シード ラウンドでの 3 回の資金調達を通じて学んだ信頼性の大切さと優れたストーリー テリングがもたらすメリット

Having started three venture-backed startups and invested in 25 seed rounds, here are insights I've learned about the importance of credibility and storytelling.
シード ラウンドとシリーズ A ラウンドについて語る Electric.ai の CEO/創業者ライアン・デネヒー氏

As I discovered while raising seed rounds for several different startups, having credibility as a founder is a huge piece of the fundraising puzzle. Electric is the third venture-backed startup I’ve founded and I’ve invested in about 25 seed rounds, so I’ve seen the process from both sides.

What I’ve learned about the seed round as a founder and VC
At the seed round, you’re really just relying on a few key factors: the founder, their background, any existing relationships they have (or that investors have with them), their idea, and their ability to articulate that idea. In my experience, seed rounds are inherently challenging because neither founders nor investors really have any data. A founder is relying on a story, the ability to tell that story, and any credibility they already have.

What I’ve seen happen is that seed rounds get closed relatively quickly…if you happen to find people who believe in the story. Otherwise, they don’t happen at all, because there’s nothing a founder can point to in order to convince someone that their business isn’t a bad idea.

DocSend Startup Index Note:
Ryan’s experiences align with our data. In 2020, for example, we found that 43% of seed-stage companies closed their rounds in 12 weeks or less.

Incidentally, this is why the focus on mentoring for underrepresented founders is so important. At the seed stage, if you come from a background where you don’t have an existing network in the tech space, or if you didn’t go to an Ivy League school, you might not have the typical credentials that unintentionally-biased VCs seek out as ‘credible’. This makes your job as a founder even harder–and raising a seed round is difficult even with these credentials.

For me, an effective seed round pitch has more in common with writing music that people like than it does with business. To be sure, the fundamentals of the business still matter: you have to convince people that the problem is huge, that there’s a market for your idea, and that your approach is both tenable and economically rewarding. But hard business fundamentals might represent only 20% of what goes into a good pitch. The other 80% is the delivery: are you explaining the idea to investors in a way that’s believable? Creating a winning delivery is where fundraising meets songwriting: a pitch should be catchy, attention-grabbing, and easy for investors to connect with.

DocSend Startup Index Note:
Ryan’s spot-on here, as well: when it comes to pitch decks, the catchier, the better. Investors are busier than ever and tend to read decks very efficiently. Through the first half of 2021, investors averaged just 2 minutes, 47 seconds reading through a deck. This means that founders need to grab VCs’ attention quickly and make a compelling case that’s digestible in a quick read.

Tackling credibility issues across three seed rounds
For my first company, the biggest hurdle was my lack of experience. My co-founder and I were very young: I was still in college, he was fresh out of college. It was an online advertising startup, and neither of us had any experience in online advertising. Right out of the gate, it was very hard to convince people that we were going to build a competitive product with very little experience. Another challenge was that we didn’t have a particularly novel solution. We were starting an online ad network in 2008–at that point, there were already hundreds of other ad networks out there! Over the course of a few years, we raised about $1M for that business, but it was a soul-crushing effort.

In hindsight, we brought it on ourselves: we had no credible experience in the space, and we were pretty late to the party in a highly competitive field. Fundraising was (just barely) doable, but it was really a grind.

I founded my second company with the same person in 2012. Again, we faced credibility problems: we were online ad guys who were trying to start an SMB-focused SaaS company. These fields couldn’t have been more different! To make things even harder, we never actually ran a real process: for example, there are ways to structure a pitch deck and organize conversations with investors, and we didn’t do any of that. We took meetings at random and constantly updated a horrible deck that told our story very poorly. We eventually raised money, but it was only after lots of unnecessary trials and tribulations.

When I raised the seed round for Electric, I had the benefit of being able to point to two companies I had sold before. However, this time I didn’t have any co-founders, we were building a highly-technical product (automating IT support), and I’m not a technical person. Even though the challenges I faced were slightly different, it all came down to credibility again. It took me several months to close the seed round. Ultimately, a lot of people passed because I didn’t have a founding team and because I had a hard time telling the story. What we were solving with Electric seemed obvious to me, but I couldn’t articulate why no one else had done it yet.

