In the fall of 2015, we raised a $1,200,000 seed round from Social Capital.
As first time founders, Alex and I knew about as much about raising venture capital as our friends and colleagues. Which is to say: almost nothing.
While we’ve matured a lot as founders over the past year, we still pride ourselves on sharing our learnings through each new milestone, from incorporating our company to getting our first 500 users to launching on Product Hunt. This is no exception. What follows is the step by step story of how we raised our seed round.
Step 0: To raise or not to raise
The first stop on the road to raising a seed round was deciding if taking investor money was something we even wanted to do.
Believe it or not, raising money from investors does have downsides.
When you raise money, you’re committing yourself fully to whatever idea you’ve been working on. If you decide you want to work on a different idea, at a different company, or in a lower stress environment, you’re out of luck. There’s no walking away. Or, as I’m fond of saying:
When you raise venture capital, the expectation is that you build a rocket and strap yourself to it, whether or not it goes up.
On the other hand, venture capital can be potent. We offer a consumer mobile app in an inherently un-viral vertical: personal finance. Venture capital would give us the resources we needed to grow Penny in a hyper-competitive space.
In the end, it was the right decision for us. We were committed to working on Penny, and raising money was the best way for us to work towards our vision.
Step 1: Get advice
Alex and I had no idea what we were doing, so our next stop was to get advice about how to actually raise money. We reached out to every founder and early employee we knew to ask for guidance.
One early piece of advice we had picked up from our reading online (the Startup Playbook is a good place to start) was to raise money as quickly as you can and then get back to work. To that end, we packed these advice-seeking meetings into a single week. We also pushed for in-person meetings when we could get them.
In total, we met with about ten different people. Throughout those meetings, we asked just about every question in the book: how to find investors, how to approach them, what to talk about, what to put in our pitch deck, how much to raise, etc.
Notably, we received a lot of conflicting advice in response.
“Have you had wildly conflicting advice from two people in the same day yet? They’re all right, you know. Just don’t choose the average of them; that’s a terrible idea.” - A startup founder
The important part was that we were exposed to lots of different ways to approach the process and were able to choose the one that best suited us.
In hindsight, these meetings were the single best decision we made throughout the fundraising process. Not only did we get great advice from the people we talked to — we also honed our pitch and walked away with some of our first introductions to angel investors and venture capital firms.
Step 2: How much is enough
Next up was deciding how much to raise.
There are two basic options for a seed round: a friends and family-backed round (typically $25–250k), or a larger, angel and VC-backed round (typically $500k-$2MM). Because we had already launched a working version of Penny and had active, engaged users, we were able to skip over the friends and family round and pursue the VC-backed route.
However, knowing who to raise from is very different from knowing how much to raise.
Based on some quick googling — our default when Alex or I have no idea what we’re doing — we eventually landed on raising enough money to cover one year’s worth of operating expenses. To find out what “one year’s worth” amounted to, we put together a spreadsheet of our expected expenses over time. The projected expenses were based on projected growth of both our user base and our head count. As all of this was subjective anyways, we tweaked our growth rates until we had something reasonable sounding.
Based on those projections, we anticipated spending just over $500k on salaries, office space, equipment, servers, marketing, etc. in our first year.
And… we quickly threw that number out the window.
As part of the aforementioned advice-seeking process, we learned that our target runway was pretty silly. It turns out that raising subsequent rounds of venture capital should happen well in advance of running out of money, so a year of runway would imply that you’d need to start thinking about your next round of fundraising about six months after closing your seed round. Not a smart idea. Instead, most recommended raising for about 18 months of runway.
Another common piece of advice we heard was to raise less than you actually want, but at least as much as you actually need, since it makes building momentum in the round much easier.
Factoring that advice in, we decided to aim for $600k (our “need” amount) and increase the round from there if we saw strong interest. At least, that’s how we drew it up on the chalk board.
Step 3: Learn to pitch
The third and final preparation stage was learning how to pitch our company. And boy, did that take work.
As one founder put it, there are two ways to sell your company to investors:
- Option 1: Show up with strong enough growth and retention that they think it’d be stupid to not hop on board (he termed this the “where does the graph end” approach).
- Option 2: Sell them on the vision and how it plays into an existing trend (hint: it better be a big vision and be pitched at the right time).
The latter is much harder, which is why you always want to go with the former if possible.
We later learned that, for a seed stage company, investors are betting as much on the founders as they are on the business. In light of that, I’d add a third option to the list:
- Option 3: Convince them that a problem exists and that you’re the best people to solve it.
That’s the angle we eventually went with.
As far as actually communicating that to investors, the theme was concision, concision, concision.
