In May 2019 we launched AZpop, a mobile app that works like Yellow Pages for WhatsApp (starting with the Brazilian market). Despite not being in the US, we managed to close a pre-Seed investment round with two Silicon Valley funds (Weekend Fund and Hustle Fund) and with some high-profile US angel investors (e.g, James Beshara who sold Tilt to Airbnb, Nick Candito who sold Progressly to Box, Dan Teran who sold Q to WeWork, and Moshe Lifshitz from Basement Fund). Our startup was also one of the 3 (out of 500 applicants) to be selected for the Product Club acceleration program.
Below you will find the many mistakes and learnings from our fundraising process.
1. Do not underestimate the power of simplicity
It is quite rare for Brazilian startups to raise money from US investors; especially very early stage startups like ours. My cofounder and I have a strong belief that part of the reason why we managed to do that is the simplicity of our product, business model and pitch. When we tell investors we are building “the Yellow Pages for WhatsApp” most will immediately understand and get intrigued by the concept.
The simplicity factor is especially important if you cannot rely on introductions and are trying to raise money from people you don’t know. That is because you will probably have five seconds to get your idea across, and if it is something complex you will lose the attention of the investor before he has a chance to understand the concept.
2. During calls, be as concise as possible
Giving clear and concise answers to investors’ questions is one of the best things you can do. First because it demonstrates you know what you’re talking about (as someone with wishy-washy grasp on some topic will not be able to give clear and concise answers about it). Second, by keeping it short you avoid talking about stuff you might find important/relevant but that the investor does not. Let him guide the conversation. I always regretted when I rambled during calls with investors.
3. Make sure your interests are aligned with your investors
Reflect and make sure that this is the path you want to follow. If your goal is to maintain total control of your business and have sustainable growth, perhaps getting investment from venture capital funds and angel investors is not the best idea. Professional investors and VCs operate under a dynamic where 95% of the invested companies will fail, so the other 5% needs to generate the return of the entire fund. In other words, they are looking for companies that want to grow huge and want to get there quickly, almost operating under the “make or break” mentality. If that is not your vision, sooner or later it will become a conflict between you and your investors. In addition, once you start the external fundraising cycle, it is difficult to stop, as the company’s growth dynamics begin to depend on it.
4. Stick to the best practices
The closer you can stick to the best practices, the better. This is valid for your pitch deck, your valuation, where your company is incorporated (more on this below), the investment contracts and clauses you use and so on. Fundraising in the US is a well oiled machine so go with the flow.
At one occasion we were negotiating with a fund that wanted to include a clause to have the option to invest more money within the next 18 months, which is an unusual clause for early-stage investments. It created a lot of problems with the other investors (who were already in) and eventually it killed the deal.
5. Seek investors from all regions and countries
Perhaps our greatest insight was to not limit ourselves to seeking investment in Brazil. If we had done that, we would have raised less money, with a lower valuation, and it would have taken much longer.
Even if your product is not easy or ready to expand internationally, foreign investors may be interested due to the size or characteristics of your local market.
6. Silicon Valley still rules
The amount of money available and the propensity to place riskier bets are still orders of magnitude higher in Silicon Valley than practically in any other region or country in the world. That is why it may be worthwhile to focus your efforts there.
My thesis, at the beginning of the process, was that we would have the same difficulty raising R$100,000 in Brazil (equivalent to $20,000) and $100,000 in the United States. This was pretty much spot on.
Just to give you an idea, we closed the deal with one of our investors in the very first phone call. After 30 minutes or so of conversation he was like “Okay, I like what I hear, let’s do it!”. This would never happen outside Silicon Valley.
7. The pandemic removed many barriers
Many funds and investors had the rule get to know in person the companies and their founders before closing a deal. With the pandemic this has changed, and almost everyone is now willing to talk and close investment deals remotely. It is a brave new world; embrace it and take the opportunities that were created!
8. Delaware C Corp is a must
In order to attract investment from any fund or professional investor in the United States you will need to open a C Corp in Delaware. This is the default. Any other type of structure, such as an LLC, or incorporating in any other state will make closing the deal much harder.
Fortunately, it is relatively quick and inexpensive for you to incorporate there even if you are outside the US. We used Stripe Atlas, which costs $500 and completes the process in a couple of days.
9. Getting your EIN might be problematic (and a possible solution)
The EIN (Employer Identification Number) is the tax ID of your company at federal level. As far as I know it is impossible to open a business bank account in the US without an EIN, so you can see how this id is going to be very important for you to finish the fundraising process!
My guess is that before the pandemic the issuance of EINs was relatively fast, but after coronavirus the IRS started taking longer and longer times (according to Stripe more than six weeks in some cases).
If someone in your team has a Social Security Number he might be able to request the EIN on behalf of the company and get it within one day or so, even during the pandemic. Even if no one in your team does it might be possible to hire a lawyer as a General Counsel for the company and he might be able to request the EIN for you.
