Fundraising

Until the end of 2021, the venture capital world was completely foreign to my context. Since then, I have had the chance to raise investment and interact with investors, which has helped me understand how this market actually works.

For someone who has never gone deep into the topic, it can sound unreal that someone is willing to invest millions of dollars in a company that is just getting started or barely has any revenue.

In this post, I am sharing what I have learned so far, knowing I will probably revisit it and keep iterating as I remember more and learn more.

Should you raise capital?

I will start here because I think it is a question most founders never ask seriously.

I think most of us get carried away by the news we see on social networks, where every day people celebrate companies that raise millions of dollars, get into Y Combinator, become unicorns, and all that. At least that was my case.

This gets amplified by stories of founders like Mark Zuckerberg, Elon Musk, Jeff Bezos, Bill Gates, etc.

Even so, I will tell you that you probably should not do it. I say that after living both sides (starting a business with and without capital) and co-founding Torrenegra Organization, where we supported more than 100 bootstrapped companies, from companies just starting to companies generating more than $50 million a year.

I also learned it from Alexander Torrenegra, who built two bootstrapped companies: Bunny Studio, which is still active and cash-flow positive, and Voice123, which was sold to a private equity fund in 2021.

On the other hand, he is now building a company where he invested $10M himself and raised another $10M USD. He is also an angel investor in companies like Cornershop, Viva Real, Platzi, Kiwibot, Liftit, and many more, and he is also invested in venture funds.

And last but not least, I have talked about it a ton with Emilio Jacome, one of the friends I know who is most obsessed with venture capital and private equity, and who has worked at different funds.

From all of that, and from many more conversations, I have learned why raising capital does not make sense in most cases.

Also, most people do not stop to think about the pressure that lands on you once you raise money.

The wrong reasons most people want to raise capital

These are the most common ones I hear, though I am sure there are many more.

• To build the product. Today more than ever, you do not need technical knowledge to build a minimum viable product. In fact, you do not even need a minimum viable product to start generating sales.

  It sounds unreal - I thought so too - but pre-selling is one of the best ways to validate whether there is demand for your product or service.

  People talk a lot about Product-Market Fit, but in reality we should talk about Product-Market-Channel Fit, because many times the channel is what fails.

  The channel is your acquisition source (email, performance marketing, content, etc.) and the messaging, what some people call product marketing.

  In the vast majority of cases, unless you are really doing DeepTech or selling to governments, if you as a founder cannot land at least 2 to 5 customers in pre-sales, something is off.

• To quit my job and go full-time. I totally get that some people cannot just quit one day and try to build a company.

  But you do not have to. It is not a requirement. I did it, over and over again, but keep in mind I was between 25 and 29, with nobody depending on me financially.

  That said, again, you should not quit too early. Work nights and weekends. You do not have to build a huge company while you still have a job; you just have to reach your minimum salary so you can go full-time later.

• To spend on social ads. Just no. You are going to burn money. No one should invest in that, and whoever does is being very naive.

• To register the brand and similar things. Forget about it. It does not matter yet.

I understand that from a founder's point of view this can feel like real justification, but the truth is that most of us should only be worried about getting customers: people who pay.

And that is important to clarify: a user is not the same as a customer. A user might use your product or service, but until they pay you, they are not a customer.

Why is getting customers important?

1. If you are reading this and wondering whether you should raise or not, odds are you are still early in this game. You probably do not already have relationships with investors, so the real question is: could you raise capital even if you tried?
2. Given the first point, the thing that will help you raise capital the most is traction, in other words, sales.

So whether you raise money or not, you should absolutely get sales.

Fundraising

With all that said, let's finally talk about raising capital.

If there is one thing you should take from here, it is that every investor you talk to is evaluating whether you can be an outlier: a company that becomes massive.

Less than 1% of companies get there. To see the reality, you can go to Y Combinator's website, where they say they have invested in 5,000 companies that together are worth over $800 billion.

But the truth is that fewer than 10 companies generate most of that value (DoorDash, Coinbase, Airbnb, Reddit, Instacart, Stripe, etc.). That is 0.2% of all the companies they have backed.

So for someone to invest in you, they have to truly believe you can be part of that 0.2%.

The main mistake we founders make is showing up with a tiny vision. Saying you will get to $10 million, $50 million, or even $100 million in revenue is not enough.

So how can you show, through different interactions, that you could become that kind of company?

Investor rejections

It is important to know that investors have zero incentive to give you direct, honest feedback. That is why you will usually hear things like:

• I love it, but you are not at the stage we invest in.
• We need to see a bit more progress or traction.
• Who else is investing?

Basically, it is a polite way of saying no. And most of it comes from the same place: deep down, the person does not believe you will be able to build a massive company.

But since they are not fortune tellers, they do not know if in a month, a year, or five years you will end up building something huge. So they want to leave the door open.

Most founders take rejection personally because it feels like they are saying no to them, not the company, and they get offended.

If you want real feedback, and only once they already have a positive perception of you, say something like:

"Alan, I know I probably have a lot of red flags for you right now. I would love to hear your candid feedback so I can understand what we should improve from your perspective."

