fundraising

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Series A(ggregate)

Published August 4, 2019

We spend a lot of time around here covering the latest startup fundraises, and for good reason. While capital is certainly an input and not an output, there is nothing quite like the closing of a round of several million in venture capital to prove that yes, the startup I’m working on is at least interesting to someone other than me. External validation shouldn’t be your motivating principle, but it is motivating. Plus, it’s a great milestone to reach out to the press and start talking up the story.

And so week after week, we cover the latest rounds. This company raised $4.5 million in a seed round, and this company raised $16 million in a series A. These stories — and the narratives behind them — are crisp, clean, and precise. A proverbial founder walked up and down South Park in SoMa, explained their story, collected a couple of term sheets, picked one, locked in the due diligence, and is now announcing their round. The VCs are excited, the founder(s) are excited, the employees are excited (and sometimes even the customers are excited!)

The reality for founders though is far more messy and gritty than those headlines would indicate. When I get founders off the record and out for drinks, the true story starts to emerge. That $4.5 million seed fundraise took eight months of maniacal scheduling with two hundred investors just to find a lead. And that lead didn’t lead lead, but took only 20% of the round. In the meantime, they raised twelve times across convertible notes and SAFEs, each one giving the company just a bit more gas in the tank to continue.

When I wrote that a startup raised $4.5 million in one slam dunk, what I really should have written was that they raised $150k, $300k, a few more $50k investments from randos, a couple of thousand from that startup competition, wow $500k from that amazing angel, a $750k SBIR grant from the government that took nine months too long to process, some credits from Brex, and finally at some point that lead investor showed up who gets $3-3.5 million in news value credit on their wimpy $900k check.

As an editor and a writer who covers these aggregate rounds, I struggle with how to approach them. Founders regularly tell me that they would love more transparency and less bravado around fundraises. They want to read how other founders handle the messy complexity of their fundraises, if only because they can compare their own hellish experiences with those of others.

More fundamentally, our readers deserve to read the truth. A $4.5 million round led by a single venture firm writing a $3.5 million check is a very different construct than a bricolage of a random assortment of angel investors. That difference in investor and round quality does indicate something about the startup under examination, and so offering more of those details would better inform our readers as well.

All that is well and good, but no one really wants to hear about these difficulties. Certainly users and customers don’t want to hear about how the software they use or purchased is run by a company that is constantly days away from death. Some early-stage employees probably have the focus to ignore such morbid considerations while carrying out their functions, but many need their paychecks to come from a black box. Somehow, the checks always arrive, and that lowers the stress for everyone.

And even just in terms of the craft of writing, do we really want to exchange the standard funding sentence (“blah blah blah raised blah from blah with participation from blah blah blah”) with a multi-paragraph exegesis of a fundraise?

Writing is about choosing which details are salient and which to pass over. It would be exhausting every morning to read tomes of fundraise detail. Yet, our consistency in depicting fundraises as efficient and precise can create an atmosphere where if you didn’t find a lead in a few weeks and lock down the whole round, you are a failure.

That’s not really a depiction I want to support.

And so, take this as someone who talks to dozens of founders a year off the record about their fundraises, and also sat on the other side of the table as a VC for years. Fundraises are almost always really, really, tough. Very few people get commits in the first meeting, or even in the subsequent meetings. Half the investor introductions during a fundraise are often a complete waste of time if not outright damaging, psychologically or materially. There are a lot of sharks out there. It is much more common today to aggregate a bunch of mini-rounds than it was a couple of years ago.

This is not failure, but just the path of the entrepreneur today in 2019. And at the end of that whole long and windy road, after all of those hundreds of hours of coffee meetings and PowerPoint strategy sessions and skeptical investor convos, all of that work will boil down to twenty words about how the fundraise closed, X dollars were raised, and money was seemingly wired magically to your bank account.

You, me, and really everyone can and should know the truth. But perhaps just rejoice in that headline, and get back to the next slog.

Fundraising 101: How to trigger FOMO among VCs

Published May 29, 2019

Let’s go beyond the high-level fundraising advice that fills VC blogs. If you have a compelling business and have educated yourself on crafting a pitch deck and getting warm intros to VCs, there are still specific questions about the strategy to follow for your fundraise.

How can you make your round “hot” and trigger a fear of missing out (FOMO) among investors? How can you fundraise faster to reduce the distraction it has on running your business?

