Convictional’s Chris Grouchy and Roger Kirkness Discuss How To Fundraise Properly
Fundraising is hard. Learn from two YC founders how to do it properly.
Author’s Note: If you don’t have time to read the full post (which I highly recommend), an executive summary is below for your convenience! Also, bolded words are for emphasizing important points to focus on.
Fundraising: a choice between stressing over cash flow or growth.
o Stressing over cash flow leaves you with more ownership of the company, at the cost of the uncertainty of managing your businesses expenses on a day-to-day or month-month-basis.
o Stressing over growth leads to having cash on hand to run experiments and double-down on what’s working, but dilutes your stake in the company and comes with additional expectations of growing rapidly in a short amount of time.
Don’t rush the fundraising process. Take time to get to know your potential investor thoroughly. More importantly, pay attention to how they treat you in your discussions surrounding fundraising. It is a strong indicator of how your relationship will be with them if you decide to sign their term sheet.
Raising too much isn’t always good. You should optimize to raise the least amount of cash needed to grow (with a buffer). If you’ve built a good business, you will be in a position to fundraise on your own timeline and terms, not anyone else’s.
Have practice fundraising meetings. sessions with other founders or investors who are willing to help prepare you for the actual conversations you’ll have with individuals and VC firms you want to raise from for you round. Practice makes perfect, or at least greatly increases your odds of raising your round successfully.
Be prepared for everything. Thoroughly prepare for every step in the fundraising process: researching an investor, getting in front of them in their preferred setting, setting up the conversation to have a meaningful dialogue, and following up. An investor wanting more information after your main meeting is a strong indicator of their interest and possible investment.
Raising money from venture capital firms is difficult for even the most promising startups. Many founders fail due to a lack of preparation regarding what investors are looking for to invest in a startup. Chris Grouchy and Roger Kirkness of Convictional have successfully raised $2.2 million in a seed round led by Lachy Groom, an early Stripe employee, with participation from AME Cloud Ventures (Jerry Yang, founder of Yahoo), Tribe Capital, FundersClub, Garage Capital, and others. Grouchy and Kirkness have plenty of wisdom to share from their successful fundraising process.
Convictional cofounders Chris Grouchy (left) and Roger Kirkness (right).
Daso: Before fundraising, how did you build the business through bootstrapping?
Grouchy & Kirkness: We both spent the first few years of our careers working in the highest paying roles we could while living very minimally. In that sense, we started working on the business many years before we began to save up enough to not have to take the wrong customers for cash flow. Both of us had 2-3 years (depending on spending) worth of cash when we left our jobs to start the company. At a certain point, you have to decide whether or not you want to go big. We feel taking on money was worthwhile, and we did it at the right time (around when we could have supported ourselves with the survival cash). In the current environment, capital is more abundant and less biased than it has been before, so that both options can be viable. Consider whether you would instead stress about growth or cash flow when thinking about fundraising.
Daso: How should a founder think about growth versus cash flow concerning fundraising?
Kirkness: I think the choice is goal and temperament dependent. In my experience, people go to the one that makes them less anxious. Some people prefer control, which means not taking money, and stressing about cash flow. Some people prefer stability, at in getting paid every other week, and are willing to trade off control to get it. If you do that by raising money, you end up with growth stress. All forms of capital available to startups have high interest, as in the expectations are high (could be a bank or a VC). So you stress about growth. By having money, you're less likely to have to stress about cash flow by comparison. You don't get the freedom to speed up and slow down at will as much; you are expected to deploy it. Personally speaking, I've found stressing about growth to be more productive than about cash flow, but not everyone gets to make that choice.
Daso: At the time, how did you decide that fundraising was the right choice over bootstrapping?
Grouchy & Kirkness: When we applied to Y Combinator, we both felt two things about the business. The first thing was we felt that there was a tremendous opportunity and something meaningful behind the work itself. The second was that to win in the market we chose, we would have to do significant R&D. Once we saw how big Convictional could be and how long and expensive it would be actually to take it there, we decided to pursue YC.
We took a considerable amount of time thinking through the TAM, an approach to distribution, and the problem we should solve through hundreds of conversations with prospective customers. We believe it should be a practical decision, as in do you need the money to grow and what options exist for getting the money, as opposed to an overly values-based one. If you prefer stressing about cash flow, and want absolute control, you have to bootstrap. If you don't mind giving up some control in exchange for cash and higher expectations, don't hesitate to fundraise.
Daso: Given that you chose to fundraise, what were your criteria for selecting investors to partner with in your seed round?
Grouchy & Kirkness: We looked for people who had been involved in the founding of companies before, especially ones that were in a reasonably complex market, as well as whether we liked them as people. We turned down checks from people whom we didn't feel we could trust or who seemed inexperienced as operators.
Convictional's market is giant and mature relative to some markets. It takes a certain amount of credibility, quality, and social proof to get into the room with customers. We needed people we felt possessed the wisdom to be able to help us do that. Early on in YC, we ended up receiving inbound interest from investors that we thought must have been typical. We decided to be cautious by slowing down our conversations. We realize that most founders don't have that luxury, and that's when it's a lot harder of a decision to decide whose term sheet you sign. Similar to dating, we found investors turned out to be an extreme version of who they were during fundraising conversations. If they were kind, they're even kinder now. If they were brash, they're even brasher. Any signals about an individual during early investment conversations will likely turn out to be an accurate read on the people that you're working with. Being a few months out of YC, we feel that we like everyone we raised money from, more than we expected we would.
