One of the biggest challenges and frustrations of being an early stage entrepreneur (heck, being an entrepreneur in general!) is fundraising. It’s one of those things that feels very much like a black box the first time around.

This post is in response to an email from a friend and early stage entrepreneur. He writes:

Business, however, is immensely frustrating – could do with some advice actually! 3.5 months and still no firm commitments. I have a website and business that will be ready to go full speed in the fairly near future and no money to pay for it! How did you go about things at Quincy? How long did everything take?

First things first. The hardest money to get is the first money in the door. Earlier investors take on more risk, so you need to develop a fundraising strategy with that in mind. Generally startups progress through fundraising as follows:

1. Friends & Family
2. Angel Investors
3. VCs

With Quincy, we raised using a convertible note, which is a debt instrument. Reasons for using a note include:

• It’s less expensive than a priced round (lawyer drafts a ~2 page document). Some say it makes sense for rounds under $1M.
• It’s easier to do rolling closings (ie. approaching individuals one by one and asking them to close immediately rather than waiting until an entire round is committed and then closing the round)
• It’s less complicated. These documents are pretty standard. They’re not difficult to explain to friends & family and angel investors are used to them.

Friends and family: Start with people who know you well. When your business is just an idea, you don’t have a product yet, and you’re pre-revenue, who are the people who are going to believe in you? Ask them to help you get the business off the ground by providing some much needed capital.

Word of advice – be very careful who you accept money from. The reality of startups is that they sometimes fail. Don’t take money from someone who can’t afford to lose it, who may hold grudges or react badly to a loss, or who is going to be a pain in your ass while you’re trying to build your company. Another way to avoid this is consider raising your minimum investment.

What to prepare? Since it’s friends and family, it should be an informal conversation. Talk about your business idea, explain why you want to start the business, what your goals are (ie. the long-term vision), etc. Then talk through your short-term plan for getting the business off the ground, how much it’s going to cost, and what the ask is. Beware of inexperienced investors. You can spot them by the amount of information they require to get comfortable with making an investment. At this stage, they’re placing a bet on you. If they want to see financial models and business plans, this will most likely be a waste of your time.

Timing – Should be able to close an individual within 2-6 weeks from initial conversation.

Angel investors: These are professional investors who don’t know you and who you must convince to invest their hard-earned money into your business idea. If you’re lucky, some of your friends & family will introduce you to angel investors that they know. Another great place to find angels is on Angellist. Most cities and alumni groups also have angel organizations.

When to approach angels? We started having success with angel investment once we had an MVP (minimum viable product) and some demand data from an alpha test. It was more than an idea, but not much more. Depending on your business and the level of perceived risk, you may need to prove more or less. In the end, the number one thing early stage investors are betting on is the team. You need to sell the hell out of your idea and convince the investor that you’re the right person to make it happen.

What to prepare? Create a one-page or two-page business summary that includes the pain point you are solving, the solution, your vision for the business including market size, information on you and your team and why you are uniquely positioned to tackle this problem, and finally the ask (how much are you raising and for what). Send this document to angels when you ask for a meeting and provide it to anyone who is making an introduction for you to an angel investor. This gives the angel a chance to read about you in advance and decide if they are interested in taking a meeting. Set up an in-person meeting if possible. If he/she is based out of town, do a phone or skype call.

What’s the ask? Capital, advice, and/or advisory board position. Depending on the person, you may want to try for all three. For industry experts or highly influential / notable investors, push for a board position. You need to fill your board with helpful people anyway and eventually after getting to know you and your company better, he/she is likely to invest.

Timing – similar timing to friends & family. 2-6 weeks from initial conversation. After an in-person meeting, we could expect to hear back from the angel within a week either asking for more information or having made a decision. If more information, then we’d have a 2nd meeting or call. With most angels, one meeting with sufficient. We even had one angel investor who was referred by a friend and wasn’t even interested in speaking with us. Another angel was part of a syndicate and was highly influential – after he made an investment another ~7 angels joined him.

Venture Capital: We found it was easier to get early meetings than it was to get early money. All VCs want to know what’s out there, but very very few want to be the first to invest. The most frustrating part about the VC process is very few VCs will give you candid feedback. Instead, they’ll tell you “you’re too early” and to keep in touch. There’s been a lot written on this dynamic, so I won’t go into it much here.

When to approach VCs? It’s OK to start building relationships early before you’re fundraising. But make it clear that you’re not fundraising. We started pitching very early (pre-product and pre-revenue) and were told we were too early. Again, depending on your business, a VC may be comfortable with the risks at an earlier stage. What most VCs want to see is some form of traction or momentum. Traction on the user / product side and momentum on the fundraising side.

I was surprised to find that VCs were actually much more risk averse than I had imagined. They require a lot more proof than angels, so come prepared. We started to talk to the VC that led our round a month before our beta launch. They ended up closing 2 months post-launch after paying close attention to our beta and having female friends and family purchase from us and provide feedback.

What to prepare? You’ll need a pitch deck in powerpoint that covers your product, market, vision, team, and financials, etc. Here are some helpful resources about creating a pitch deck:

• http://techcrunch.com/2012/01/07/pitchdeck/
• http://entrepreneurship.berkeley.edu/resources/Morgenthaler_Ventures_Handout_3_1_10.pdf

You’ll also need a financial model to support the financials you provide in your pitch deck.

Timing – Much longer process. From the initial conversation to receiving the funds, it took 12 weeks. We had 2-3 meetings to review the business and a couple additional meetings with an industry expert that knew the investor well.

We started fundraising in October 2011, pitching to VCs. We realized we were too early and refocused on F&F and angels November – April, usually taking in one or two $25K checks each month. We closed our round end of May, 8 months later.