Guest post by Bhavin Parikh
I had the pleasure of being on a panel at NextSpace Berkeley with Aaron Schwartz, CEO of Modify Watches, Michael Berolzheimer, managing partner at Bee Partners, and Doug Bend, lead attorney at Bend Law Group. By the way, I’m Bhavin, co-founder and CEO of Magoosh. The four of us know each other well. Aaron and I went to business school together at Berkeley. Michael, also a Berkeley MBA alum, invested in both Magoosh and Modify. And Doug serves as Modify’s lawyer. As a panelist, I enjoyed actually knowing the other panelists for once; we had some playful banter and built on each other’s stories – hopefully, the audience found us as entertaining as we found ourselves.
As two startup founders (with teams of 8 and 15) a VC, and a lawyer, we’ve made our fair share of mistakes…well, maybe not the lawyer. Throughout the evening, we shared a variety of tips and learnings. Here’s my top seven:
Be a line, not a dot
Finding an investor is like dating. You wouldn’t ask someone to marry you on your first date, and you shouldn’t ask an investor for money in your first meeting. Take time to build a relationship with an investor. Start the relationship before you even plan on starting to fundraise. Just let the investor know that you’re still at a very early stage, you’re looking for feedback and advice, and you may be back in 3 to 6 months when you start fundraising.
Lines have a slope and trajectory; dots are static. You want to demonstrate to an investor that your startup is moving up and to the right over time, like a line. Mark Suster of Upfront Ventures writes about lines not dots more eloquently than I ever could. Sidenote: Aaron and I both had relationships with Michael for nearly 2 years before he invested in each of our startups!
Find a founder mentor
Founding a startup is hard. And asking others for money to fund your startup is often harder. That being said, it’s also one of the most important things you can do to help you startup grow and succeed. Find someone in your network who has done it before, ideally no more than a few years before you, and tell them everything about your startup. That person likely has learned many lessons, and you should use their experience to your advantage. I’m currently helping several startups understand how to approach fundraising, sharing the mistakes that I made. And the more open they are with me, the more helpful I can be to them.
Just say no to NDA’s
Speaking of being open, I and the other panelists all feel strongly that asking for NDA’s are a bad idea when you’re fundraising. Most investors won’t consider signing one, and even asking them to sign an NDA sends a negative signal. Early stage investors are often investing in you and your ability to execute, they are not investing in your idea (which will likely change several times over the years anyway.) By presenting an investor with an NDA, you look somewhat naive, thinking it’s your idea, not you, that’s valuable.
Raise enough money
One of the biggest mistakes that founders make is not raising enough money. Fundraising takes a lot of time and energy, often 3 to 6 months from when you decide to raise. So when you are raising, you should try to raise a little extra, even if that means giving a little more of your company away. Otherwise, you might find yourself raising again, which will take another 3+ months. We didn’t raise enough money for Magoosh, and a year later we were 3-4 months away from going out of business. I had to reach out to investors again asking for a bridge round, which took my time away from focusing on the business. Luckily, it all worked out and we’re now a profitable and growing company, but not every startup is that fortunate. Raise enough money to last you 18 to 24 months, you’ll need it.
Understand the difference between “no” and “not now”.
When an investor passes on your company, ask why. If it’s because you are a consumer web company, and they typically invest in healthcare, then “no” likely means “no.” You are out of scope for them. However, if you are in-scope, and they have concerns about the team or progress, then keep them updated via a monthly newsletter, because the “no” is actually a “not now.” Michael had told Aaron that he would never invest in Modify. Aaron kept Michael updated via a newsletter on the company’s progress and six months later, Michael invested. Pro-tip: if you haven’t started a newsletter, start one and keep investors, advisers, and friends updated.
Find a good lawyer
I mentioned this on the panel, and I’ll say it again here. Legal mistakes can be painful and costly. We initially did our incorporation and equity grants using LegalZoom, and we made some mistakes that were very difficult to undo. Doug mentioned that many law firms have a flat rate for early-stage company documents, usually costing $2-3K. Another alternative is to pitch a larger law firm that might offer you deferred fees, such as $25K deferred, payable when you raise an equity round of financing, at which point you’ll be able to afford it. Also, read this book before you start fundraising: Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist. But you’ll still want a good lawyer.
Be the prize
When you start fundraising and meeting with investors, it’s easy to try to over sell yourself, which actually might make your company look less appealing. Playing hard to get can sometimes be effective. But remember that you and your company are something special, so get the investor to sell themselves to you, don’t just sell to them. It’s a fun little dance. Ask questions such as, “How do you typically help startups in your portfolio?” or “Could you introduce me to a few founders you’ve invested in?” And read the book Pitch Anything. But remember, there’s a difference between some fun back and forth and coming across like a jerk, so tread carefully.
Bonus tip: Modify watches is running a Kickstarter campaign to do one-off custom watches. I’ve funded it and so should you! You could put your company’s logo (or your face!) on a watch.
Bhavin is CEO and co-founder of Magoosh, a company that creates web and mobile apps to help students prepare for standardized tests such as the GRE and GMAT. He loves advising startups on growing their ideas and building great cultures. Years ago, Bhavin played on several Nationals-level ultimate frisbee teams. Now, he eats gelato.