Raising money is extremely tough and sometimes ends in failure, but it’s also one of the most important parts of starting certain businesses. To learn more about what experts have done to raise their money, we spoke with serial entrepreneur and investor Jamey Harvey, DataTribe investor and entrepreneur John Funge, and Modscore founder Mike Modica.
ABERMAN: So, what makes fundraising such a painful process?
MODICA: One of the reasons I started Modscore is, the thing that makes it the most painful is that most founders and entrepreneurs don’t realize they’re in a buying/selling process. You’re not literally selling your company, but you’re convincing people of the concept, and you have to understand your buyers. And over time, back in the 90s, buyers were looking for product, a little revenue, and some other metrics. I’d call them financial investors. Over time, the guys in San Francisco have kind of taken over, and they’re closer to what I’d call market investors. They’re looking to throw bigger money at owning a market, and they’re not looking at the same metrics financial investor look at.
So particularly here in this area, I think people pitch their deals, and for me, there’s something happening. There are so many seed companies being funded now across the world. Thousands and thousands. But the data will show you the data for A and B rounds, which they really need, is going down. But the amount per round is going up. So, big funds, big capital, the partners haven’t changed so they need to deploy more capital. So, what you see is this bifurcation, a huge hole in the market. Lots of seed, lots of later-stage growth, but the middle growth is a lot harder to get.
ABERMAN: So the big pain point for an entrepreneur is that they’re growing a business to satisfy customers, but having a business that’s a financial asset may be a different thing? Jamey, what’s your experience?
HARVEY: I think what people don’t know about raising money is, while you’re raising money, you’re investing your life. All your time and passion, and all attention you could be spending on family or your well-being, you’re pouring it into going out and talking to people who don’t understand what you do, and having them tell you no all the time. So, that creates a kind of stress people don’t understand. When we got our first big break at my first company, Digital Addiction, while we were in the process, two painful things happened. One, the guy I worked with, his virtual CFO company got crammed down in the round, so my friend got 30,000 dollars taken away from him. Another is, an investor’s cockatoo bit me in the middle of my presentation, and took a big chunk out of my hand. At which point they said, you’re funded, the bird loves you. So it was funny. The bird liking me was a big part of connecting with that investor.
ABERMAN: So for you Jamey, it was really the personal aspect, giving up your life, the sacrifices, and dealing with, frankly, eccentricity, to get money?
HARVEY: And delivering bad news to people. Like when you invested in one of my companies, and I had to tell you it was shutting down.
ABERMAN: And I bit you!
HARVEY: All kidding aside, I know founders who’ve killed themselves, or ended up institutionalized. It’s tough.
ABERMAN: Exactly. Startups and entrepreneurship are such binary spaces, and they attract binary personalities. That’s one of the biggest challenges I had as an investor, separating people who were a little off-the-wall enough to take a challenge from people who were truly off-the-wall. Part of the due diligence is ensuring an entrepreneur is sane.
HARVEY: And if you’re a woman, unfortunately, you’ll probably even be sexually harassed. If you’re a person of color, you’ll probably face discrimination. And I don’t mean by everybody, but out of the thirty angel investors I dealt with in the 90s, at least two have been exposed as treating people this way.
FUNGE: Entrepreneurship, there’s a side to it that can’t be fully rational. If you’re purely rational, you probably won’t be an entrepreneur. From my experience, I’ve had a unique opportunity to be on both sides of the table. I’m a multi-time entrepreneur in the DC area, and then a few years ago I began working at DataTribe, and we’re a venture investor, startup studio, and foundry, primarily focused on cybersecurity and AI-intensive companies. It’s interesting, I think one thing that makes it challenging for entrepreneurs is, by and large, founders are super passionate, knowledgeable, deep in certain discipline, but not necessarily deep in venture.
One only needs to look at the NVCA docs, which I encourage any entrepreneur to do. There are some very clever people that work in finance, as we know, and they’ve been tinkering on deal structure– even in this conversation, you guys are using terms the average, starter entrepreneur may not even know. There’s this massive knowledge asymmetry, so one of the things I’d encourage is that entrepreneur needs to target their investors. One ounce of targeting will save you massive amounts of effort. The other thing is, try to understand the business of venture. I’ve raised money for a few different companies, and my eyes have only recently been opened to learning so much about the inside view of venture. The better you can mutually empathize with what the VC is trying to do, the better you can align with their goals.
ABERMAN: That’s something said at a lot of podiums a lot of times, and I think entrepreneurs are reticent to listen to who they see as rich people on that. But at the end of the day, from my perspective, Amplifier never wrote a check for more than half a million dollars. And I’d get emails saying, we’re raising a ten million dollar round. Good for you! I help start companies, I don’t go do later-stage funding.
MODICA: Part of the reason I started Modscore is for that. When I was consulting, I spent 80 percent of my time telling people most of the stuff they were told is a myth. That’s a real problem. So, there are buyers and sellers. If you’re an entrepreneur going to a buyer, and they’re telling you, you shouldn’t raise more than 3 million dollars, but there are funds that write checks bigger than that, it’s a lie. They don’t know how much you actually need, and you shouldn’t necessarily listen to that.
