Originally published on Xconomy on May 6, 2019
As the co-founder of Assembler Labs, a Detroit-based startup studio, I breathed a big sigh of relief after we closed our inaugural round of fundraising at the end of March. It took about seven months of investor meetings, sending around documents, and wrangling signatures, but my co-founder and I looked forward to calmer calendars and more focus on building our business. However, in pursuit of building big, venture-scale businesses, we’ll never really leave fundraising behind.
Fundraising, as an action and a skill, is often critical to launching companies, especially for Assembler Labs. Whether you’re a startup attacking a big market and growing quickly, or a startup studio like us, you can expect to be back on the fundraising trail 12-18 months later. This means you have to get mighty good at it.
From building an investor pipeline, to increasing visibility and creating leverage, fundraising is an exercise in relationship-building, persistence, and communication, sprinkled with a healthy dose of good fortune. I tell the story of how we raised our first round in the hopes that it helps you when it’s time to raise your own investment capital, now or in the future, and demystifies a sometimes-opaque process—especially here in Detroit and, more broadly, Michigan.
Being new to town is hard, but not impossible
Ian Sefferman, my co-founder, grew up in metro Detroit and moved back from Seattle about a year before we started the studio, but I was (and still am) new to Detroit. One investor cut to the heart of it when he asked us, “You’re both relatively new to Detroit—what makes you think you’ll be able to build a network to not only recruit founders, but even get this off the ground?”
Great question. Fortunately, we had some advantages: Ian’s dusty, but not completely dormant, Detroit and Michigan relationships; the assistance of Techstars; an attitude of confident naïveté; and a modest, but growing, willingness to get out there and meet people.
Before I even crossed the Michigan state line, Ian had begun poking his head into the Detroit startup scene. He reached out to VCs in the city, had a lot of coffee meetings we’d debrief on afterward, and started meeting founders working on their own companies. Simultaneously, we tapped our Techstars alumni network (Seattle Class of 2012 in the house) and got involved with Techstars Detroit, which exponentially opened up (and continues to expand) our network.
From there, it was all about meetings, asking those people who else we should talk to, and more meetings. We ended up meeting or talking with a little over 400 people, of which 150 were potential investors. Yes, our calendars were fun to look at.
The 150 potential investors were mainly angels, with a handful of VCs mixed in. We found that most VCs had mandates that prohibited investing in LLCs or non-traditional startups (like studios), but former founder/operator angels totally got what we were trying to do and were excited. They didn’t have a limited partner’s structural constraints and wanted to strengthen their connection to the Detroit startup community through our studio.
In the end, we raised money from 21 fantastic investors. We faced plenty of rejection—94 said no—but are happy with our 14 percent close rate and our capital raised.
If we were to do this over again under the same circumstances, I think we’d aim to double the potential investor pipeline, which probably means networking even harder/smarter and meeting with 600-800 people.
Press sells
Barely two weeks after we left our jobs, I remember Ian and I discussing our media strategy. I felt like it was too soon and we were way too unproven, while Ian thought we needed to launch publicly as a way to get some attention. All we had was a website, a Google sheet with some business ideas/problems, and a pitch deck. We didn’t have a spinout business, we hadn’t (in)validated anything just yet, and we weren’t even in the same city: I was still in Seattle and Ian was in Detroit.
Man, was I wrong. What we had was enough for a compelling narrative. I didn’t see that our Detroit focus and me physically moving to Detroit was sufficient to pique some interest. Five weeks after we left our jobs, we were written up in three publications: Geekwire, Crain’s, and Xconomy.
Those three articles led to people reaching out to us and, in a round-about way, to 11 percent of our fundraise (and to meeting a handful of potential founders). I historically discounted the benefits of press, but now I think I’ll lean into it. We’d seen the power of press with our first company, MobileDevHQ, and its impact on signups and revenue, but were surprised by just how much it contributed to fundraising.
(We should probably disclaim that we did not advertise our fundraise, just in case any of you are current or budding SEC regulators.)
Why yes, networking is valuable
Like many people, I find networking uncomfortable. I’ve tried many tactics to make it more palatable, like setting a goal of meeting five new people before allowing yourself to leave, but it’s still unnatural for me. The most comfortable I’ve been was when I found myself at the same conference I’d attended for two years and saw familiar faces.