Investors buy a video, not a photo

Imagine you are an investor. Out of nowhere, someone comes up to you at an event and pitches you for 20 minutes, asking for money. You know nothing about them beyond that conversation. Would you invest? Probably not.

Now imagine you are one of the founders of OpenAI and you have an employee who joined when the team was just 10 people. Over the last five years, you saw them give it everything, do things that seemed impossible, and have a massive impact at OpenAI. Would you invest? Probably yes, because you have a five-year video of them, not just a snapshot from one meeting.

That is what fundraising is like. You should be building relationships before you try to raise capital, because it is very rare to raise money without any previous relationship.

The best ways to turn a photo into a video are:

1. Mentorship sessions.
2. Investor updates.
3. Building in public.
4. Warm intros from other founders the investor already trusts.

If you ask for money, they give you advice. If you ask for advice, they give you money.

Along the same lines, in Silicon Valley there is a saying: those who ask for money get advice, and those who ask for advice get money.

It is because, through mentorship, both sides can evaluate whether there is real value in the relationship. This applies especially with angel investors.

The best part is that most founders are receptive to giving advice or mentorship because, just like they are helping you, someone helped them before.

But you have to be good at cold emails and messages. It is not about asking for mentorship just because. You need a clear ask, and it should make sense with the other person's area of expertise.

I see this all the time: a founder asks a well-known entrepreneur for BioTech advice even though that entrepreneur has never worked in BioTech. That just shows you did not do your homework.

Know your strengths

It sounds obvious, but most people have no idea what their strengths look like from the outside. Those strengths can be:

1. Track record. Universities and companies you have been part of that carry prestige.
2. Traction. How fast you are growing month over month.
3. Unfair advantage. The things you have that would be very hard to copy. For example, Bad Bunny has a huge audience he can use as a distribution channel and plenty of connections in the music industry, so a music company from him would be interesting.
4. Vote of confidence from people you have worked with. This is even more powerful if you come from a big, well-known company. If you worked at Airbnb, ideally your manager, or even one of the founders, should be writing you an angel check. It shows you did great work and that someone with that reputation, who saw you execute, trusts you.

There are other things tied to your personal situation that basically show you are not risk-averse and that you will dedicate your life to this. You can, for example, read my investment memo.

Know your weaknesses and make them obvious. Run an anti-pitch.

No business is perfect, not Elon Musk's, not anyone's.

Every business and every team has weaknesses. Anyone in their right mind knows that.

The mistake founders make is trying to hide them and look perfect. That makes you look naive rather than experienced.

The best way to handle your weaknesses is to make them obvious yourself: point out what is tough about the industry, and then show that you have thought through how to mitigate that risk.

Financial projections do not make sense

If an investor asks you for a financial model, it is for two reasons:

1. Either they do not get it and you should run the other way.
2. They want to see how big you are aiming.

No financial projection comes true. Like people say, Excel is the land of dreams.

The data room does not matter

If an investor asks for a data room, I would think twice.

It is more standard in ecosystems like Latin America, but to me it is ridiculous to ask for dozens of documents from an early-stage company (anything under $5M USD in annual revenue).

Especially in San Francisco, if someone is asking for a data room when you are early, ignore them.

Do due diligence on investors

Just like an investor can dig into you by talking with previous bosses or peers, you should do the same.

There are plenty of horror stories you will not uncover unless you actually do the research.

The investor is not doing you a favor

This is one of the biggest challenges for first-time founders. We feel like whoever invests is doing us a favor by giving us money, because it feels like free cash.

Something I have learned from people at Ivy League schools and, more broadly, from the United States mindset is that you have to be a bit cocky. You can hear it in this episode with Palantir co-founders Joe Lonsdale and Alex Karp.

You are giving the investor the opportunity to invest in your company. They are not above you or below you. You are equals.

Ask other founders for feedback

Founders usually have a lot of empathy for another founder because they have already lived through the process and know how exhausting it can be. That is why they will give you more transparent feedback, so you do not waste time.

Before you even try to charm an investor, get feedback from founders first and iterate on the early versions of your pitch deck and narrative.

The pitch deck is just a formality

Startup competitions that turn pitches into a circus have made us believe that a pretty deck raises the round.

And yes, it is important that your deck is well done, but what it really helps with is getting the first meeting.

Investors invest in teams, not PDFs.

Take advantage of accelerators and fellowships

If you do not have connections, accelerators can be a useful bridge into the network. In a short time, they tell you whether they will invest and help you grow your network.

In this post you can find 50 programs around the world.

Take it seriously and build a rigorous sales process

Finally, the other key thing: this is not a part-time or once-in-a-while process. If you really want to raise capital, you should dedicate yourself to it full-time and run a rigorous process.

The most common mistakes are:

1. Not segmenting which investors could actually be a fit.
2. Not knowing your company's value proposition for the investor.
3. Not knowing how to communicate that value proposition to investors.
4. Not putting daily intensity into the process.

In short, not running a sales pipeline.