Daso: How did you two determine the amount that was appropriate to raise?
Grouchy & Kirkness: Our fundraising process evolved over a few weeks, which is a small amount of time relative to other startups. We initially modeled out a worst-case, lean-case, and best-case scenario for fundraising. Those scenarios were determined based on the maximum dilution we would have felt comfortable with, and the amount we felt we could reasonably raise. The worst-case assumed that we wouldn't be able to raise at all, and so we could keep bootstrapping but run fewer experiments. The lean case was based on wanting to raise enough to see through all the tests we had in our head about our market. In our mind, that was roughly $1M in the leanest possible way of approaching it. In the end, we raised a little over double that, our best-case scenario, which was opportunistic because of the terms we were getting. In the best-case situation, we wouldn't need all of it to run the experiments that we defined, but it gave us a buffer. Depending on the terms you are getting from the market, it can make sense to raise more or less, but you should model out.
The most practical approach seems to be to try and figure out how much money you'll need to get to the next level, and then work backward to determine what you'll use it for. Once you know what that number is, consider how many things you might be missing and add a buffer. Finally, fundraising is enormously distracting when it comes to the actual day to day issues, so we wanted to optimize for doing it as few times as possible in the life of the business. All of those reasons led us to raise more than we needed.
Our lesson was that we feel we ended up raising the right amount and that most people we know with regrets raised too much on bad terms without holding out for better conditions. Better terms generally comes from having a better business, the idea is to raise as little as you need at a particular time and put it off as long as possible. We benefited a lot from that approach, but I think it does generalize to others. Show meaningful progress, and it will resonate.
Daso: What are some of the common pitfalls to fundraising, and how did you avoid them? If you fell into them, how did it impact your fundraising process?
Grouchy & Kirkness: We mainly focused on partnering with smart, good people whom we could learn from. We defined the terms we would accept in our scenario modeling and did not waver from them if only to increase our expectations once we saw that the "best-case scenario" was attainable. We saw many founders not take introductory "feeler" meetings and try to do it all at once, which didn't seem to work as well. We saw people raise on bad terms out of fear and miss out on something better a few weeks later. We saw people take what their current investors wanted too slowly into account and end up complicating the process. We saw people take non-standard terms and have immediate regret. It's not clear there's an excellent way to avoid those things entirely; it's a learning experience. We were poorly prepared for our first few meetings, and those meetings could have had very different outcomes, if not.
We would have taken a few practice meetings before actually getting into meetings we cared a lot about so that we had the experience beforehand. There are all kinds of ways to do it wrong, but a lot of them are recoverable with experience. If you don't have the experience, you have to start somewhere. We saw people over-index on advice when they didn't have the experience, but raising money for someone else is going to lead to regret.
So we just formulated the plan on our own, failed our way through more than a few early meetings, and eventually got a rhythm where the meetings went well, and we felt good about the people we were partnering with. You improve on your fundraising skills from experience more so than talent. The person on the other side of the table has done this a lot more than you have. So you will encounter pitfalls. At the end of each meeting, think critically about the questions you were asked, how you answered them, and how you would answer them differently next time.
Daso: Based on your own experience, what are the few things that every founder should know before they start reaching out to investors?
Grouchy & Kirkness: The conversion rate on investors we reached out to cold was zero, whereas conversion on our network and inbound was incredibly high. Fundraising is similar to sales. Inbound leads often close more efficiently than outbound leads. In fundraising, if you can find a way to get in front of investors (like an accelerator or competition), that helps a lot if you are starting from scratch. The reason is that different investors will have different interests and value companies differently. You want to find the ones that share values, who can't believe no one else has invested because it's such a great opportunity. It is a challenge to infer people's values by following them on Twitter or reading the things they have written. We found it helps just to have a way to get in front of lots of them generically, and the ones that your work resonates with will find you.
The other thing would be to make sure the business is ready. It is immediately evident when you talk to a founder how long they have spent on an idea. There's this smell that investors can get from pretty far out that someone is not serious or hasn't done enough work to figure out what the opportunity is. We were fortunate that we spent more than a year trying to experiment and fail. We had customers too, so the combination of talking about things we have tried (and how they failed) and what customers were telling us was powerful. We would not have had the fundraising experience we did, if not for being able to do that.
The last piece of advice we would give is to nail the basics. Book your meetings well in advance and run a competitive process; don't half-ass it. Show up to each meeting prepared, research the investor and their firm, portray confidence and be honest about gaps in your understanding, know your numbers and what kind of round you're raising before the meeting, tell a compelling story at the beginning of the meeting, maintain control of the conversation, find things to learn from after each meeting that you have, and always follow up. We would follow up on the same day with a brief recap of our company (personalized to the person and the conversation we'd had), and we would offer to share our writing about the market, product requirements document, and a custom demo. If an investor took us up on the offer for follow up information, then they were usually close to making a decision.
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