The fundraising process often seems like it’s a feast or famine. Sometimes, it looks like you won’t be able to raise money at all, but at other times, you can end up with too much capital. Both of these scenarios can set you up for failure (or cultural issues) down the road.
This is why we’ve always looked at the capital for the long term. Since our vision was always to build a company for the long term, we wanted our funding partner to think about the long term as well. So the way we raised capital, in the beginning, was by asking ourselves fundamental questions about the funding based on our long-term vision. For example: “This is what the next three years of our journey will look like; is this round going to be enough to get us there?” We didn’t want to dilute unnecessarily; we just wanted to get the right level of funding to accomplish what we needed to accomplish.
So we had really clear milestones for what each round of financing would help us achieve. Based on that, we picked a partner who would be supportive in that stage of the journey, who had relevant domain experience, and who had sufficient depth and breadth for that stage and beyond. We didn’t want to have too many investors; we weren’t chasing capital that much. We just wanted a group of people who would align with us for the long term and be a good match for Postman overall.
It is very popular to raise money now. What most don’t understand is that ultimately they are giving
their ownership to someone. For example, I have had many seed and Series A founders who have come to me and said they are raising money. I said, but why are you raising money? Where are you going to deploy the money? They have no answer to that. The common response that most people give is that they are getting a lot of inbounds, which was scarce in the time of Amazon and Facebook. I think the big reason behind this is that there is so much capital available and all the branding that happens from the capital race. It has also become a big factor playing into the founder’s mindset that if I am not raising money, I am really getting left out.
Don’t go for the valuation headlines, don’t complicate and give preferential treatment to investors; keep it as simple as you can; it always works. Go for the best VCs. Think of them as partners; it’s a partnership.
More recently, I have had a realization. So let’s say whatever you are giving to an investor, technically, you are taking a loan, and you have to give it back. If the investor is going to exit, you have to find someone else to make that person exit. So, you look at it from a different perspective where you are taking a loan for seven years. If you think about what you have to do in seven years with the money you are raising right now, you can make more sense out of it rather than thinking now, now.
The thing I always say is that story is your friend, data
TO SECURE VC FUNDING, YOU SHOULD BE ABLE TO SAY THAT IN FIVE–SIX YEARS YOU WILL REALIZE $100 MILLION IN REVENUE. YOU NEED TO CHART THE PATH THROUGH A CREDIBLE STORY OR AN “AUTHENTIC LIE”, AS TED GORDON LIKES TO CALL IT. MANY VCs WILL EVEN PLAY A PART IN THIS. AS LONG AS THE AUTHENTIC LIE WORKS, MORE AND MORE PEOPLE WILL BELIEVE IN IT AND MORE MONEY WILL COME IN. BUT, AT SOME POINT, THE EXECUTION ALSO HAS TO CATCH UP WITH THE PROMISES. THAT IS SOMETHING ENTREPRENEURS SHOULD UNDERSTAND.
is your enemy. Investors may not like to acknowledge this, but, in my experience, very young startups with a good story have raised a lot more money than startups that have struggled for two-three years— mostly bootstrapped with small revenue. The data actually worked against them. By story I mean the kind of story investors want to hear. For example, if people want the next Freshworks, and they pitch something like, “Oh, there is a founder who sold the company to Freshworks, he is coming out again, and he has got a good high-quality team, you know, exFreshworks, ex-Zoho,” you would immediately see investors fighting to fund, even though the pitch had no idea. That is where the story becomes important.
Another thing is to check whether you have a VCfundable business. VCs rarely care about a 1 million/ 5 million/10 million business that will be profitable. If you want to do that, don’t go to a VC. It is still a good business, just not a VC-fundable business. VCs want companies that can grow to at least $100 million in revenue. To secure VC funding, you should be able to say that in five-six years, you will realize $100 million in revenue. You need to chart the path through a credible story or an “authentic lie”, as Ted Gordon likes to call it. Many VCs will even play a part in this. As long as the authentic lie works, more and more people will believe in it and more money will come in. But, at some point, the execution also has to catch up with the promises. That is something entrepreneurs should understand—this is why we keep talking about the big market, and the need for building a high-quality team so that you can quickly build $100 million revenue in less than five years and keep growing. So, you want a high-growth company at 100 million, which is when the VCs will start making their money.