Founders facing similar credibility questions should focus on eliminating as many questions or risks from the business as possible. If you can do this effectively, you’ll be more likely to find investors who are willing to jump on board. In my case, I was eventually able to convince just about everyone that the market was huge and our solution was badly needed. Whether or not people believed I could build it was another issue! But in order to even reach that point, I had to eliminate other doubts.

Two temptations seed founders should avoid
The first thing seed-stage founders should keep in mind is to be crystal-clear on what you’re trying to accomplish and in what amount of time. This means founders should resist the urge to try and solve too many problems too quickly. Instead, founders should ask themselves, what are the one or two things we can do that will eliminate as much doubt as possible about our business model? These days, companies are raising larger and larger angel rounds and pre-seed rounds–with so much money flying around, it can be easy to get distracted and try to prove too many things during a seed round.

A second piece of advice I have for seed founders is to be selective about the investor meetings you take. It can be tempting to pressure yourself into taking meetings with VCs from all over the world who contact you as soon as you create a profile on Crunchbase. Not only would this take up a lot of time, but it’s also the case that the investors reaching out to you likely aren’t ones who would actually fund your business (perhaps they only write $50M checks, for instance). Instead, reach out to investors only when you’re sure you’re ready to raise. And when you do so, make sure you’re connecting with the right partner at the right firm who invests in companies in your field and at your stage. This will save you time and ensure you’re building relationships with long-term goals in mind.

Embrace the process and nail what you can actually control
Although each seed round had its challenges, the process got easier each time I went through it. The most important realization was that there are a specific set of things you need to articulate in a seed pitch deck to even have a shot at closing a round. For example, over time I learned what the market data needed to look like and how I needed to describe the product. These are specific boxes seed founders can tick as they’re putting together a deck.

The second crucial thing I realized is that you have to actually run a process. It doesn’t do you any good to take meetings haphazardly with people who may or may not even be relevant investors in your space. Investor outreach should be much more formalized: you have to make a list of targeted VC firms, get introductions to the partners, and take meetings in rapid succession. Once I learned the specifics of running an effective process and building an effective pitch deck, I eliminated about 50% of the challenges I was facing. The other 50% of the process was still very challenging, but at least I was able to take charge of what I could actually control.

Think through the details, but don’t try to have all the answers
When I first began fundraising, it looked to me like lots of seed-stage companies were getting term sheets with just an idea on a napkin. I was very surprised to find that this wasn’t the case! Sure, maybe you can get investors excited in a first or second meeting just talking through your big idea. But eventually, you have to prepare yourself to be able to speak in a relatively high amount of detail about how you plan to solve the problems you’ve identified. I simply didn’t appreciate this part of the process early on.

If you’re starting, say, a B2B SaaS company, of course you won’t have years’ worth of sales data. But you at least need to have an opinion on how you’re going to take it to market. This doesn’t mean you need to have a detailed sales plan, but if an investor’s going to give you $2M-$4M for a seed round, you have to show that you’ve at least thought about what that route to market looks like and what strategies you plan to try out. You need investors to believe that you’ll take your fundraising money and actually run thoughtful experiments, not just hire a bunch of salespeople. The same logic applies to the product roadmap: you need to show that, if you get the money you’re looking for, you know what you’re going to build and why.

Fundraising got easier for me once I found the middle ground between the forest and the trees. I realized I had to lead the horse to water on my overall vision and be prepared to go into a lot of detail about every aspect of my startup’s execution. These details involved having ready answers to questions about how I was going to hire, the stages of the roadmap, and how I was going to sell and to whom.

Early on, I felt frustrated because investors seemed to demand a level of detail on every part of my business that I simply couldn’t provide. Over time, though, I came to embrace the fact that investors weren’t actually expecting me to have perfect answers to all their questions; instead, they simply wanted to know that I had given these questions some consideration. They also wanted to make sure that I’d be open to advice and feedback on how I planned to grow the business.

