Recently as CEO of Paces, I raised a 7 figure pre-seed. This was the first time I properly raised outside capital for a startup and wanted to share the experience to help others. I know a ton of people who have raised money, but even after asking a ton of questions, it still always looked like a black box.
Our Traction
We were definitely pre-seed. We had signed one letter of intent with one potential customer. We had not started building any software (though had collected some data). My cofounder was still full time at another company and so could only work on the weekends. We had no revenue. In essence, we had VERY little traction. One thing we had done was talk to well over 150 people in the cleantech and energy industry. This alongside creating a 3,000 word notion document with videos of my cofounder and I, mockups of the proposed product in Figma and a standard deck was all we really had going into the raise.
A Numbers Game
This is the most important thing to know. You need to create a +500 investor list and expect to reach out to 100s. We reached out to 415 investors.
65% never replied
18% replied and passed
17% took meetings
4% gave us a term sheet
3% became investors
Once we reached out to someone, we immediately put them in the pass column and only put them as “Real Opportunity” should they express an interest in meeting. We got used to a lot of nos!
The Raise Started Two Years Earlier
I left my previous company 19 months previously. In those 19 months, I was mostly living in Mexico, exploring a few different ideas and actively building my network. In 2015 when I left NYC to travel, I had a really strong network of hedge fund type people and basically did not keep in touch with anyone and so all that strong networking had mostly died. This time, I knew I needed a really great network in order to do anything in tech. So I set out to build that network and be helpful to the community in all the ways I could. There were three things that had an outsized effect on building relationships:
On Deck
Podcast
Talk to everyone
On Deck
I was in On Deck Founders (ODF6) in October 2020. I had applied and been rejected in August 2020 and then got in on a second attempt. At the time I was working on a chatbot guiding farmers to be more climate friendly. My cohort had 250 people and only 15 of us were working on climate. It was early into covid + work from home, so nearly everyone was working on zoom/slack clones. I talked to maybe 100 people in 2 months. I stacked 20min meetings and would have 8-10 a day. In all my calls I would add notes on what they were working on to my personal CRM (copper.com) and in every call I would try and be more helpful to them than they were to me. I would introduce people to each other, offer advice and all in GIVE MORE THAN I TOOK. This abundance mindset is the key.
Podcast
In June 2020 I started Carbotnic. I had long wanted to have a podcast and thought a climate founders interview format would be cool to do. I started talking to lots of interesting people. I would have these amazing conversations during the podcast, but even more valuable was the 10-15mins after we turned the recording off when I really got to be helpful and engaging with the guest. Those relationships became strong really fast and again, was always focused on being helpful to them as much as I could.
Talk to Everyone
For more than a year, I would accept a 20min zoom call from pretty much anyone who asked. I had calls with potential customers, people in policy, mentored some people starting out their careers and made tons of intros. I got to know a ton of people in communities like Airminers and MCJ, learned the climate space incredibly well and brought that abundance and helpful mindset to as many people as possible.
Between these three things, when I really knew the company I wanted to build and started my raise I had a great list of people I had genuine connections with.
Introductions
Introductions are everything. Existing relationships or introductions accounted for 7 out of 8 of our investors. People previously met via my podcast, on deck and close friends were the best introductions. The only cold investor we closed was contacted through On Deck so there was at least some network there.
First, go to Linkedin and find target investors and then find people in your network connected to them: I would then send an email to my contact like:
Wanted to update you on a few things! First, SOMETHING PERSONAL/RELEVANT TO THE CONTACT. Then I cofounded Paces AI! We are building the Data Platform for the Green Infrastructure Revolution and are currently raising our pre-seed (Data Room). Noticed you were connected to a couple of investors I would love to chat to. Can I send you forwardable intro emails for any of the below?
Sometimes they would reply they are happy to make an intro, sometimes they would say they did not know them well enough. If they dont know them, ask someone else and just keep going down through the list. If they can make the intro, follow up in a separate email chain per investor something like the below:
Hi MYCONTACT! As discussed, we would appreciate an introduction to INVESTOR. I’m including relevant information below if you are able to pass it along? Thanks so much!
-----------
Hi INVESTOR!
Paces AI is building the Data Platform for the Green Infrastructure Revolution and is currently raising its pre-seed; from your investment thesis it looks like there may be a fit?