“You’re trying to make a market for your equity. In order to make a market you need multiple people lining up at the same time.”

Unsurprisingly, I’ve noticed that experienced founders tend to be more systematic in the tactics they employ to raise capital. So I asked several who have raised tens (or hundreds) of millions in VC funding to share specific strategies for raising money on their terms. Here’s their advice.

(The three high-profile CEOs who agreed to share their specific playbooks requested anonymity so VCs don’t know which is theirs. I’ve nicknamed them Founder A, Founder B, and Founder C.)

Have additional fundraising tactics to share? Email me at eric.peckham@techcrunch.com.

You need to create a market for your shares

“You’re trying to make a market for your equity. In order to make a market, you need multiple people lining up at the same time.”

That advice from Atrium CEO Justin Kan (a co-founder of companies like Twitch and former partner at Y Combinator) was reiterated by all the entrepreneurs I interviewed. Fundraising should be a sprint, not a marathon, otherwise the loss of momentum will make it more difficult.

Rebuilding employee philanthropy from the bottom up

Published August 26, 2018

In tech circles, it would be easy to assume that the world of high-impact charitable giving is a rich man’s game where deals are inked at exclusive black tie galas over fancy hors d’oeuvre. Both Mark Zuckerberg and Marc Benioff have donated to SF hospitals that now bear their names. Gordon Moore has given away $5B – including $600M to Caltech – which was the largest donation to a university at the time. And of course, Bill Gates has already donated $27B to every cause imaginable (and co-founded The Giving Pledge, a consortium of billionaires pledging to donate most of their net worth to charity by the end of their lifetime.)

For Bill, that means he has about $90B left to give.

For the average working American, this world of concierge giving is out of reach, both in check size, and the army of consultants, lawyers and PR strategists that come with it. It seems that in order to do good, you must first do well. Very well.

Bright Funds is looking to change that. Founded in 2012, this SF-based startup is looking to democratize concierge giving to every individual so they “can give with the same effectiveness as Bill and Melinda Gates.” They are doing to philanthropy what Vanguard and Wealthfront have done for asset management for retail investors.

In particular, they are looking to unlock dollars from the underutilized corporate benefit of matching funds for donations, which according to Bright Funds is offered by over 60% of medium to large enterprises, but only used by 13% of employees at these companies. The need for such a service is clear — these programs are cumbersome, transactional, and often offline. Make a donation, submit a receipt, and wait for it to churn through the bureaucratic machine of accounting and finance before matching funds show up weeks later.

Bright Funds is looking to make your company’s matching funds benefit as accessible and important to you as your free lunches or massages. Plus, Bright Funds charges companies per seat, along with a transaction fee to cover the cost of payment processing, sparing employees any expense.

It’s a model that is working. According to Bright Fund’s CEO Ty Walrod, Bright Funds customers see on average a 40% year-over-year increase in funds donated through the platform. More importantly, Bright Funds not only transforms an employee’s relationship to personal philanthropy, but also to the company they work for.

Grassroots Giving

This model of bottoms-up giving is a welcome change from the big foundation model which has recently been rocked by scandal. The Silicon Valley Community Foundation was the go-to foundation for The Who’s Who of Silicon Valley elite. It rode the latest tech boom to become the largest community foundation in eleven short years with generous stock donations from donors like Mark Zuckerberg ($1.8 billion), GoPro’s Nicholas Woodman ($500 million), and WhatsApp co-founder Jan Koum ($566 million). Today, at $13.5 billion, it surpasses the 80+ year old Ford Foundation in endowment size.

However, earlier this year, their star fundraiser Mari Ellen Loijens (credited with raising $8.3B of the $13.5B) was accused of repeatedly bullying and sexually harassing coworkers, allegations that the Foundation had “known about for years” but failed to act upon. In 2017, a similar case occurred when USC’s star fundraiser David Carrera stepped down on charges of sexual harassment after leading the university’s historic $6 billion fundraising campaign.

While large foundations and endowments do important work, their structure relies too much on whale hunting for big checks, giving an inordinate amount of power to the hands of a small group of talented fund raisers.

This stands in contrast to Bright Funds’ ethos — to lead a grassroots movement in empowering individual employees to make their dollar of giving count.