This is something I really got wrong when I started my second company. I felt that my co-founder and I had to have the “right” answer for everything, that we had to have fully thought through every possible problem we’d face. But this is totally not the case! Investors just want to know that you’re being thoughtful about the business and that you know enough to know when you don’t have the answer. That’s how you show you’re receptive to outside advice and feedback.

The Series A round adds data to the seed round’s story
Whereas seed rounds involve storytelling and building credibility, Series A rounds add hard data into the mix. The biggest difference between my seed rounds and Electric’s Series A round was that I really had to quantitatively demonstrate how we validated the original thesis from the seed round. In a seed round, you’re presenting a thesis about how the world should work, and you’re asking for money to go out and prove that the world can work the way you think it should. In my case, our thesis was that there was a better solution for IT for small businesses that we could deliver as subscription software that people would like. At the Series A round, our story was still there, but in order to close the financing we had to back up the story with early proof points showing that customers wanted to buy our solution and that our business model was viable.

In addition to this quantitative data, I found that my attitude changed for this raise. At the Series A stage, it’s really important to stay humble and relay to investors that you are aware you don’t have all the answers and can’t singlehandedly build the company. I owned up to questions that we didn’t have great answers for, and spoke a lot about the importance of building out our team. Nobody likes a founder who has an answer for everything!

Series A is a very awkward phase for a company. On the one hand, you’re still a very young company with a largely unproven business model. On the other hand, you’re mature enough that you have some data points that hint toward a process that is very clearly working while being far from perfect. Most of the data you have is still pretty nascent, your team is likely pretty junior, but you’re dealing with investors who are quite sophisticated. These investors expect you to show how you’re going to build a $5M- or $10M-revenue business with maybe only a year’s worth of data. This challenge shows how far Series A companies have come from being seed-stage companies, but equally how far they have to go before they’re proper growth-stage companies.

Seed-stage storytelling inspired our Series C deck
All the work I put into my seed rounds certainly proved useful when raising later rounds. When we were raising our Series C in January, 2021, I actually went back to my seed-stage pitch decks for storytelling inspiration. With each successive funding round, you get increasingly focused on the metrics and fundamentals of your business. For later-stage investors, that’s really what matters: they want to drill down on margins, customer lifetime value to customer acquisition cost ratios, and net dollar retention. But it’s equally important that you continue to drive home your vision and how that’s evolved over time. Returning to those early seed decks helped me nail down how Electric’s story had changed as the company grew.

When I initially started putting together my Series C slides, I had all the data I could want, but it wasn’t wrapped in a bigger vision or story. At this late stage, that’s exactly what you need: you want to make sure you’re layering a compelling story on top of all the great data you’ve collected about how your business is growing. At the end of the day, metrics are great but investors are still buying into a business idea that largely hasn’t happened yet. This isn’t private equity: VCs aren’t investing in the company as it stands today or in the 12-month trailing numbers. They’re investing today in an idea you’re going to deliver in the future. This is why storytelling is crucial at every stage of a startup’s lifecycle.

Easier access to capital…but more noise in the system
Fundraising has gotten both easier and more challenging since I raised those early seed rounds. On the one hand, fundraising is easier because there are more people from whom to get funding and more ways to structure the funding you receive. When I was raising the seed rounds for my first two companies, there were a lot fewer angel investors. There simply weren’t as many sources of capital for early-stage founders. Just in the last five years, however, tech IPOs have created thousands of new angel investors looking to fund new startups. From this perspective, fundraising is easier than before. New financing options like SAFEs have also given founders more options.

On the other hand, fundraising today is more challenging because the barriers to entry for starting a company are lower than ever. It’s easy for a founder with a relatively credible background to put together a good pitch deck while sitting in a coffee shop. This means there’s a lot of noise in the system, since so many founders are clamoring for investors’ attention. The competition to get noticed is much stiffer than it was a generation ago.

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