Building Codiga: Fundraising
Note: This is the third post of a series about building Codiga.
Two episodes of my life have been particularly painful:
running a 100 miles under 100 degree Fahrenheit (40C) in 30 hours with food poisoning
raising a $2M seed round for Codiga
In 2021, I would I would have preferred running a second 100 miles.
In the following post, I explain how fundraising works and make connections with my own fundraising story.
Should you raise money?
If you can avoid raising funds for your startup, do not raise. Raising money means giving up some control of your company. The moment you give away some control of your company to investors, you are no longer fully the captain of your ship.
Some investors are a real pain to work with, while others always act in your best interest. I never had to complain and had only amazing investors on my cap table, but I have heard horror stories from other founders. Before accepting significant funding from an investor, always talk to founders who worked with them.
Some founders perceive the amount raised and its associated valuation as a vanity metric. It’s common to see founders talking only about the amount they raised. We are in a society that overvalues money, and too many founders believe that the more money they raise, the more their odds of success increase. Thinking that money solves most of your problems is the biggest misconception in startup land (and it’s generally false – money never solves large, systemic problems – governments are a good illustration that too much money does not solve your problems, it often aggravates them). If money could solve everything, startups would be doomed from day 1, and every big company would crush small startups.
You should raise money only for one reason: to reach your next milestone. If you are a pre-seed company, your next milestone might be to build a team and develop a product. If you are a seed company, your next milestone might be to reach $1M ARR before raising your series A. If you are series A, your objective might be to reach profitability or develop more products. If you can reach these milestones without raising funding: do not raise. And try first to reach your next milestone without hiring: work with a friend and give them equity, pay contractors in countries with lower wages, etc. If you really need money: raise and only raise enough to reach your goal to avoid traditional pitfalls with fundraising.
I raised money for Codiga because I wanted to make a perfect product with a great developer experience. I am decent at knowing if a product or design is good. But I am a terrible designer, I hate JavaScript and I do not understand CSS (trust me, I tried). I used the money and hired a great designer and frontend engineer. I also wanted to develop more integrations and I could not do more than what I was already doing so I hired another engineer.
I raised a total of $2M. My objective was to raise enough to have 3 years of runway. This would be enough to build a product that is good enough that it sells itself. If we did not make it after 3 years, we then deserved to die. That was my philosophy.
Fundraising 101
In exchange for money from an investor, the investor receives equity in the company. In other words, the investor owns part of the company. There are multiple vehicles to invest in a company (convertible debt, SAFE, equity rounds, etc.). We will not cover the specificity for each of them - I would be incompetent at explaining each of these investment methods. For more details, you should read Venture Deals to understand this more clearly.
When you raise funds, you generally raise a given amount ($1,000,000) at a given valuation ($10,000,000). If you raise $1,000,000 at $10,000,000, you give away 10% of your company (the exact number depends on how the money is raised) in this round. As you keep raising more money in subsequent funding rounds, you will give away more equity in your company and will be “diluted” further.
When raising funds, the important numbers are how much you raise and the valuation (e.g. “I raise $X at $Y valuation”). The higher you raise, the more you can accelerate your company's growth, but the more equity you give away.
You start by owning 100% of your company. After your seed round, you will own between 85% to 70% of your company. Each round will dilute more and more, reducing your company ownership.
When I entered TechStars, I already gave away ~10% of the company (6% for entering the program and another ~3% for their convertible debt). When I started raising fund, I owned ~90% of the company. I ended up raising $2.1M and giving away between 20% and 30% of the company, which is within what you can see in the industry. At the time of selling Codiga, I still owned more than 60% of the company.
How to raise money?
This paragraph needs a full book by itself but I will try to make a condensed version.
There are three reasons investors will fund your business:
You have strong metrics (revenue or user growth) that show a good potential with strong economic fundamentals. This is almost never the case because your metrics typically look horrible in the early stages.
They believe in the team. This is more common.
You look like the investors. You come from Stanford/Harvard and have similar background than the investors. This is very common (look at how many Stanford graduates receive funding from investors that come from … Stanford!). Investors invest in people that look like them.
When you are at the seed stage and can demonstrate strong metrics, fundraising should not be a problem. For example, if you can show 50% revenue increase every month for 6 months and have high margins, investors will fund you because you are a golden goose. It’s extremely rare to show such metrics and strong traction at this stage.
More often, you do not have revenue or even a product. In this case, investors bet on a team. In these cases, credentials matter a lot. But more importantly, what matters is the proximity with investors (more on this later).
When raising, have your pitch deck ready (well-designed slides that explains the problem, your solution and the team). Make sure your pitch is simple, crisp and clear. Take examples from great pitch decks like the one from AirBNB. Rehearse with friends, family, alone: make sure you are ready to pitch!
Track your fundraising progress using a pipeline (example of the pipeline I used for my fundraising). An investor pipeline is exactly like a sales pipeline: it moves every investor through different stages (contacted, first meeting, second meeting, close, funds raising). No need to have a CRM for it, a good old excel spreadsheet is enough. In this fundraising pipeline, put the name of the investor, their email and when you had a contact with them. Then, find someone connected to this investor and ask them for an introduction. Never cold email investors yourself, always use someone you know that can introduce you (this is where accelerator are useful - you leverage the accelerator network to get warm introductions to investors).
