Fundraising Is a Momentum Process

Utah founders ask me about fundraising more than any other subject, and the ones asking are usually nine months into a raise that has stalled. When I walk back through what happened, the same two mistakes show up almost every time. The first is being too altruistic about who the investors are. The second is never running a deliberate process. I'll take them in that order, and then spend most of this piece on what a deliberate process actually looks like, because that is where the work is.

Start with the altruism. In Utah there is a widely held feeling that an investor from Utah will be more likely to back a founder from Utah, and will be more aligned with that founder's values. An investor in Utah has the same prerogatives an investor in San Francisco has. Assuming a coastal investor will treat you worse, or create adverse incentives for your business, compared to a local one is naive, and most Utah founders who have raised at least once learn that quickly. My own experience runs the other direction. Coastal investors have, generally speaking, aligned more with my vision, shown me more respect and autonomy, and been kinder with my time than Utah investors, by orders of magnitude.

The deeper problem is what the altruism does to your job. One of the core risks you have to burn down for the company is capital risk, and you and you alone are the person who can do it. Your goal is financing the company, and a hyper-focused matrix of investor characteristics you have decided arbitrarily fit you gets in the way of that goal. The number of conversations I've had with Utah founders who are nine months into a failed raise with Utah investors and feel strung along is high. Finance the business, do it ethically, do it with ethical people, and don't pretend those people only live inside the state boundaries of Utah.

Now the process. A lot of entrepreneurs approach a raise the way a lawyer used to hang a shingle: start having conversations, have them consistently, and eventually the round will come together. Fundraising rewards momentum, and the shingle approach never generates any. The more you look at it through the perspective of building momentum, the better you'll run it.

Two things follow from that. You need to dedicate time to fundraising where you are doing nothing else inside the business. If you need to build software, delegate it to someone on your team and go run the raise as efficiently as you possibly can. Doing it part time over months is too distracting and it kills the momentum you're trying to build. And you need to prepare, and what preparation looks like depends on the kind of round you're going to run.

Which round to run

If you're going to use convertible instruments, primarily SAFEs, there are two ways to close.

The first is to find an institutional investor who wants to invest on a SAFE. They will typically run a diligence process that looks almost identical to a priced round. The formal close is far more efficient, because you skip the legal process of closing a priced round, but the front-loaded time is the same. The difficulty, and the number of reps it takes, to find an institutional VC who will underwrite your deal on a SAFE is close to what it takes for a priced round. You save on the back end.

The second is rolling closes. Rolling closes look to funds that generally participate rather than lead, to high net worth individuals, and to angel investors, and build commitment cycles toward milestones where you can actually wire and close on a given valuation cap. You might get $250,000 from four to six angels and close that on a $3.5 million cap, then raise another million over the next four to six weeks at a $4 million cap, then another million at $4.5 million.

The benefits are real. Getting to a close is faster. With Artifact I closed between 60 and 80 percent of the angel investors I pitched, depending on the round. My conversion rate with institutional VCs was dramatically lower, sub 5 percent of the people I actually talked to, and for many rounds sub 1 percent. So you can get cash into the business to fund it and keep raising the cap as you go. You also skip the formalities of an institutional close. Nobody asks for an observer board seat, major investor rights, or most favored nation clauses. You send a vanilla YC SAFE and close the vast majority of people that way.

The downside is the waterfall. It is easy to lose sight of what those SAFEs will actually convert to at the next round, and if you aren't thinking deliberately about the calculated dilution, you can become prohibitively diluted without noticing.

The choice between these strategies comes down to momentum, traction, and how much time you want to spend fundraising. If you're in a hyper-competitive market, I'd lean toward a priced round. Capital risk is even greater when the market is competitive, and you need to capitalize the business quickly. You cannot be pitching 20 to 30 investors you need to close over six months. You need to raise the round in four weeks from one to four investors. If you're a first-time founder, or have never raised, or aren't comfortable raising, rolling closes are a great way to get your first half million to a million, get some wins, and learn what the commitment cycle actually looks like. And if you have real uncertainty about what's next for the product, or where product-market fit sits, it will be easier to gather that capital from angels who believe in you than from institutions carrying strict fiduciary responsibilities to their limited partners.

