How to Have a Smarter VC Strategy

Four Tips for Startups

I was sitting at dinner with my family after a week of non-stop, around-the-clock meetings, phone calls, purchase agreement edits, more agreement edits…again with the agreement edits, and I found myself settling into the fact that the company we founded just five short years ago had just successfully completed a Series A round of funding.

A pivotal startup milestone? Sure. Unique? Not really. But every startup’s journey towards getting to the Series A point is certainly unique in its own way, and when I reflect on what it took to reach this goal, there were four key strategies, related to raising funds and seeking out investors, that really set us up for successes and helped us get there not just faster, but smarter.

The first one relates to the most important investor…you, the founder(s)!

1. Bootstrap if you can, for as long as you can

As a startup you’ll likely fail. Not necessarily the entire business, but at some point, something will fail and you’ll either learn from it and grow or it will be the beginning of the end. Either way, if you know you’re going to fail, it’s much better to do so with your own money on the line than money that also costs you in dilution, perpetuity or more.

I speak from experience. Our “is this really happening” moment came when we realized that solving the problem we saw would not be possible without first addressing a larger industry problem. At this point, we had already developed the first phase of the platform by bootstrapping. We got back on our feet and successfully pivoted the business.

2. Consider convertible debt

Before diving into a seed round, you may want to consider convertible debt over equity financing. Convertible debt is best when you don’t yet have revenue or a good sense for your valuation, because it allows you to raise money on the basis that the valuation will be set one to three years in the future, based on execution of the early business model.

You benefit from the capital and investors benefit from a nice discount at conversion, usually in the range of 20 percent. We were able to raise $750k this way. Some came from angel investors, but we also sought out industry experts to be early contributors in this stage, which leads me to tip number three.

3. Find extra value in “smart” money

Many early stage companies seek out money wherever they can find it, often from dozens of angel investors, and worry about attracting more strategic investors down the line. Some of the best advice I’ve received as an entrepreneur counters this approach; the advice to prioritize strategic investors, even early on, to make future fund raising more successful.

While we were absolutely grateful for contributions from a few friends and family members, we put the majority of our energy into recruiting “smart” money; investors that could give us not just money, but time, advice and expertise to balance out our strengths and weaknesses. Face it, you don’t know everything — even Steve Jobs didn’t know everything. The right investors can fill two gaps, the money gap and the knowledge gap.

Our hyper-focus on searching for value-add investors allowed us to bring on both a strategic investor with significant experience in our space and who had already built a successful business, as well as institutional money from ATX Seed Ventures. With these two new, knowledgeable, “been there done that” stakeholders it was almost like having the benefits of a board before we were really ready to have an official governing body.

While the money was important, the time and advice we received at this early stage was just as, if not more, crucial. Our strategic investor had a major impact on the way we shaped our business model, and we owe a lot of our success to his advice. Delaying in obtaining this level of talent would not have had nearly the same impact. And bringing in institutional money from ATX Seed Ventures brought tremendous value in the form of gaining attention and press, especially in Austin, as well as access to the firm’s team and network. In fact, our most recent board addition came out of our ATX Seed relationship, a connection we made years ago and have been benefiting from ever since.

4. Investor location matters

About a year and a half after closing our convertible debt round, we pursued our first equity round. The “Seed Round” is critical because it’s in this round that you establish your board and corporate governance. With that in mind, we were not shy about being picky. We met with close to forty VCs around the country in a span of six months. Location was a major factor in our search, wanting to ensure geographical diversity as the board took shape.

We focused on firms based both locally, in Austin, as well as on the East and West Coast. An Austin investor was important to us for obvious reasons; we wanted to have someone we could meet with regularly in person, with a network that would help us with executive hiring and growth. But knowing we wanted to raise more money down the line, we knew it would be beneficial to look at outside money as well. In the end, our seed round funds came from firms in both Austin and on the West Coast.

Many Austin-based startups focus on Austin firms only; if they spent a little extra time marketing themselves to outside firms, they could help set the foundation for expanded visibility and growth in the future. Seeking out even just one West or East Coast firm can give you an “out of Austin” presence that extends your network in a way that can prove incredibly fruitful. Rather than waiting until your Series A or B round, when it’s harder to build outside relationships, bringing in outside firms early allows you to leverage that extended network from the start.

Since our seed round, we’ve made a point to speak with our West Coast investor regularly, keeping the relationship going for when we raise future rounds. When we do get to our Series B, for example, having this firm already know who we are and where we’ve come from means a lot of the hard work is already done.

There’s of course more than one way to successfully raise money and reach the Series A milestone, yet the strategies we’ve learned along the way, often times the hard way, have helped us be smarter and more efficient with our money and investors. This ultimately comes full circle, as these attributes make us even more attractive to future investors as we approach additional rounds down the line.

Now here’s to hoping the next round involves slightly fewer agreement edits!