You can see below an example of the spreadsheet that I used during my fundraising. The real one had 1,000 rows in it. I sourced investors from the Techstars database, crunchbase and got lucky to have a lot of cold introductions (more on this later).
Like dating, practice your pitch with investors you do not want on your captable. Take your time to adapt and talk to your ideal investors only when your pitch is ready.
Fundraising is an unfair game. A lot of people receive an insane amount of funding while others do not get everything. There are often complains about culture/gender/location discrepancy in fundraising. And these are true but complaining will not increase your odds of getting funded. The reality is that investors help/invest people that look like them: similar location, culture, etc.
My first check was from a french angel investor in San Francisco (people that shared my culture, nationality, location). It was then followed by an investor that knew them. Reach people that know you or share something in common with you. Of course, it’s way easier to do this if you are based in the US and attended Stanford or MIT. But as more founders are building companies and becoming angel investors, capital is spread in more diverse investors.
The harder part is to raise at least 50% of your round. Once you start to get commitments and checks coming in, raising is getting easier. When you start, nobody trusts you and you need to prove you can get interest. Investors believe they have time to invest. Once you close 50% of your round, the dynamic changes: FOMO kicks in and investors start to invest, fearing they will not be able to participate in this round.
Number and scale matters. I heard many founders complaining that fundraising was impossible when all they did is to contact 20 investors. Such a mentality comes from people that believe the first investor will give them millions at the first call. There are the number I got for raising a $2.2M seed round
I contacted 200 investors
It took me 6 months from the first call to receive the investments
I had a total of more than 400 meetings, each of them being between 30 minutes and 1 hour.
You need to constantly work on your fundraising, discover new investors, find a way to get warm introductions and grow your fundraising pipeline until you are done.
Use your investors. Once you have investors, ask them to make introductions to other investors in their network. When I raise my round, I cold email Bart Macdonald and Alex Cohen (check out their angel funds, they are awesome). My success of getting a check from them was close to 0 since I did not know them but I gave a shot. I met Alex in Mountain View and he committed to a check. Alex had a huge following on Twitter and all famous investors and asked him to put a tweet to help me. Thanks to Alex, I got dozen of introductions, got to meet a lot of investors in person while I was in the Bay Area. In retrospect, this has been one of the biggest help from an investor and I am very thankful for the support Alex gave me. Should I not ask Alex for help, I am not sure I would have had the same success.
Fundraising Pitfalls
You have three typical problems when raising money
how much you raise
your valuation
how much power you give to your investor
If you raise too little money, you may not have enough cash to reach your next milestone (and not acquire enough customers, market share, etc.). It will be a bad signal to investors that you have no idea what you are doing and impact your ability to raise again. Raising too much money is also an issue because (1) your valuation will be too high or (2) you will give away too much ownership to your investors. Investors want founders to have a stake in the game. After your first round, you should give away 20% to 30% of your company. It will ensure you are still in control and will have control after the next round.
If you raise at a low valuation, you will give away too much equity. It will impair your ability to raise your next round. Your first valuation must be an anchor, and your next valuation will be higher than this one. If you raise at a high valuation, you may impact the sale of your company and your ability to raise your next round.
Acquisition: if, at some point, a company wants to acquire you (which may happen - rarely - at this stage), they will acquire you for a multiplier of your valuation (to give a return to investors).
Future raise: if you raise at a high valuation, your next round must be higher than your current round. Otherwise, it’s a down-round and means that the new investors have a better deal with the previous investors (that took more risk since they invested earlier).
When you raise, you typically give some control to your largest investors (typically a board seat or information rights). Most investors at the early stage will not ask for any specific rights. But some (especially the larger ones) may ask for some control of the company (e.g., having a board seat). It can greatly boost the company, especially if your investor is a recognized expert in a specific domain. But it can also be a huge issue if the investor has too much control and can take over the CEO. There are some cases when founders gave away too much power (e.g., control of the company) to an investor who took over the company, fired the founders, and hired engineers abroad to reduce costs and be profitable.
When I raised my round in 2021, I noticed many people raising large seed rounds ($4M, $5M) at very high valuations ($20M to $30M - without a product!). At this time, some people asked me to increase my fundraising expectations (e.g. more money at high valuations). This never made sense to me as these numbers needed to be justified and backed by strong economic reasoning. Raising what I needed to raise (around $2M) at a reasonable valuation was the correct move: it allowed me to execute, make progress without too much dilution.
Know your investors
The best investors are past entrepreneurs. They know exactly what you have been through and understand how to build a startup. Investors who never built anything or do not have deep expertise are generally just followers.
Of all my investors, the most useful and humble people were prior entrepreneurs that already had their first successful run. They were always caring, available, and extremely useful. They never pushed me to do anything but took the time to explain their experience, decision-making process, and why they did something. This is the type of investor you want on your captable.
Final Thoughts
… if you talk to an investor more than twice and they do not commit: you are wasting your time. Some investors asked me to meet up to 6 times and they never committed. If someone has conviction in you, they will commit after two meetings.
… if you are a repeat founders and had a successful exit, your odds, pace, round size and valuations will all be higher than anybody else.