I am a true believer in having a bulletproof process for raising money. When I first set out to raise capital for my company Loopd, I did not have a formula. I wanted to go out into the market with a precise plan, so I reached out to a few successful CEOs in my network. I asked each one, “What were ten steps that you followed when raising your last round?” After reviewing several models, I created my own. These aren’t hard and fast rules, but rather tips and tricks that I learned firsthand. Below are the first three steps that I used to raise my round.
Find a Lead Investor
The most important step to raising your seed round is finding your first investor. I’d like call this investor your lead. Your lead investor should be a super angel who has a large network, a respectable reputation and a burning passion for your company. This is the hardest but most crucial step. I personally met my lead investor, Tim Draper, while attending Draper University in San Mateo, California. Draper understood my vision to disrupt the large and outdated event industry.
Your lead investor will help accelerate the entire process, so take your time and make sure you’ve identified the right person. They will not only set the terms for your round but will also share the round with their personal and professional networks.
Define the Terms
You and your lead investor should agree on a structure for your round. For most seed deals I would recommend using a convertible note. With this format, you don’t need to set a valuation for your company. You can protect your investors with a cap and reward them with annual interest. My first convertible note had average terms for a Silicon Valley hardware and software company. We had an interest rate of 5 percent, no discount and a $4 million cap to protect our initial investors.
A convertible note is a very fast process but it doesn’t create real value for your shares until they completely convert. By contrast, a priced round is a simple format that involves a real valuation for your company based on the price per share and the number of shares issued for the round. This structure provides complete transparency for you and your investors, since they will be buying a number of shares based on their price. A priced round will take longer to establish the correct paperwork, will cost more in legal fees and in my opinion, is only worth it if you can receive a justified high valuation. I would recommend aiming to give away between 18 percent to 22 percent equity in your first round.
Create a Dream Team List
After securing the terms with your lead investor, make a list of other angel investors who could make up your dream team. To find the initial set of right investors, go to websites like CrunchBase and AngelList. Each investor should have completed deals with your lead investor and should have experience investing in your sector. My initial list of investors had co-invested with Draper on hardware deals.
Once you have your list, narrow it down to 20 investors. Ask your lead investor to go through the list with you. They should identify and validate at least 10 key investors on your list and recommend 10 others who they believe would be a good fit. This is a critical step, because there are thousands of active investors who don’t appear in search results. Together Draper and I added and removed investors to create a dream team of “super angels.”
These three steps will help you start fundraising. Reach out to your network and talk to other entrepreneurs about the process. The steps above can act as an initial foundation, although you should complete it based on your own needs.
A version of this post appeared here.
Brian Friedman currently runs Loopd, where he focuses on branding, marketing, business development, UI/UX design, product design, mechanical engineering, and manufacturing.
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