You need to build traction whilst you fundraise

 Tl;dr: You need to build traction whilst you fundraise to capture investor attention. They expect it as they have choice regarding who to invest in. They like the ‘shiny’ startup, so figure out how to grow and pitch. Best idea is to prepare to raise before you start the raise.

Building a startup is hard. Fundraising is a huge pain (and also hard). So wait for it, whilst you fundraise… you also are expected to keep growing your startup!

No one ever said quitting your job to build a company would be easy, but pretty sure you didn’t believe quite what would be expected of you if you plan on using other peoples’ money to fund it 😉

Here is why.

Why investors care about continued growth

More startups than investors

There are so many startups raising that not all of them will be funded (for reasons including not actually being fundable). Only a small fraction are.

Making an investment of any size is a big deal and investors don’t take it lightly.

If you’re an investor who seems a lot of companies raising and you only make a few investments a year you have the luxury of being picky. If something comes a long growing like weeds and another sounds interesting, but nothing is happening, you go for the shiny one.

They care about learning as much as you care about the money

Investors generally have no pressure to invest their wonga. The longer they can watch a startup the more they can learn. If investors really like you but just aren’t sure, “wait and see” is the go-to option.

It’s not really their problem if you need the money now. They’d prefer a startup that doesn’t NEED the money and will succeed without them.

What investors are looking for in startups

You have confidence in raising

Pretty pitch deck with strong logic, solid financial model, engaging pitch and competence in how questions are answered. You follow up with any additional analysis same night and feel in control of things.

On top of that, you’re really confident about the raise closing. You’re managing the process well. You give a vibe it’s happening and none of the neediness.

Sounds simple, but that’s a huge amount of work!

Growth

Investors don’t always know what startup will work. What they can understand is growth. Charts which go up and to the right for the top line stuff and down for the cost stuff.

There’s all sort of metrics to track which depend on the stage you are at. If you don’t have revenue, then it’s users or engagement time etc.

You keep making progress

Steady growth is sexy. If every time you meet your weekly growth rate is the same as before and you have new things to talk about, you’re interesting. If all you have to talk about is fundraising, less so.

Investors are investing in a business. Yes, you just want their money, but you should also be obsessed with product/customers and not the money which is bankrolling it all.

You keep learning

Most of this blog is for early-stage startups, but it can apply for later-stage startups.

The rate of learning from testing is a key diver of success. Even insurance companies are in the game making thousands of small tests to optimise conversion rates etc.

Let’s say you visit your niece who is learning German and all she can say is “Wer ist the sausage Meester?” You come back 3 months later and she’s reading Mein Kampf. I’m mean firstly, you’re super concerned as to what the heck is going on in the household, but you’re also shockingly impressed at how fast she learned.

Startup example is having a crappy converting landing page. If the next time you meet the investor you have it fixed and it’s working really well, that’s cool.

When you said something will happen soon… it does

Founders make a lot of claims when they are raising. Investors take it all with a grain of salt. They will discount it to zero till it happens.

I told investors about the huge pipeline closing! They said sure, we’ll wait till the deals start being signed. Groan.

Some founders told me about this amazing marketing partnership they had in the works which would show huge consumer adoption. It didn’t even close.

If you say you are about to hire Jim and Jim actually joins when you said he would, you do what you say you will.

Handing over $10m to do what you plan on just feels like it makes sense with founders who deliver.

What kind of traction are investors looking for?

Not press releases

Paying Forbes to feature you isn’t traction, it’s bribery.

Avoid spending time on things that don’t move the needle on metrics that matter. It’s hard to focus, but focus is critical.

Anything that de-risks you

What’s the difference between you and Airbnb? They’re huge and you aren’t. But break startup into steps:

• Have an idea
• Idea makes sense
• You can build a landing page
• You can get a user
• User likes it
• User becomes customer
• You know how to acquire customers
• You know how to retain customers
• You can get customers to make referrals
• You are profitable
• You can IPO…

The further you can go the less risk you are. The less risk the higher the valuation and the amount of money you can raise.

There are order of magnitudes with traction.

• First customer
• 100
• 1000
• 10000
• 100000

Once you are at 1000, 1001 doesn’t matter. If you are at 500 and you can push to hit a 1000 for your raise, that’s a nice milestone that might mean something to investors. But does 1100 matter as much? Maybe you reallocate time to engagement numbers when you are at 1000?

Anything that makes you look better than the competition (at your stage)

You have competition. The hotter the market the more competition. Investors will reach out and talk to all your competition before they invest in you. They will get their numbers.

No competition, no matter! Especially for larger and more speciality investors, they have metrics for companies at your stage. They can compare you to what similar companies looked like at your stage.

If you aren’t sure what traction investors care about it’s probably simple to figure out: what numbers would you not want to show to investors? See you already know what they are, you just don’t want to show them.

The earlier the stage you are at, the more top of the funnel matters. As you get on with things the more that “profitability” might be talked about. Haha, who am I kidding!