4-5 bullet points on the business and a calendar link
CBA vs BCA
In our list of 500 investors, we divided them into As, Bs and Cs with just over 150 for each:
A. The best possible investors for us. Mix of tier 1 VCs, climate focused funds and famous angels
B. Great investors who we would be happy with but not quite As
C. A mix of really long shots and a handful of friendly face investors
We spent the first 2 weeks only contacting Cs. We did this to basically try to improve our pitch and product. As you get experience and improve your pitch skills, we then went to Bs and then As. We never completed our As list before we closed the round. And in the end, 4 of our investors were not even on our original list!
I think this was a good approach, though I spoke to a couple of founders who do something more like BCAs. Either probably work, just make sure you leave As until you have a few weeks under your belt.
Our Terms
We started wanting to raise $1.1M at $10M post money valuation cap. Our overall max target dilution was 15%, so we felt that if we could get close to 10M Val cap, we would be in a great shape from a dilution POV. For the first two week these were the terms we said to everyone. And no one wanted to invest at those terms. We also spoke to a friend that sees alot of VC data and said 10M Val cap was very aggressive in the current market.
Then our first Angel agreed to come in at $8M val cap. We decided to lower it to 8 Val cap until we could get to 6 figures of investment, then increase it back to 10M val cap. I chatted to a ton of founders about raising on multiple val caps… some said they have 3-5 tranches of val caps, some only do 1. We decided to target 2 tranche’s and once we hit 6 figures, we did move to 10 val cap. We also raised much more than $1.1M in the end.
How long does it take?
When we started, in my head, I gave us a 30% chance of actually raising the full amount, 20% chance of raising something at all and 5% chance that the whole raise would be done in a month. In the end from start to hitting our target raise took 51 days. It took another month to add a couple of more checks, but we put less effort into that and more work on building product. We are incredibly privileged and fortunate. Our investors in order of investment, and in terms of days after we started raising:
Day 1 started investor outreach
9: First investor was a close friend who was nearly a cofounder with me for an earlier idea, met through On Deck (Angel 1)
21: A completely cold angel I messaged via the On Deck slack channel (Angel 2)
27: A senior person at one of our LOI signing companies (Angel 3)
34: A friend of a friend of my cofounder’s who knew our space really well (Angel 4)
35: A college friend of mine who had recently sold his own startup (Angel 5)
36: Someone I met via my podcast introduced us and our Angel 4 vouched for us (Fund 1)
42: Met him via On Deck a year earlier (Angel 6)
44: Angel 5 introduced us (Fund 2)
51: Lead investor term sheet (Fund 2)
51: Reached our target raise, but then increased it $200K
81: Cofounder network intro (Fund 3)
87: Met through On Deck (Fund 4)
94: Two angels met via our existing investors on cap table (Angel 7 + 8)
94: Round closed
How we knew the investors:
Via On Deck (3)
Via college (3)
Via Existing Investors (2)
Via other friends (2)
Via my podcast (1)
Via user research (1)
We were also offered a combined +$650K from investors that we decided not to go with, due to being over-allocated and not wanting to increase dilution.
The number and type of meetings:
Angels 1, 6, 7, 8 were closed each with only one zoom meeting with me only
Angel 2 was closed after they had separate zoom meetings with both I and my cofounder
Angel 3 was closed after a zoom meeting with my cofounder and I both on the call
Angel 4 was closed after one in person coffee with both my cofounder and I
Angel 5 was closed via text message only
Fund 1 was closed in 1 zoom meeting with me and 1 call they had with Angel 4.
Fund 2 was closed in 3 zoom meetings with me, a call with Angel 1 and a call with a colleague of mine from a previous company
Fund 3 was closed in 2 zoom meetings, several lengthy emails and via text message
Fund 4 was closed in 4 zoom meetings
Remarkably, only one person was met in person for a specific pitch pre-them investing. Of 71 first meetings, we closed 9 or 14% close rate overall.
Time Wasting?
A couple of investors definitely wasted our time a bit. One we had 4 hours of meetings and then had a somewhat strange pass reason. Another went from amazingly excited multiple meetings in a week to crickets for a month, even as we updated them weekly. Some investors I knew reasonably well prior to the raise and after our pitch, they weirdly went silent and did not give an explicit pass (maybe they didn't want to be mean, but please investors, PASS!). We started to learn that +5 business days without a response always meant a pass. I want to repeat this - if they have not replied in over a week or two your last two emails, unless they are ill, it is a pass! Cross them off your list.
Also, some fraction of investors have very involved forms you need to fill out in order to cold pitch. In general these were a waste of time and I wished we had skipped all of these until the end when we might be more desperate. When you are contacting 100s of people, spending 30mins on a cold form is simply a waste of time, and I believe that investors who use such forms tend to get worse deal flow. Alot of the forms also asked weird questions that were not of the typical PROBLEM<>SOLUTION<>MARKET<>TEAM structure. If investors are reading this, think about it, while a specific form to fill out is helpful as you have the founder write the investment memo for you, will the best founders actually spend time on such forms???