Rebuilding charitable giving for the platform age

Bright Funds is the latest iteration of a lineup of workplace giving platforms. MicroEdge and Cybergrants paved the way in the 80s and 90s by digitizing the giving experience, but was mainly on-premise, and lacked a focus on user experience. Benevity and YourCause arrived in 2007 to bring workplace giving to the cloud, but they were still not turnkey solutions that could be easily implemented.

Bright Funds started as a consumer platform, and has retained that heritage in its approach to product design, aiming to reduce friction for both employee and company adoption. This is why many of their first customers were midsized tech startups with limited resources and looking for a turnkey solution, including Eventbrite, Box, Github, and Contently . They are now finding their way upmarket into larger, more established enterprises like Cisco, VMWare, Campbell’s Soup Company, and Sunpower.

Bright Funds approach to product has brought a number of innovations to this space.

The first is the concept of a cause-focused “fund.” Similar to a mutual fund or ETF, these funds are portfolios of nonprofits curated by subject-matter experts tailored to a specific cause area (e.g. conservation, education, poverty, etc.). This solves one of the chief concerns of any donor — is my dollar being put to good use towards the causes I care about? Passionate about conservation? Invest with Jim Leape from the Stanford Woods Institute for the Environment, who brings over three decades of conservation experience in choosing the six nonprofits in Bright Fund’s conservation portfolio. This same expertise is available across a number of cause areas.

Additionally, funds can also be created by companies or employees. This has proven to be an important rallying point for emergency relief during natural disasters, where employees at companies can collectively assemble a list of nonprofits to donate to. In 2017, Cisco employees donated $1.8 million (including company matching) through Bright Funds to Hurricanes Harvey, Maria, and Irma as well as the central Mexico earthquakes, the current flooding in India and many more.

The second key feature of their product is the impact timeline, a central news feed to understand where your dollars are going across all your cause areas. This transforms giving from a black box transaction to an ongoing dialogue between you and your charities.

Lastly, Bright Funds wants to take away all the administrative burden that might come with giving and volunteering — everything from tracking your volunteer opportunities and hours, to one-click tax reporting across all your charitable donations. In short, no more shoeboxes of receipts to process through in April.

Doing good & doing well

Although Bright Funds is focused on transforming the individual giving experience, it’s paying customer at the end of the day is the enterprise.

And although it is philanthropic in nature, Bright Funds is not exempt from the procurement gauntlet that every enterprise software startup faces — what’s in it for the customer? What impact does workplace giving and volunteering have on culture and the bottom line?

To this end, there is evidence to show that corporate social responsibility has a an impact on recruiting the next generation of workers. A study by Horizon Media found that 81% of millennials expect their companies to be good corporate citizens. A separate 2015 study found that 62% of millennials said they’d take a pay cut to work for a company that’s socially responsible.

Box, one of Bright Fund’s early customers, has seen this impact on recruiting firsthand (disclosure: Box is one of my former employers). Like most tech companies competing for talent in the Valley, Box used to give out lucrative bonuses for candidate referrals. They recently switched to giving out $500 in Bright Funds gift credit. Instead of seeing employee referrals dip, Box saw referrals “skyrocket,” according to Box.org Executive Director Bryan Breckenridge. This program has now become “one of the most cherished cultural traditions at Box,” he said.

Additionally, like any corporate benefit, there should be metrics tied to employee retention. Benevity released a study of 2 million employees across 118 companies on their platform that showed a 57% reduction in turnover for employees engaged in corporate giving or volunteering efforts. VMware, one of Bright Fund’s customers, has seen an astonishing 82% of their 22,000 employees participate in their Citizen Philanthropy program of giving and volunteering, according to VMware Foundation Director Jessa Chin. Their full-time voluntary turnover rate (8%) is well below the software industry average of 13.2%.

Towards a Brighter Future

Bright Funds still has a lot of work to do. CEO Walrod says that one of his top priorities is to expand the platform beyond US charities, finding ways to evaluate and incorporate international nonprofits.

They have also not given up their dream of becoming a truly consumer platform, perhaps one day competing in the world of donor-advised funds, which today is largely dominated by big names like Fidelity and Schwab who house over $85B of assets. In the short term, Walrod wants to make every Bright Funds account similar to a 401K account. It goes wherever you work, and is a lasting record of the causes you care about, and the time and resources you’ve invested in them.