A priced round runs on the same diligence as pitching any institutional VC, with the added burden of finding the one who wants to lean in and set the price. Finding the lead is the tipping point for the entire round. Unless you're doing rolling closes, you can't assemble a round out of people who won't price it, because most of them are committing capital contingent on somebody else placing a valuation.

How to prepare

Preparation for a priced round means building momentum in waves. I'm going to avoid the word tier, since it's overloaded in venture to mean the caliber of the fund. In the first wave you target your second-class, less preferred investors. In the second wave you target your first-class, most preferred investors. Most entrepreneurs do the opposite and reach out to the Midas List almost immediately. That is a hard way to build momentum. Still target the ideal investor for your company, just build toward them rather than starting with them.

Preparation for rolling closes is essentially a networking play, and the tooling for it is better today than it has ever been. Take the companies you admire or that look like yours, not direct competitors, since that's a conflict of interest, and use AI to find the individual angels who invested in each of them. Make a list. Even without AI in 2020, it was easy for me to build a list of about 175 investors who had personally invested in companies we admired: Digits, Airtable, Notion, Webflow, all of them. Run that list through an enrichment service like Apollo or RocketReach and find their personal email addresses. I have never once had an angel investor get upset with me for reaching out on a personal address, as long as I was respectful of them and their time, even when I was persistent, and never used tactics.

By tactics I mean being salesy, being manipulative, or creating fake urgency. That principle applies to every investor you talk to. They read through it fast.

Then I wrote a personalized blurb for all 175 investors explaining why I thought their experience and career history would be informative and important to our company. In 2020 that took me five days. Today it would take 20 minutes, and you'd spend the rest of the time reviewing it to make sure it reads authentically and sounds like you. Put real energy into this. A paragraph the investor knows came from you and is actually real makes a huge difference. One way to do it now: pull the LinkedIn profiles for all 175, record yourself with Granola command-clicking into each one, and talk through why that investor's background looks compelling to you. Then use the recording to write the blurbs, so the words are yours. Mail merge the outreach and start pitching people based on their interest.

Even when an investor doesn't respond to the first email, it is fine to keep them informed about how the round is going and the capital you're pulling together. Just be deliberate about how often, and don't blast them.

The commitment cycle

This applies to every kind of round, and it applies especially to rolling closes. Fundraising runs on soft commitments and firm commitments, or what people call soft circling.

Every angel pitch should end in a yes or a no. Every institutional pitch should end in a yes, a no, or exact next steps. Those are the only acceptable outcomes. Most entrepreneurs are afraid of pressuring an angel to decide in the moment, and I can promise you that by three-fourths of the way through the conversation, they have already decided. Everything after that is formalities.

So the pitch goes well, I like how the investor has received it and the questions they've asked, and at the end I make a direct ask. Would love to hear how you feel about what we're working on. Are you interested in putting some capital to work in the company? Would you like to make an investment?

You will hear one of three things. Yes, I'm excited, I'm good for 25 or 50 or 100 thousand. Or, I'm not sure yet, I'd have to think about it. Or, probably not, it isn't the right fit, or I'm not liquid enough right now. The first and the third are acceptable answers. You don't get off the call with the second one.

The way I've almost always resolved the second is: totally get it. Curious to know, if there was an amount I could get committed to this round, would that change your interest in investing, and if so, how much would you be willing to put in? Usually you hear one of two things. Either it's really just not the right fit, thanks for the time. Or, yeah, if you get to 250K I'm in for 10K.