But, I discovered that it’s essential. Our studio will be successful if we can recruit amazing founder talent. In order to do that, it helps to have a great network. A great network is filled with high-quality people that you know (preferably well). In order to increase the odds of knowing quality people, it helps to have a big network. We based our fundraising strategy on this premise and sought to raise money from as many highly-networked investors as possible. By doing so, we were able to exponentially increase the size of our network.
After whittling down the 150 potential investors we spoke with, and excluding family connections (which could be considered networking), we closed about 41 percent of our total fundraise through sheer force of networking. It’s shocking how much serendipity plays into networking. After meeting with one person—and five successive new introductions later—you can end up with a committed investor. That’s something that can be tough to orchestrate at the outset.
You can make up all kinds of excuses to just sneak out a little early, or linger on the periphery while on your phone, but it will only be to your detriment.
Ask not what you can do for your investors, but what your investors can do for you
We’re in business to produce returns on invested capital. That’s our job. However, that doesn’t mean that our investors can’t be incredibly helpful in that pursuit. (And talk about aligned interests.) One of the most effective ways to meet more potential investors is simple: ask your committed investors for introductions to interesting people who might also be interested in investing.
We weren’t methodical and systematic about this until more than halfway through our fundraise, when two things happened. First, we gave a fundraising update to our already-committed investors at our inaugural quarterly investor meeting. We value transparency, and so showed them our pipeline and our projections. Afterward, three investors told us they wanted to help us with fundraising, but weren’t exactly sure how we wanted the help.
Second, we had fortunately just read this 2016 post by Alex Iskold. Alex’s post not only validated some issues we’d been having with verbal commitments (more on that next), but it also exposed our omission in not leveraging committed investors. In our next investor update, we followed Iskold’s advice and asked for two or three intros to people. That led to 16 highly qualified investor introductions and increased committed capital by about 18 percent.
Now that we’ve done it, it seems incredibly intuitive and, as two people who have fundraised before and spent altogether too much time reading VC Twitter, I’m frankly a little embarrassed we didn’t realize it sooner. Better late than never, I suppose, and our spinout founders will benefit from the experience.
You cannot over-communicate
As I’ve mentioned, Ian and I profoundly value transparency, especially in business, which compels us to communicate openly and frequently with our stakeholders. This includes investors and founders. But, over the course of a nearly seven-month fundraise, we underestimated the sheer amount of communication the process demanded. Yet again, I’ll bring up Alex Iskold’s post, where he writes:
“Promptly follow up every 2 weeks to keep committed investors up to date. Good rounds have momentum, and you want the investors to feel good about investing. The update email should include progress on the company and on the round.”
We thought our detailed monthly investor updates were sufficient, but they weren’t. We did a first close in January, which meant that our fundraise ran through Christmas and we went radio silent a little too long around the holidays. As a result, we lost an investor who felt like we were losing momentum (we weren’t). Investing is highly emotional and in this case, our lack of more frequent communication spoiled the opportunity for that investor.
Macro matters
We had two previously-committed investors drop out and one potential investor come in due to macroeconomic changes. When you’re fundraising from angel investors, it can be easy to forget that your investors are giving you money that’s likely in another form in markets that may be trending up or down at any given time for various reasons. That means that a verbal commitment on Day 37 may not result in a signature on Day 52 if, for example, Bitcoin plummeted in between (that was a fun day), or Facebook’s shares shed 35 percent as privacy concerns mounted (yikes).
Conversely, the butterfly effect can work in your favor, like it did for us related to one potential investor. (Thank you, financial analyst, for publishing a timely buy rating that led to a 30 percent share increase and foreshadowed the next quarter’s positive earnings report that led to another 30 percent share increase). You’re just going to have to take the good with the bad and hope that Father Timing is looking favorably upon you.
I’m not saying there’s anything you can really do about it, because there isn’t. It’s just good to know so you can properly set expectations that you may lose some verbal commitments due to factors outside your control, even if you’re just setting expectations with yourself. Your own psychology can be your worst enemy, especially during fundraising.
In conclusion
Fundraising, while difficult, is learnable and incremental. You have to start with something worth it for investors. However, if you pay attention to how you build and engage with your pipeline, seek out—and genuinely value—networking, display your accolades with the media’s help to manufacture interest and visibility, systematically get intros from your committed investors, and factor in the macro goings-on to lessen turbulent moods, you’ll be fine. ;)