Explaining your company in clear, concise words sends a strong signal that you know what you’re talking about. It also makes it easier for investors to figure out what it is you actually do. You’d be amazed at how often that is a problem.
Step 4: Hustle
Once we had practiced our pitch, we turned our attention to the fun (or for some, terrifying) part: meeting with investors.
This process varies wildly from startup to startup. For some it takes months, for others weeks or even days. Instead of discussing those various scenarios, I’ll simply recount our own journey.
Our fundraising efforts started off on an unexpected foot. We were just wrapping up our advice-seeking week and were planning to gather intros to investors and begin pitching the following week. But our timeline was rapidly accelerated when we met with a user who wanted to share their feedback in person. As luck would have it, the person happened to be a Silicon Valley veteran. When he caught wind that we were planning to raise a round, he started grilling us on every aspect of the business.
Ten minutes after the meeting ended, we were talking things over when he text us: “Can you come back? There’s someone I’d like you to meet.”
Fifteen minutes later, the person he introduced us to offered to write us our first check. Later that night, we did a handshake deal over email for $50k. And with that, our first check was booked.
The encounter taught us a lot, including: angel investors move quickly, this industry is crazy, luck plays a big role, and at least one other person thought what we were doing had the potential to be valuable.
After that handshake deal, the clock started ticking on our “round.” In order to build momentum, we had to start talking to other investors in earnest. Our new angel investor was invaluable on that front. He and his investment partner already had a powerful network in the valley, and they put it to good use on our behalf.
We set up approximately ten seed-related meetings in our first week of fundraising, fifteen in our second, and another ten in our final week. Most followed the same pattern: a warm email introduction, a 30-minute phone screen, and an in-person meeting or two.
As you might imagine, not everything went our way. One investor thought our monetization strategy was a deal-breaker; another was so distracted that we had to essentially interview ourselves; our contact at one firm came down with mono and wasn’t able to meet; a partner at another spent more time talking about his brilliant idea for a startup than discussing ours.
However — on aggregate — we were lucky. We were in the right space at the right time with the right team.
One of the meetings we were most looking forward to was with a partner at Social Capital. It was one of our first trips down to the fabled VC holy land in Palo Alto; the majority of our other meetings were remote or in San Francisco.
I’m not sure what I was expecting, but I know I wasn’t expecting the partner to walk into the room holding a giant bowl of ice cream. Needless to say, he was a pretty laid back person.
Within twenty minutes, he expressed a preliminary interest in investing. We were stoked. He also suggested we consider expanding our round from the $600k we had quoted him. His line of reasoning echoed what we had heard leading up to this process, so we were inclined to agree.
The only hurdle between us and an investment was a partner meeting early the following week. If you’ve never participated in a partner meeting (we hadn’t), count your blessings. A half-dozen venture capital partners pepper you with questions for the better part of an hour while you do your best to not say anything too stupid. It’s an intimidating, rigorous meeting for the uninitiated. And as with any high-pressure performance, we walked away wishing we would have done better.
Luckily, we did well enough to pass.
Step 5: Close
By the second week of fundraising, we had a pretty good sense of which investors we were most excited about, and which were most excited about us. As a result, we transitioned from pitching mode to negotiating mode.
We narrowed it down to two VC firms that were interested in leading our round — Social Capital included — and a handful of other firms that might contribute smaller checks if given the chance.
Despite how quickly we thought we were moving, managing concurrent timelines still proved to be tricky. The first VC’s offer to invest came over a week before the second’s.
In our case, the real issue boiled down to inexperience. Luckily, both partners graciously gave us some extra breathing room while we fumbled our way through the process.
Our negotiation with Social Capital spanned two late-night phone calls. On the first, we confirmed the anticipated investment amount and first broached the topic of our valuation cap (a term that sets the investors “worst-case” ownership percent and the company’s “best-case” valuation). That call was followed by some backchannel reference checks and a quick data audit.
The second call was two days later, on my birthday. The call came shortly after I finished dinner with my wife (then girlfriend). To give you a sense of how quickly these negotiations can move: the call lasted no more than ten minutes, including small talk, and the major terms moved by roughly 20%.
With the partner still on the phone, we sent an email to confirm the terms and had him respond in kind, thereby sealing the handshake deal.
And that was it. Our seed round had come to close.
Step 6: Get back to work
It was an emotional moment for Alex and me. While money by no means implies success, the investment meant that we would have the opportunity to continue pursuing Penny full time for the next couple of years. Given how strongly we believe in the mission — increase financial literacy and make finances less stressful — that meant a lot to us.
The next day, we reviewed and signed the mostly-standard paperwork to confirm the investment, the money arrived in our account the following business day, and by the morning after that we were moving 100 miles an hour on the product again.