Paul Graham, the founder of Y-Combinator explains early-stage growth rates here:

“A good growth rate during YC is 5-7% a week. If you can hit 10% a week you’re doing exceptionally well. If you can only manage 1%, it’s a sign you haven’t yet figured out what you’re doing. The best thing to measure the growth rate of is revenue. The next best, for startups that aren’t charging initially, is active users. That’s a reasonable proxy for revenue growth because whenever the startup does start trying to make money, their revenues will probably be a constant multiple of active users”.

How to get investors more willing to invest

You’re a super founder who can handle anything

I’ve known some next level humans. Those nerds that went to MIT at 16. When investors talk about investing in exceptional people, they’re who they are ideally looking for.

These people just are built differently.

They make raising and running their startup work. It’s obvious to investors.

For us mortals:

• Put in the work so you can control the narrative
• Don’t answer questions too quickly
• Push back on unreasonable requestions
• Turn up to every call full of sunshine
• Keep calls from meandering and stay on point

Illustrate you’re growing fast

You have the information. Investors don’t know what you don’t tell. Make the effort to show that you’re growing. And you can (within reason) attempt to control the narrative by defining what growth means to you and how you track it.

Just don’t take this too far.

Have updates

Some people will be able to raise (especially from angels) in a week after meeting once. That’s optimistic.

When you hear about people raising $10m in 3 weeks, it is because they spent 3 years building relationships with their investors and keeping them informed on how they are progressing.

For most people, your raise is going to be a struggle. You’ll be naked running around the woods at night, occasionally seeing a light. You’ll run to it realising it’s a lighthouse in the ocean and the investor didn’t really plan on investing.

Most investors have no conviction. They will wait and see if another investor steps up first and once you are about to close the deal you’ll suddenly see them queue up. I’m deadly serious about this.

So what’s the best thing you can do to try to bring these investors into the fold and keep them engaged? You have something to say and they are called updates.

How the fundraise is going (or not) is not an update. Sudden growth, new partnership, key hires, and whatever milestones are updates investors want to hear. The best update of course is that the round is closed since this is exactly when they would prefer to join the round.

If you can send an update every week with some real news, you’ll have investors wondering “are these guys on speed, or what!?” Amazing.

Do shady things

There are things you can do to plan growth and a nice update or two.

Let me give you an example. My friend planned a Groupon (back when people still cared) during the raise to show a spike in user orders. He raised the round.

How to manage growth and raising

Split responsibilities between founders

If you have 2+ founders then huddle. Make it super clear that the CEO is responsible for the raise and the others take on responsibilities for keeping things going.

If you are a sole founder, you’re screwed here.

Of course, the CEO can still work a bit on the startup, but the focus has to be on getting the round done. The other founders should expect results.

I remember a co-founder was sent back to Europe and told to raise the next fund and he wasn’t allowed to return till it was done. Harsh but fair.

Get your team to step up

I personally like my staff to know (some of) what is going on short of concerning them lest they jump ship prematurely. I also think it helps them feel they aren’t monkeys but we are in this together.

When you’re about to raise, tell your staff you’re raising and you need their help to push to show results to help you make it happen. Maybe ask your management heads (if you have) to step up a bit?

In my experience, they absolutely love hearing about how meetings with investors went etc. That can be a double-edged sword though.

Plan for the raise so you can space out the workload once the clock starts ticking

Once you start raising you are racing against the clock. There comes a point between the 3 and 6-month mark when investors will start thinking you are deadwood and no investors are interested. If you are dead startup walking, you are pretty much screwed.

If investors see things going boom boom and investors are all talking about you, you are in a favourable position. Investors act a little more band camp nerds who want to be invited to Cindy Mae Sue’s party with the jocks.

If you want to appear like you have it all together, then do the work before you need to! If you need to raise in 6 months, why not start doing the groundwork?

• Get your data room together as a boring weekend to do.
• Start learning about how fundraising works.
• Build a list of investors to target.
• Get your financial model done.

All these things take time.

If you have all foundations in place and you know your pitch, then once you turn the clock on by reaching out to investors you only need to focus on pitching and getting one to say yes.

You won’t do it, but it’s a good idea, right?

Prioritise growth over fundraising

Most people preach Total War when it comes to raising. Just focus on it and make it happen. The problem with this is you can over-allocate time to it. You’re more likely to do the analysis you could probably have talked your way out of by pushing back. You might let calls drag on rather than cutting to the point.

An alternative paradigm is growth at all cost. You focus on your startup “100%” but in all that time you would spend messing about on Quora you instead take meetings with investors. You fit investors around your schedule, not the other way around. That could mean getting investors to meet you in SF rather than driving down to Palo Alto. And today, it could mean Zoom.

I believe this will work for startups in more developed markets who are doing something a bit more scalable like SaaS where you can keep showing results.

You need to decide for yourself what will work.