Whether the impetus is altruism around giving or something more utilitarian like retention, companies are increasingly realizing that their employees represent a charitable force that can be harnessed for the greater good. Bright Funds has more work to do like any startup, but it is empowering the next set of donors who can give with the same effectiveness as Gates, and one day, at the same scale as him as well.

Here’s what you’ll learn at Atrium’s fundraising workshop

Published April 17, 2018

Justin Kan is qualified to teach you how to pitch, and isn’t shy about it. Having raised about $90 million for a few companies and sold his startup Twitch to Amazon for almost a billion dollars, not being shy is actually part of what Kan teaches. His legal services startup Atrium today officially launches Atrium Scale, its free Series A fundraising workshop that’s helped eight startups raise $100 million since it started in beta five months ago. The two-day in-person seminar includes pitch coaching, intros to investors and mentors, follow-up online pitch deck help, legal advice, Amazon and Google Cloud credits and tax and accounting services.

I went through Atrium Scale myself, pretending I was the founder of a hypothetical startup that replaces your phone’s contacts app. While the lectures were full of valuable tips, you can get a lot of those from instructional blog posts by Kan and other VCs. But the small group Q&A and coaching with entrepreneurs who’d successfully raised did a remarkable job of improving attendees’ pitches and the esoteric song-and-dance necessary to get investors to part with their cash.

Atrium co-founder Justin Kan

Here’s a breakdown of how Atrium Scale works:

When: Once per quarter over a Saturday and Sunday
Where: Atrium’s offices in downtown San Francisco
How much: Free, but Atrium hopes you’ll end up using its legal services
Who: Startups planning to raise their Series A in the next six months, the sooner the better, who fly themselves in from all over the world
Who gets in: Atrium selects the 10 percent of applicants most ready for venture funding. Applications can be submitted here
Investors involved to date: Sequoia, General Catalyst, Accel, Venrock, Social Capital, Signia, KPCB, Lightspeed
Mentors: Justin Kan (Atrium, Twitch), Holly Liu (Kabam, Y Combinator), James Richards (Teleborder, TriNet), Andrew Trader (Zynga), Ashu Desai (Make School)

What Atrium Scale teaches

The Atrium Scale method revolves around the concepts of how to pitch and when. While there are plenty of ways to show off a business, Kan recommends a calculated approach to storytelling. “When should you raise? When you can convince investors to give you money and when cash is the constraint to scaling your business,” Kan said to kick off our program.

The song

“It all starts with a narrative — 99 percent is the work of building the business, but an important 1 percent is convincing people,” Kan relays.

First, explain how the world is a certain way. Describe the problem, why it’s big and who in the market would pay for a solution. Demonstrate that you’re an expert.

Second, explain how the world is changed by your solution to the problem. Frame what’s possible for businesses or consumers once they have your product.

Third, explain how the world is new now that your solution exists. Provide metrics on traction and mechanisms for growth, and show why your team is uniquely equipped to succeed. Identify adjacent markets your product will conquer.

Unlike the frothy days of yore, “people are no longer willing to lose money on a per-unit basis,” says Kan. VCs will demand to understand your unit economics and scalable customer acquisition strategy that turns cash invested into more cash earned.

Perhaps the most important part of the pitch is practice, though. Pitch to fellow founders, investors or angels, but explicitly tell them you want feedback, not money. Running through the pitch over and over boosts confidence, A/B tests narratives and unearths questions. Know your numbers by heart so you always seem sure of where the business is heading, and define a personal pitching style that plays to your personality strengths.

Kan says it all comes down to making investors see your vision for how you’re going to become a massive company.

Atrium Scale helps here by letting you pitch in groups, as well as one-on-one with mentors. Simply being surrounded by people all trying to improve creates an atmosphere conducive to progress rather than getting defensive about criticism. There could be better homework or takeaway materials to help startups continue to improve after the workshop ended, but I heard entrepreneurs work out kinks and trim off tangents that could have derailed their pitch during a real meeting.

The dance

Where Atrium Scale shined brightest was digging into the cadence of the fundraising process. Anyone can work out a decent pitch in their garage, but it takes special know-how to navigate turning that pitch into money in the bank. This is the kind of in-group knowledge that often makes it tough for outsiders to break into Silicon Valley.

You should pitch wide, planning to talk to at least 10 to 20 investors, but knowing it can take 100 ‘nos’ to get a ‘yes.’ Pick investors not based on their firm’s name recognition but their expertise and track record in your industry. Contact investors at least three to four weeks out and schedule meetings in as rapid succession as possible. The goal is to be able to get term sheets back at the same time so you can play firms off each other and pick the best deal.

