How to Raise Angel Funding in DFW: Part 2

This is Part 2 of How to Raise Angel Funding in DFW by Mike IveyClick here for part 1.

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Like any well researched 2-part article, let me start with a few corrections… First, I incorrectly stated that angel groups don’t have a diligence process for smaller rounds. We had <$100k left by the time we went this route and already had an active term sheet. Therefore it was simpler for investors to reach out to me directly (or through the leader of the group) and I took it from there. I’ve learned this is atypical.

Secondly, the “pay-to-pitch” comment clearly struck a nerve. For or against, this is a conversation worth having, however it missed my point. Angel groups serve a tremendous role in the startup ecosystem, but take a great deal of time and have a very low likelihood of success. This cannot be stated enough to cash-strapped startups.

Lastly, this is written entirely from my experience raising money for the first-time. We did some things right, but a lot of things wrong. My sole concern however is helping other startups in an attempt to make DFW the most active / attractive startup community in Texas. What can I say, I’m an Aggie so it kills me when Austin is #1!

What We Did Right

Be Credible

In medicine it’s “first do no harm,” in fundraising it’s “first be credible.” Behind closed doors, after the sales pitch is over, the central question investors have to answer is this: “why you?”

If the answer isn’t quantifiable to some extent your likelihood of raising money is very low. This is true even in Silicon Valley (h/t AngelList):

image

For us, raising money to prove the concept wasn’t attractive or an option, so we did 3 things in an attempt to become credible:

  1. We formed the team around a complimentary set of skills (sales, technology, and domain expertise). All 3 founders in fact had strong industry experience, and our CEO had even previously founded a well known company in our space.
  2. We spent months talking to customers, and had multiple contracts in place before our product was even finished.
  3. We delivered on those contracts before raising money.

Whether we executed this purposefully or were just plain lucky is our little secret, but we did this to actually prove people wanted our product instead of asking everyone to take our word for it (see Steve Blank for more).

Don’t Make Them Think People Want Your Product. Show Them.

The typical story for most startups I’ve met over the past few years (including myself) is this:

  1. Have epiphany.
  2. Build “amazing” product in isolation.
  3. Realize the market wants something else.
  4. Craft a story about how v1.0 revealed a general truth that you will now solve with v2.0.
  5. Try to raise money to build v2.0.

The problem with this approach however is best summarized by my boy Neal:

I invest to accelerate growth, not be a lifeline!

— Neal Rapoport (@nealrap)

This is where Tech Wildcatters plays a tremendous role. Finding promising teams, getting them off the ground, teaching them to pitch, and bringing the local investor community together to vet them is no easy task.And they’re doing a great job!

And yet 4/5 of these startups will still fail. Why?

To butcher a line from The Social Network, “In DFW innovative technology isn’t cool, you know what’s cool? Technology people already want!” This is the unspoken truth about the importance of “B2B.” It isn’t necessarily required, it’s a litmus test. A litmus test to see if anyone in your industry has already expressed that they want what you’re building.

We were interesting because we proved that through revenue, plain and simple. If there was a concern about our market size, product, or any lack of understanding of our industry, the fact that I was able to twice come back and say we doubled revenue made my job raising money significantly easier.

No One Wants to Jump Alone

So at this point let’s just assume that you’re able to appear credible and that investors find you interesting for a variety of reasons, unfortunately your path to investor money is still not guaranteed. That requires convincing the first person to actually jump.

In part 1, I mentioned that we approached investors 6 months before we were ready. We did this to gauge early interest, spell out the milestones we thought we could reach organically, and then prove ourselves before ever asking for money. But it took two years to build these relationships (If you were waiting for a funding “hack”, sorry this is it…)!

Thankfully though we were extremely blessed to convince guys like Roger Chang to join our round early on. Roger is the perfect investor for any early stage company because not only is he an extremely successful entrepreneur with a plethora of valuable insights, but he also helped us set the terms of our deal quickly and fairly.

We’d most likely still be in negotiations without an active term sheet.

Conclusion

Raising money is not sexy, and it’s no guarantee of success. More often than not though it’s required simply because people need money to survive and building a product takes time. But remember this:

I invest to accelerate growth, not be a lifeline!

— Neal Rapoport (@nealrap)

Right now, with whatever runway you have, pick a couple worthwhile milestones then plot a course directly to them. Even if it isn’t launching your product, design it, mock it up, show it to your customers and above all else ask for their money. This is the work we put off because we think our product will eventually sell itself. Trust me, it won’t.

Get to know every investor you can during this process, and tell them what you’re working on. Get them excited / interested in you first and foremost, and your product if you’re lucky. And for God’s sake don’t worry about anyone stealing your idea!

To those of you who are about to fund raise, I salute you. Best of luck with your round, and feel free to reach out if there’s anything I can do to help.

Cheers!

(sidenote: I can’t stress enough the importance of having a lawyer you can trust. We work with Kevin Vela here at Modern Message, but I’ve also worked with Ryan Roberts. Both are top notch, entrepreneur friendly lawyers that are worth every penny. Having your stuff together is paramount before you begin this process.)

  • Show Comments

  • Arlo Gilbert

    Nice article Mike!

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