Erm… gimme 5 minutes.” I called up one of our advisors… and got my answer straight away.
For each of the three categories of people mentioned in the point, here’s a few specific pointers:
Make sure your advisors have actually done the nitty gritty details of a fundraise before, and not from the investor side. This way, they’ll have been in the trenches – and will also understand the pressure you, as a founder, face.
And make sure they speak to you in plain English, not investment jargon. I can’t stress this point enough. Our panel of advisors were awesome, and saved us so much pain and stress.
Everyone loves lawyers right? The thing is, they are so important. From negotiating your term sheet, through to wording your investors agreement, right through to executing the documents upon signing, having awesome legal representation is critical. There is a lot of legal lingo that lingers in a deal.
Schedule regular calls/meets with your lawyers and make sure they’re actual humans, not just paper pushers. Fortunately, ours were!
Ultimately, an investment is a commercial play, so it always comes down to the numbers. Whether it’s on your forecasts, your cap table, or your asset structure, get ready to deep dive into a million and one spreadsheets.
Having a solid bean-counter on your side is critical. They’ll tell you if you’re over-spending in one area, under-spending in another, and will give solid guidance on boring things like tax liabilities and depreciation.
8. Due diligence isn’t always fun… but it’s important.
For those who haven’t heard the term before, “due diligence” is the period between signing terms (an agreement in principle) and the final close (when you get the money).
Think about it like an MOT for your business. Your investors look under the bonnet of your car, and highlight anything that is either broken, or could break.
It’s a lot of detail. A lot. It’s basically everything you’ve done up until now, in all it’s gory detail. From your revenue model and forecast, to your cost projections, right through to your employment contracts, insurance levels, and IP protection strategy. It’s a lot of work, and will take you a long time.
It’s frustrating. It’s arduous. It’s going to keep you up at night. And it’s worth every second.
Why? A rigorous DD will highlight elements of your business model that need attention. We learned so much through it.
Some of it was negative (i.e. you need to do this, have this, and get that). But the vast majority of it was positive. Things like, “Have you thought about this market?”, or “What if you need to scale faster than planned?”, or “Are you spending enough on Prosecco?” (Note: that last one didn’t come up. But it could have).
Your DD process will consume your life, so make sure you have people in place who can manage “business as usual”. However, your business will come out of DD stronger than before… Like they say, there is no pleasure without pain.
9. Never mind the Brexit, here’s Phrasee.
Our deal closed on July 1st, so about a week after the Brexit.
We were acutely aware of the potential risk the Brexit could pose for Phrasee’s investment round.
Four days before we closed, I was invited onto CBC TV, Canada’s BBC, to discuss the effect the Brexit could have (you can watch it here if you’re interested). Inside, with the studio’s lights shining in my face, my emotions were churning – “a deal ain’t done until it’s done,” my internal monologue was depressingly repeating.
But, here’s the thing. Upon reflection – a business with a majority cost base in (currently cheap) pounds, with substantial foreign (and currently stable) currency revenue streams – is actually not a bad model. So, for Phrasee’s investment at least, it was a storm in a teacup.
Post-Brexit, there was mass hysteria. People, especially in the week directly after Brexit, were noticeably concerned. The markets dropped, the Sterling devalued, and there was an atmosphere of uncertainty, at least in London.
And still, a week later… we closed our deal.
According to my research on CrunchBase (which wasn’t exhaustive), Phrasee’s Seed round was the first major post-Brexit investment in the UK’s MarTech sector.
Why am I humble-bragging? During your funding round, the world isn’t static. Things will change around you. You have to ensure your business is resilient and can withstand uncontrollable shocks, like the Brexit.
Listen, you can control a lot of things – the hiring of employees, the deployment of product updates, and things like that. But there’s WAY more things you can’t control – the weather, your customers, and largely the world around you.
So don’t stress about what you can’t control, and focus on what you do best – running, and growing, your business.
10. The day we closed is a day I’ll never forget.
The day we closed, we had a deadline, at which time all the parties were meeting up to sign all the requisite paperwork. And there’s a LOT of paper in these deals, wowza!
The meeting was set at 4:30pm.
As of 1:30pm, we were finalising a few details.
After 6 weeks of back-and-forth, DD, and countless phone calls, everyone was on the same page, all in agreement.
I hung the phone up. The flurry of emails stopped. No one was calling me. And it was the most excruciating few hours of my life.
I went to a roof terrace in Soho, and had a cup of tea. I aimlessly scrolled through Instagram, the images not registering in my head. I sat there for an hour, unable to form a cognizant thought.
I checked my watch. There was still two hours to go.
No emails through. “What were they all doing?” I wondered. “Have they changed their minds?”
I called one of my co-founders and asked her what the deal was. “They’re doing their jobs Parry, what did you expect?”
I left the terrace, and left onto Shaftsbury Avenue. I had two hours to get to Liverpool Street.
So I started walking.
I walked up to Holborn, then down to Aldwych. I walked across the bridge, then down Southbank, then back over. I wove through the alleys of the City. I aimlessly crossed one street, than back over.
And I have no memory of any of it.
Then, somewhere between Soho and Liverpool Street, I had a cathartic moment. A moment of clarity, if you will.
It was this – the business my co-founders and employees have built is inherently valuable. And industry experts – our investors – agree, and were backing what we built with cold, hard cash.
At about 4:20pm, 10 minutes before our meeting, all alone, sweating in the sun, sore feet from walking aimlessly, I stopped and looked around.
Surrounded by 8 million people, all doing their business, hustling from one place to another, rushing by me, not knowing what was happening inside my head.
At that moment, I felt paradoxically huge… and simultaneously tiny.
It was a moment I will never forget.
I went to meet my awesome co-founder Victoria at the station.
We gave each other a fistpump, a hug, and said, “Let’s do this.” And we set off to sign on the dotted line.
It’s been a wild ride this far. I’ve never had so little sleep. Or been so excited. Or been so uncertain.
And would I change a thing?
And here’s one bonus point, probably the most important one of all.
11. Don’t forget to celebrate!
When you start a business, you do it for a number of reasons. But, anyone who’s done something new, something innovative, something exciting, will understand this.
Your milestones, be they large or small, need to be celebrated. Because you’ll never do something for the first time again.
Let me reiterate the point: it’s so important to celebrate. With your co-founders. With your investors. With your team.
Because if you aren’t enjoying the ride, what’s the point?
When we started Phrasee, we had no idea what was in store for us. We still don’t know what tomorrow will bring. But no one can take away the 18 months of laughter, tears, sweating and celebrating that Phrasee has brought to our lives.
If you have any other sage advice for anyone looking to fundraise, stick them in the comments below.
The points above are some of the things I’ve learned along the way. Maybe not all of them are in a textbook, but they’re all things that I’ve picked up taking Phrasee from being a fledging startup to an actual company.
For all the entrepreneurs out there, no matter what stage you’re at, good luck.
And for those who have a job, but have always wanted to live the dream – do it. You’ve nothing to lose – except your life savings, and a whole lot of sleep.
No big deal, right?