Fundraising in the U.S. Part 1: Fundraising Etiquette
By Michal Tavrovsky, co-founder and COO of JFE Organization, a 501(C)3 non profit founded in 2009, with the mission to accelerate entrepreneurship among Jewish and Israeli founders.
Last week, I had lunch with a NY investor and we had a fun time, sharing stories about founders messing up their meetings and opportunities to get funded. This conversation became an inspiration for writing this post. It will probably end up being a series of post because there is so much to be said there. As I look back at the time when I first started working with fundraising startups in San Francisco, I realize how much information we all took for granted and expected everyone to know. Simply because we were in Silicon Valley. Fast forward 6 years and having advised startups from the east coast, Europe, Latin America, and Israel, I know that often times you have got to start with the basics. First time founders, especially if they come from abroad, almost always need to begin their fundraising journey by learning the U.S. etiquette for talking to investors. What is the right way to ask for money in the U.S?
1. Show respect. Know what’s appropriate and what’s not.
First of all, never ask the investor you are having a meeting with if he/she is Jewish. There are many jokes out there that Venture Capital is dominated by Jews, and yet this industry is just as diverse as any other. Your racial profiling skills may fail you and a seemingly innocent question may turn into an offensive and awkward situation for everyone. Even if the investor is Jewish, it’s still not appropriate to ask.
Secondly, do not talk down to your investor as if you’re talking to your grandma who doesn’t know anything about tech. Most likely, the investor you’re meeting with is an expert in your field because: a) he/she took the meeting in the first place because your vertical is their area of their focus and b) this investor has met with dozens if not hundreds of companies like yours, regardless of how revolutionary you think your product/technology is.
And if you are Israeli please, please, please stop telling everyone that you served in the army. Yes, we “dumb” Americans (Jewish and non-Jewish) all know that you are from Israel and that you have served in the army. We all know about your unit 8200 and unless the fact that you were a fighter pilot is directly related to what you’re doing today as in manufacturing control boards for airplanes, nobody gives a sh@#%. Only talk about your relevant experience.
If the investor will tell you “no,” “we’re not interested,” “you’re too early,” “you need to change your revenue model,” “come back to me in 6 months with more metrics,” etc., do not get angry, show your emotions, and under no circumstances start arguing. It’s not good either to nod your head all the time and readily agree with everything the investor says (you want to show that you are a strong leader, a visionary who thought everything through and through), but there must be a balance. On one hand, you can gain a lot of value and knowledge from an advice; on the other hand, nobody knows your company and industry better than you do. After all, you are the one living and breathing it.
Don’t burn bridges. Even if this investor was not interested today, it doesn’t mean that he/she is not going to be interested in 3 months or at your next financing round. Every investor has a number of missed out opportunities and investment deals they wish they had made. In many instances you can continue to stay in touch and keep the investor updated about your company’s progress. The tech community is small and you have to realize that you are building long-term relationships with its players. Definitely, don’t say: “In 6 months you will be running after me” (Israeli founders especially like to say that). Instead, politely ask if it would be okay to follow up with updates as you continue to grow.
2. Be smart. Do the math. Know whom you are meeting with.
First of all, before your meeting you need to do your due diligence. Just like going to a job interview, you need to research everything about the investor and the investment firm. It’s important to know who is in their portfolio and what their average check size is. If they typically invest $1-2m per deal, asking for much less or more is not going to get you very far.
It’s an industry standard in the U.S. to give away 20% of your company’s equity for your seed round. Keep that in mind when you’re putting down your numbers. For example if you are raising $1.5m, then your valuation should be in the $6-8m range. Of course, there will be exceptions here based on many variables, but that is a whole separate topic for discussion. Regardless, you should always think about how much you really need vs. how much you think you can get. Whatever you do, do not start changing your numbers mid conversation. Bargaining here is not going to get you anywhere. You’re only going to lose your credibility. You can’t start off the conversation with: “my startup is worth $20m” and then drop it down to 4. Or say something like: “I will make you a good deal.” You’re not at the Mahane Yehuda market here and you’re not selling a Persian rug.
3. Be honest. You can’t hide anything. Sooner or later everyone will find out.
Sometimes it’s okay to say: “I don’t know” when you actually don’t know the answer to a question. After all, you are a startup that came to this investor asking for help and advice (in addition to money). You’re better off being honest about not knowing something than looking like an idiot by trying to come up with a BS answer on the spot.
You also need to realize that once things will get serious with the investor, you can expect a great deal of thorough due diligence. So no hiding bodies in the closet, no messing around with your metrics, cap table, etc. If you had a falling out with your co-founder and he/she left the company, you have to disclose. If you have gotten a cease and desist letter from a competitor, you can’t keep it under the radar. It’s a small community and people do talk to each other. A lot.
The truth will inevitably come out at some point and when it does, it may ruin your reputation, company, and career. Technically, an investor may sue you for misrepresentation. The startup journey is never smooth and you will get more respect and support as a founder when you show that you are not afraid to face challenges, deal with complex issues, and make it work no matter what.
Most good investors will tell you that founder/investor matching is like real life dating. You have to have the right chemistry, connection and energy. Once you get them on your cap table, there is no turning back. When you know that divorce is not an option, you will want to search for the right partner to get married to. If your gut feeling is telling you that you are talking to the wrong person, don’t waste everyone’s time. It’s not going to work out.
Although it is very important to find the right investor for you and your company, there are many more crucial topics such as: the right time to raise money; understanding the math of fundraising; showing the right metrics; negotiating term sheets; and many others that I plan to discuss in my next posts.
Michal is the co-founder and COO of JFE Organization, a 501(C)3 non profit founded in 2009, with the mission to accelerate entrepreneurship among Jewish and Israeli founders. She heads JFE Accelerator's East Coast New York office and manages day to day operations. Michal is an entrepreneurial spirit who has successfully launched two non profits and an art gallery in Silicon Vally and expanded them to the East coast in under four years.