Now you have 10,000 soft circled, and the next investor hears exactly that: I've got 10,000 soft circled, we're looking for additional investors, and here is where the round stands. You run the same commitment cycle. That person either soft commits another 10,000 or says they're in for 50,000. The next investor hears: I've got 50,000 committed and another 10,000 soft circled, would you like to invest, and if so how much? You keep that going until you hit the milestone, whether it's 250,000 or something else. Then you go back to each investor whose threshold you've reached, firm up the amount, send them the SAFE, send wire instructions, and watch the money come in.

Running the waves

For institutional investors on a priced round, the commitment cycle runs inside the waves. Same spreadsheet, two tabs. Tab one is wave one, the investors who are second order for your company for any of a dozen reasons: they haven't invested in your industry before, you're unsure how much capital they have to deploy, you haven't heard of them. Tab two is wave two, the investors you're most excited about.

You set up a calendar link that only allows booking over the next four days. You do not let an investor book three or four weeks out. You send the same personalized email to everyone. If you can get a warm introduction, take it, and forwardable emails work very well for this: send it to an existing friend or investor and ask them to pass it along so the recipient can opt in. If you're going cold, go cold. Cold outreach is extremely effective and I don't care what anyone else says. The vast majority of my investor conversations came from cold outreach. I have also closed very good investors from introductions made by people who passed, which is also counter to what you're told to do.

Don't put the calendar link in the email. That's too forward. Just ask for time. Attach a static PDF preview of the deck, three or four slides, only the problem, the solution, the product, and maybe market size. Mail merge it out with the personalized blurbs, and send wave one on the Wednesday or Thursday before the Monday you want to start raising. They get it Wednesday, work through it Thursday and Friday, respond over the weekend, and you spend Sunday and Monday booking the next four days. By Monday your week is full of wave one pitches.

By Wednesday or Thursday of that first week, especially in coastal investor networks, your wave two investors have already heard about your deal. An associate at a firm you pitched has told them. The deal is being socialized without you. Meanwhile you're working wave one for a yes, a no, or a clear next step, collecting soft circles and partner meetings, and refining the pitch every time you give it.

Week two, you pitch wave two, with a refined pitch and some socialization and soft commitments already behind you. Week three, you may well have someone leaning in as a lead, and you can start telling everyone still in the pipeline how many preferred investors are leaning in and how many partner meetings you've had and have scheduled. Second and third meetings with wave one and wave two continue through the subsequent weeks, and the whole thing compounds toward a lead. This is on the order of hundreds of people. Four to eight meetings a day, every day, for four to five weeks if you do it well. At the end you have a lead investor and a term sheet, and you go back to every secondary investor and tell them who's leading and for how much.

If a VC passes, do you ask for an intro?

I saw a VC on LinkedIn say: if I tell you no, don't ask me for another connection. The overwhelming consensus agrees with that. The honest answer is that it depends. If an investor who passed offers to introduce you to someone, and you can tell they're doing it because they genuinely liked the deal, take it. If you can tell they didn't like it, that they had real conviction reasons to say no, don't ask.

Grace G., now at Amplify Partners in San Francisco and very bright, was an associate at Menlo Ventures when I pitched her. We had a term sheet from South Park Commons the second week of February 2020, and Menlo got skittish about two weeks before everyone else and could see the Covid writing on the wall. Menlo suddenly stopped our conversations. We had a partner meeting scheduled and they dropped off. I reached out to Grace and asked what happened, whether everything was okay, whether we could reschedule. She told me they were pausing new checks, probably until after summer, that she loved the deal and was bummed they couldn't take a closer look, and that she'd like to introduce me to four or five other people.

One of them was Steven Rosenblatt at Oceans. Steven became one of our major investors and is probably the closest VC relationship I have to this day. He took 12am phone calls. He flew out to see me. That relationship came from an introduction by an investor who had just passed.

Use your judgment and read the room.

Everything above comes back to the same two ideas. Finance the business, with ethical people, wherever they happen to live. And treat the raise as what it is, a momentum process, where every email, every four-day calendar window, and every direct ask at the end of a pitch either adds to the momentum or gives it away. Capital risk is yours alone to burn down. Nobody strings you along for nine months if you never let the round stand still.