Common Questions
At preseed, the investor is trying to derisk market, product and team. Is this market big enough, does the product solve the problem and is this the team to execute on it?
Due to my cofounders amazing technical background, there were never many worried questions on our ability to build product. Most of the questions were around the market, with a ton of concerns around TAM being big enough, the business model and scaling distribution. We have good answers to all those questions, but we found that either people believe that green infrastructure is massive and about to grow even faster or they didn’t. No amount of materials we sent ever convinced an investor that we were in a large market if they did not already believe it.
The Types of Pitch
There are a ton of youtube resources about how to pitch. Most of them were pretty useless as it turns out there are ALOT of different types of pitches and you rarely know which one it will be like before you talk to the investor, So you sort of need to be ready for any of these!
The Business Overview - About 40 investors prefer a deep walk through of the business, but without any visuals, its a conversation only. These were often tough calls, but gave us the biggest signals on how we needed to improve for future pitches. The big learning was that the follow up email to your weaker answers became really key! Fund 1 closed via this method.
The deep bio dive - Around 20 investors were bio obsessed; talking about my time on an irish farm as a young lad and other elements of my cofounder and I’s bio took up 90% of the call. Because my cofounder and I have interesting enough backgrounds (both immigrants, lots of weird and wonderful experiences) I think we showed really well in these calls. I also found these really relaxing and fun; its like a radio host is interviewing you about your upbringing! Our Fund 2 lead investor used this method.
The shared vision nerd out - A couple of angels immediately got what we were trying to do and we just nerded out together about the opportunities. These had close to a 100% conversion rate as investors
The group pitch - did two of these. For both, the standard of startups were pretty poor, mostly on the team side. Alot of people asking for money to then hire a developer to build their product. Because we were strong on the technical side, we did OK on each. One ended up in getting a meeting with a partner at the firm but we closed our round before that meeting. The other tried to get us to do an unsuitable accelerator program.
The Who Else is Investing Text - We closed one Angel just by text message once they knew how much we had raised from other angels.
The deck screenshare - this is what most people think of as a pitch, you walk through your deck live and do a fairly formal pitch. Interestingly that only happened once for a european fund. It threw me a bit as I had 50 non-deck meetings by then, and it was a pass from them.
Who Should be on the First Call?
Only the CEO. That is honestly it. Our close rate with just me on the call, was way higher than when both my cofounder and I were on the call. I don’t think this is a reflection of your cofounder’s quality; mine is great after all! I think it's more about not introducing extra complexity. Investors are very simplistic in their approach. They want to understand the 2-3 biggest risks and have a clear idea on how the startup will mitigate those risks. One person can be more direct and clear with information than a team.
There is also the importance of experience. I was terrible at my first 40 meetings. After that I got good, and by the end I was really good. The actual information I relayed was nearly identical between meeting 1 and meeting 50. The big change is EXPERIENCE. I had by then experienced every sort of question and AB tested lots of different responses. I knew what got the investor excited vs concerns in a way that someone without 50 meetings under their belt would not.
Take aways
Build your relationships and network now, through being a genuinely amazing resource for your community.
The most important thing - GET ANY INVESTMENT AT ALL. Most of the funds we went after early said no. It was so much easier for a couple of angel checks to get us introduced to leads, versus trying to get a big lead and fill in with angel checks. Honestly, do anything you can to get a 20K investment from SOMEONE.
Improve your pitch EVERY SINGLE DAY: I practiced into a mirror for hours.
Make company progress EVERY WEEK: We made good company progress each week, including launching a web app and signing new customer LOIs. We sent out what are typically monthly investor updates, weekly to investors. It meant we always had things to talk about and could give a sense of real momentum
Raise small angel checks via Angelist RUV: Wish we had started with this, makes managing small checks way easier.
Get pickier over time: We went from open to nearly any investor to being extremely selective as we closed out the round.
Be the most prepared startup out there: Our 3000 word notion doc was something very few peers did. Remember, you are in competition with 1000 other startups looking for funding right now. They have better connections and teams than you, so set yourself apart through amazing prep!
Think of “NOs” with curiosity not defensively. Startup founding is getting 1 million NOs and still building something. Raising is one part of that, as is getting customers, trying to hire great people etc. Because of my sales background (and honestly alot of tinder dating before I got married) I am comfortable with lots of NOs and rejection and being curious rather than stressed about why people say NO.