Deepbench's Yishi Zuo Has Raised 1M+ From Angel Investors. Learn How He Did It
Learn how to raise money from angels the proper way.
Author’s Note: My apologies for being late with this edition. I should have done a better job getting this one organized before I went on business travel. I’ll do better from here on out.
When investing, angel investors don’t demonstrate a herd mentality like VC investors. Fundraising from angel investors is somewhat different from traditional venture capital (VC) firms. Whereas landing one (major/top-tier) VC can help close the rest of your round faster, landing one angel does not lead to others flocking to your company quicker.
Investors who talk more than they listen is a clear red flag. If an investor isn’t actively engaged to learn about your business rather than dictate endlessly from their perspective on how they view your startup, that could spell trouble. They may not be able to adequately provide the advice you need as you describe to them the challenges you face in critical moments.
Having a staged, repeatable fundraising process is key to obtaining and signing term sheets from investors. Yishi did a fantastic job building his fundraising methodology and pipeline to ensure that he minimized wasting his or a potential investor’s time, and also shielding his team from getting dragged into the fundraising process itself. You should probably consider having one main person on your founding team focused on investor outreach and fundraising while the rest focus on building the business.
There are different dynamics at play when raising money from angel investors instead of venture capital firms. Yishi Zuo, one of the cofounders of Deepbench, has successfully raised over $1m+ in funding from angel investors. Zuo has plenty of wisdom and interesting stories to share from his startup’s successful fundraising process.
Yishi Zuo, cofounder of Deepbench.
Frederick Daso: What are some of the differences between raising from angel/individual investors and venture capital firms? Are there any advantages with signing a term sheet from the former instead of the latter?
Yishi Zuo: As a caveat, we have not received any VC term sheets to-date, but we have raised over $1mm - mostly from individual angels + one corporate investor.
The critical difference is the distribution of outcomes. What I mean by that is with VC term-sheets - once you get a lead, you are pretty much done - people pile on, and it should be relatively easy to close (to my knowledge).
With angels - even if you get a few commitments - it doesn't mean that others will commit. Sure, it does provide some validation when we can point to X or Y on our cap table - but it doesn't have the same effect as having an institutional lead.
On the plus side, there is generally less pressure with angels. You can use rolling SAFEs. The concept of a "round" doesn't necessarily exist.
For example, the first check-in our angel "round" came in May 2018. We have our last check coming in December - 2019. In the interim, we raised from more than a dozen angels — the smallest at $10k, largest generally $100k, and median somewhere around $50k.
Whether you call this a 20-month round or something else - I don't know or care. All that matters is that a continuous flow of funds helped us survive and positioned us in a place where we are close to cash-flow positive with nine employees and can thrive. Maybe we raise a VC term sheet round in a couple of quarters, or we can keep growing sustainably. The latter is a little slower, but more of our destiny is in our hands, and there is less pressure associated.
Another difference is the speed of the diligence process. Our first check back in May 2018 came very randomly and fortuitously. There was a speaker who went to a small lunch event at my school - MIT Sloan. I knew his work pretty well, as I used to work in that industry (finance) I asked some great questions during his talk made a good impression, and afterward, I approached him and had a quick 3 min convo.
I thought he might be a customer of our product - but when I brought that up - he immediately said that he was more interested as a potential investor.
So I set a call with him the next week. It was a 15-minute phone call. I don't think he had much experience with start-up investing. I had to explain to him how a SAFE worked (I wasn't exactly sure either - it was the first one we did - but I managed a decent response, I guess) - and he just told me to send the docs over. When he asked me how much we wanted - I wasn't sure what to say - this was one of our first conversations ever. I stammered and threw out a number - $100k, and he said sure. He wired the money the next week.
So after 15 minutes of work - we got our first check in the bank for $100k.
That's happened one more time with another angel a year later, (15-minute diligence process + $100k from a stranger ), but those I'd say are outliers.
By and large, I've probably emailed ~300 people and had ~100 convos via phone/zoom/in person to get to this point. That's roughly a 5-10% success rate depending on how you cut the data. Like the other founder in the VC article said, it is a number + funnels game.
Daso: What was the craziest investment conversation you've had with an angel, and why?
Zuo: One guy took an employee (who introduced him to me) and myself out to dinner.
It was an odd experience. The potential investor talked a lot about himself and the companies that he invested in and how there could be synergies - they could pay us hundreds of thousands of dollars in revenue.
He was a big talker and big thinker, a bit rambling. He said he had connections to Middle Eastern money and had all these visions of what our company could be.
He did pay for dinner, but it was just a big waste of time. Generally, when an investor talks more than they listen during a convo - that is a red flag.
It was just a very odd experience. We are still in touch, more out of politeness than anything - don't want to burn any bridges and create any unnecessary foes but don't think we will ever be taking money from him.
Daso: Are there any tools that you used to help facilitate a meeting with, pitching, following up with, and signing a term sheet from an angel investor?
Zuo: I use a combination of Hellosign, the YC standard SAFE contract, and Google Sheets.
Beyond those tools, I have a relatively standard process for soliciting investments by now, detailed below:
Step 1: Send a blurb of the company to investors.
Step 2: If there is interest, I set up a call. I usually send the deck as I schedule the call unless they ask for it before. Some people say never send the deck beforehand - I think that's silly. No one wants to waste time, and I want them to be as prepared as possible.
Step 3: Now, the call takes place. During the call, I try and run through a demo of our platform. I always ask about a) check size they are comfortable with and b) timeline. Very important - get them to confirm one way or another by a certain date if they are in or out. That could be 1 or 2 weeks. Whatever it is - it is not a big deal. But, they need to provide a date - otherwise, they might yank your chain.
Step 4: Depending on how the call goes, I send them a) a list of our previous angels, b) a customized line or two about why they would be a great fit and how excited we would be to have them on board, c) a word version of the SAFE, and d) a note telling them explicitly to get back to me by the date they set (see above). I, of course, offer to answer any questions in the interim.
Note - I may do a follow-up demo of our platform of some sort - send some additional docs - but for checks $100k and less - I do not let them talk to customers /speak to my co-founders (and there hasn't been too much pushback with that). I keep the process lean and focused on my sanity and that of my team so that we can focus on building the business.
Step 5: I follow up only once, usually a couple of days before the deadline. Telling them explicitly, "Unless I hear otherwise from you, I assume there is no further interest this will be the last email from me."
Step 6: if there is interest, I will send them the HelloSign execution version of the SAFE (Sometimes I combine this with step 4).
Step 7: Once they sign, I have yet to have a real issue with investors not sending money, so I let them take their time to pay me cash.
From beginning to end, this process usually takes 2-3 weeks.
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