10. Understand how it will affect your local tax obligations
For most startups the United States operation will become the controller of the local operation in your country (if you are located outside the US, that is). Make sure you understand all the ramifications of this change will have on your tax obligations.
11. Get a lawyer when issuing stock
Stripe Atlas has a tool you can use to issue stock to the founders. I was tempted to use it to save money, but decided to hire an attorney to oversee the process for us. It was $300 very well spent! If we had done it ourselves we would have made a bunch of mistakes that could become larger problems down the road. Pay particular attention to filing form 83(b) if needed in your case.
12. Get ready to have vesting
If initially you formed an LLC or if you incorporated outside the US you probably already had access to 100% of your shares or quotas. By migrating to a Delaware C Corp. you will get vesting on all your shares. The usual term is 4-year vesting with 1-year cliff. This is obviously to protect investors from having you walk away from the company with all your shares, which I believe is fair.
One point you might be able to negotiate is the commencement period or the vesting. You might be able to adjust that to the actual start of the company rather than the date it was incorporated in the US.
13. Get ready to have double acceleration
Single acceleration: If the company is sold all shares that are still in vesting accelerate (i.e. become available to you immediately)
Double acceleration: the company needs to be sold and you need to be fired for the acceleration of vesting to occur
Another standard clause is “double acceleration” for vesting, so get ready to have one in your stock purchase agreement. This means that even if your company is bought, your shares will not be converted automatically. You will need to continue working for the acquiring company until the end of your vesting contract. Only if the acquiring company fires you that your shares accelerate.
It is not a very encouraging clause for the founders but it is important to increase the probability of attracting new investors in the future, as it makes your startup more appealing to potential acquirers.
14. Cold emails do work (if you work at them)
I have always heard that the only way to reach investment funds was through introductions from people they already thrust. I ignored this information and sent an e-mail to the funds that interested us, using the form or e-mail from the same website, and to our surprise the majority responded.
Obviously the email needs to be good, so spend some time on it. I would recommend customizing it for each fund and investor, crafting a very catchy subject line and being very succinct and direct in the body of the email so that you present all the relevant metrics and let the investor decide whether or not he wants to hear more.
15. It is a numbers game (initially)
If you send out five emails you will probably not get any replies, regardless of how good your subject line and email content are. You will need to send out hundreds of emails to start getting some replies. Too much work you say? Then perhaps fundraising is not for you!
16. Leverage the first connections
After you get some replies to your cold emails you can start asking for introductions to other investors or funds that the person believes might be a good fit for your startup. If your project is interesting and has potential this will work very well because by introducing you to the other potential investors the person will gain some karma, so it is a win-win-win.
17. The pitch deck doesn’t have to be beautiful
Our pitch deck was pretty ugly. I did it myself, and I suck at design. If you look at the first decks of many unicorns you will see the same pattern. What matters most, obviously, is the clarity of the information you will put there and the numbers to corroborate that your company has potential.
18. What to put on the deck
19. Exceptional traction, technology or team
In my opinion you need at least one between traction, technology and team to be exceptional (if you have more than one even better!), otherwise you will not be able to attract investment from professional investors and funds.
Traction: almost always needs to be measured as revenues or paying customers, and ideally it is growing more than 20% month by month
Technology: it needs to be cutting edge, something that I can’t replicate with $100,000 or in a matter of months.
Team: an exceptional team is formed by second-time founders, possibly with prior exits, or with very rare technical qualifications
20. Do not determine the valuation
Initially our deck had the valuation we wanted for this round, until a major investor in the United States replied to my email saying that this was a mistake in his opinion. He suggested including only the value of the investment we were looking for, leaving the question of valuation to be determined by or with the funds, as they have much more experience than we do to find the correct number. We did that and in fact the results improved a lot.
21. Fundraising is a full time job, so be prepared
During the fundraising process you will probably spend most of your day sending and replying to emails and having meetings and zoom calls. Anticipating and preparing for this is important so that your company will not fall behind schedule. Ideally one or more of your cofounders should take some of your responsibilities.
22. Learn as much as possible
Regardless of being able to close the investments I’m sure you will learn a lot from the process. Generally, you will be having meetings with very successful people with a lot of experience, and their doubts and feedback about your project will give you a lot of clarity about your strengths, problems to be solved, possible strategies for the future and so on.
23. Cultivate mentors throughout the process
Many of the investors I spoke with were willing to chat whenever I wanted to get feedback or discuss issues about our project. Obviously I took advantage of this opportunity, which ends up practically leading to a mentoring situation, which is very important for any entrepreneur.
24. Be proactive about growing your network
Fundraising can be an incredible opportunity to grow your network, as long as you are proactive about it. Make sure to add everyone you talk to on LinkedIn, send thank you emails, send updates after a couple of months to keep in touch, and consider organizing all the connections in a spreadsheet so that you can easily find the right ones in the future.