Entrepreneurs should be able to value themselves correctly. The day you realize that you are taking a risk with your time, money, health, and relationships is when you will start valuing your equity. Value your equity from day 1, even if you don’t know anything because you are taking a disproportionate amount of risk and a disproportionate amount of trouble in your life. That is the perspective from which you should start the fundraising process. This will help you pave your journey. Position yourself as a creator, a builder. Your dilution and fundraising should happen from that perspective, not by underselling yourself from the start because you came from some random background. That, to me, is the crux of the fundraising process—learning all the marketing techniques of storytelling, hitting the market at the right time, negotiating with the right people, and getting the right partners.
I don’t think anyone in the world who can build a great product requires more than Rs 10–15 lakh. You just require a few great computers to build your software and after that, the money comes from the market. It does not come from your pocket. If your customers are not willing to pay you for what you’ve built, spending money in the market will not make them want it and the bulk of the money that people ask for is so that they can make a marketing splash. At least in the B2B space, marketing does not work just like it does not work in the enterprise space. The enterprise space is a sales-driven space, it’s a word-of-mouth space just like the SMB space. Sometimes after you earn some money, you may want to do branding. Let me tell you something— businesses don’t care about the brand, they care a lot about the product. Consumers care about the brand, therefore, you have a marketing-oriented way of selling to consumers. So, what’s the point of spending all that money if you are in the B2B space? So, people can ask for millions of dollars in funding, but is there a need? The answer is NO.
I would ultimately view your angel investors or your early investors to some extent as a diverse team of people. By that I mean you want different skills and different outlooks, common perspectives from people. So, for example, I have a very old blog post talking about the different types of angel investors you may want and bringing people who are very good at the nuts and bolts of the startup—hiring, firing, and product building, and things like that. There may be people very good at life-cycle events for the
I WOULD ULTIMATELY VIEW YOUR ANGEL INVESTORS OR YOUR EARLY INVESTORS TO SOME EXTENT AS A DIVERSE TEAM OF PEOPLE. I THINK TO SOME EXTENT YOU SHOULD THINK ABOUT IT AS A PORTFOLIO OF SKILLS AND REALLY THINK THROUGH WHAT ARE THE SETS OF SKILLS THAT YOU WANT ON BOARD. VIEW IT AS A BASKET OF PEOPLE AND REALLY THINK THROUGH HOW YOU WANT TO CONSTRUCT THAT GROUP.
— ELAD GIL
company, future fundraises or M&As or people who can introduce you to a dozen customers and help that way. So I think to some extent you should think about it as a portfolio of skills and really think through what are the sets of skills that you want on board. View it as a basket of people and really think through how you want to construct that group.
I would say having a longer-term vision of not just saying that I am going to sell software, I am a SaaS company, I make $50–$100 a month per store or something like that but of the big picture about where are you headed, what is this company about. Laying that vision out and saying that this company, yes, originally used to be about developing software but is moving to be, what is our aspiration, it is about being a gateway to the industry, being a backbone to the industry, and then laying out what that implies and actually taking the time to articulate that clearly helps them to realize that this opportunity is huge.
There is an upside on the table so the willingness to give you a better multiple or valuation moves up. If they did not have that upside, they will be stuck and will say that 400–500 million is the best that they can give you. Also, while fundraising I found people who were good at it, but yes, the domain will come down on people who can invest. Either you pick someone who happens to have spent a lot of time in this industry and is very passionate, saying I want to put in money in this space because I get it, I get the landscape, or you would have to find someone who knows the playbook very well and brings value.
The sooner you realize what you are good at, the better it is. We are bad at fundraising, as in we don’t like to do comparison shopping to get a better valuation. The first person who gives us a decent evaluation we are like, okay, you sound good, and let’s make it happen. Because we don’t optimize for valuation. We optimize for annual recurring revenue (ARR), optimize for market share, optimize for building a good product that someone can genuinely use and we believe that is the starting point for everything else that will happen in our company.
The more important question is that you must make sure you are disciplined about how much you raise. Otherwise, you will raise way too much and to justify that way too much raise, you will have to do funny stuff—crazy experiments/senseless expansion, which will eventually mean that the numbers won’t stack up. And then, unless you can get everything you were trying to do right, it won’t work. This only time can tell, but at least we haven’t been great at some of our bets, and we could have avoided them if we hadn’t raised all the extra money we raised.