You’ll start with single partner meetings. You’ll hear back within 24 to 48 hours if they go well, and you can assume they didn’t if you don’t hear back soon. Those that like you will set up multi-partner meetings, and you should ask them what their colleagues will want to know. If that goes well you’ll be brought in for an exhaustive full-partnership pitch where they’ll try to poke holes in your business. Lots of questions means lots of interest, while few questions and VCs bored on their phones means you’re toast.

If the partnership believes in you, you’ll quickly receive a term sheet, but you don’t have to sign it right away. Since you can’t fire your investors, be sure to call their references so you’re sure which you want to work with forever. This also gives you time to go back to other firms you’ve pitched. Don’t say who it’s from, but use your existing term sheet as leverage to get them to give you one or one with a better deal.

Aim for a lead investor that will put in at least 25 percent of the round volume and then fill it out with other firms, strategics and angels. Know that the median delay for investor due diligence is 41 days, so make sure you have enough runway to wait that long after you complete the pitch process. The fundraise should last you 12 to 18 months, but be careful because your spending will expand to take up what’s in the bank. Be ready by then to show you’ve hit new milestones that de-risk your business.

The program also reviewed more advanced topics like raising money from strategic investors, equity versus SAFE financing, crooked deal terms like ratchets and liquidation preferences and how to manage your board. That one-size-fits all info is certainly helpful, but thanks to the small class size, Atrium Scale’s Q&As let founders get answers to industry-specific questions and their own edge cases.

There are plenty of people looking to help startups in Silicon Valley, but few are giving away this high-quality of education for free. Accelerators can charge 7 percent of equity and advisors can charge a percentage point or two. That can be worth a lot if the startup does well. Consultants want cash that pre-A startups rarely have. But Atrium is merely looking for lead generation and it needs them to raise money to be able to afford its legal services. That aligns the workshop well with the outcomes for the companies.

If you have a dumb business idea, no amount of turd polishing will get you legitimate funding. But for startups on to something that just need help communicating, Atrium Scale could be a quick and cheap way to boost their chances of getting picked from the crowd.

What does it take to be a startup that raises huge sums quickly?

Published February 24, 2018

Some founders toil for years to secure a meager seed round. Others seem to go from launch to a massive fundraise in no time. Why is that, and how does one get into that second group? There’s no single formula, of course. But data indicates it helps to be famous, involved in a hot technology sector or working to cure cancer. Read More

Justin Kan’s Atrium is starting a boot camp to help founders raise money

Published December 4, 2017

Raising a Series A is hard for a founder. Especially when you consider they’re usually doing it for the first time, while the VCs on the other side of the table are essentially professional negotiators getting pitched and doing deals every day.
So to help give founders a leg up Justin Kan’s new legal tech startup Atrium is launching a program to help founders become better… Read More

Cap tables, share structures, valuations, oh my! A case study of early-stage funding

Published September 6, 2017

For many entrepreneurs, especially first-time founders, raising outside capital can be daunting. Between all of the new vocabulary and the very real legal implications of the agreements being signed, it’s easy to get overwhelmed. Indeed, raising outside money is one of the more esoteric aspects of being an entrepreneur — but it doesn’t need to be confusing. Read More

Three things that every startup should consider before the fundraising tide goes out

Published August 24, 2017

Now is the time for startups to engage in strategic planning so that future liquidity needs will be met. This article discusses market trends and how debt financing and other protective measures can engineer optionality that can help a startup not only survive, but potentially thrive during a period of financial distress. Read More

The very first question to answer when taking on new investors

Published July 20, 2017

Fundraising is a stressful process. You do all you can to impress prospective investors by honing the story, optimizing key metrics and making your company look as attractive as possible. But before you decide the amount of money you raise and the type of investor you want on board, you must decide the kind of relationship you intend to have with your new partner. Read More

New Clerky tools help startups hire and raise funds without running into legal problems

Published April 2, 2017

Clerky may not be a household name like TurboTax today, but the company’s business formation software has been called a “secret weapon” by startup founders in Silicon Valley for years. Many Y Combinator cofounders use it to get their companies started on paper. And now, Clerky is launching two new tools called Hiring and Fundraising to help startups move beyond… Read More