ABERMAN: They’re telling you what you need based on what they can give you.
MODICA: Right. So, the industry is almost a monopoly on a lot of stuff. Now, people like you and your company, you’re part of the problem right now, in a good way. You’re creating this huge amount of really, really well-run companies. They’re well-run, getting capital, half a million, million, two million dollars. Which is creating this huge demand for these A and B rounds. When I talked to Barry Eggers, who was head of the NVCA, he said: We don’t do 8 million like we used to do. We’re doing 25, or 2.
ABERMAN: What’s really interesting is, the venture capital industry is so bifurcated in that way. There are people still very interested in garage inventors in that way. We’ve never ha more money in this VC space, but it’s going into larger and larger funds that need to invest in WeWorks and other huge projects, hundreds of millions at a time. If you’re an entrepreneur, what do you really have to do well to raise the capital you need?
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HARVEY: You have to get out and have a lot of conversations. There’s a bit of a random walk element to it. I see entrepreneurs encouraged not to talk to this kind of person or that kind of person, and you do have to be careful with your time. But sometimes I’d get invited to talk to an investment bank, and clearly they weren’t in our asset class, but they want to get educated about virtual objects, which turned into a billion-dollar industry we invented.
ABERMAN: Often, an entrepreneur can have a great idea at the wrong moment.
HARVEY: Exactly. We were always too early. They’ll write that on my gravestone. But those investment bankers helped us make introductions, introduced us to people. There were a lot of random connections that got made that led to raising money.
ABERMAN: So, take a lot of meetings?
HARVEY: I later tried not doing that. I didn’t get the kind of benefits there that I got that I had make through networking so hard earlier in my career. It became a problem.
ABERMAN: But that might run counter to what Mark is about to say: that you have to be tactical.
MODICA: Yeah. So, there are three problems. One is data. There’s a lot of bad data. Financial models are bad, decks are bad. Those are all for financial advisers, but we’re doing something different. We’re creating new data where there is none, because that’s what I saw being bought in Silicon Valley. They were buying vision, the ability to go really big, then go really small and extrapolate from simple data. So, we’re building a system around being able to create data someone wants to see. Two is speed: you need to be fast. Harvey may have down a random walk, but he did it fast, and it’s getting harder and harder to do that.
Especially because the bigger money is concentrated, and we’re trying to get to a place where it isn’t so much like that. Three is connectivity. Are you connected, targeting the right stuff? There are funds in Silicon Valley you’ve never heard of that would be all the capital in D.C. There’s this weird bifurcation separating normal funding from these supergiant rounds. How do you get to that if you have this big idea? Because everyone you invest in is going to say they have a big idea. They’ll all say it’s a billion-dollar idea. So for us: your deck sucks, no one is funding a deck. Your financial model is outdated, no one is funding that. You need something different.
ABERMAN: So we should go broad, but you need a tactical view. John, my experience as an investor is that I want people showing up at my door early in the process and taking money from me.
FUNGE: Yeah. One thing that’s important to keep in mind is when you are entering this relationship, you’re putting together hundreds of pages of legal documents that bind you together until the company exits or goes bankrupt. So, there is a kind of courtship that goes on, and it’s important that the chemistry works and you work together well. There’s a mutual evaluation going on. Like Jamey was saying, you have to go hard at itm but I’d add one thing: you need a lot of targeted, quality meetings. If it’s possible, talk to people who have the authority to make a decision. A lot of people are relatively junior, don’t have much authority to actually make decisions, and they can waste a lot of an entrepreneur’s time. As an entrepreneur, there’s a little bit of theater.
While I was prepping for the show, I thought, of the myriad entrepreneurs we’ve met at DataTribe the past few years, who really stood out? There’s a bit of a show involved. The VCs are looking at that and asking, how can they compel me, and therefore compel customers? Part of that is being prepared, and understanding who you’re talking to, your market, your competition. It’s really not good if you’re in a meeting and someone with a light understanding of what you’re doing can pull up a competitor you didn’t know about. That’s basic homework you have to do before you enter the process. Realistically, it’s very dynamic, and you can’t always be fully prepared. But you want to be very targeted, and prepare the best you can, and have a little showmanship with how you do it.
HARVEY: When I said random walk, at the end of the day, you’re doing that so you can find the right person. I’ve found the wrong people before. When I met you, Jonathan, I’d targeted you.
ABERMAN: You were kind of stalking me.
HARVEY: Totally. Because you were the only investor in the area that made the kind of investments I needed. But, I knew that because I’d talked to thirty other people and they’d all told me the same thing. At the end of the day, you’re trying to get to the right relationship, because those wrong ones, you ask yourself, how did I end up with them? I went to an investor group, a breakfast, and my deck breaks down. I say, I’ll just do the pitch off the top of my head, and I do my best pitch I’ve ever done in my life. No deck. Everyone ran to invest.
FUNGE: Oftentimes a conversation, no presentation, can be the most effective.
MODICA: I don’t think this is the way to do it. I think it’s completely wrong. There are thousands of companies out there, I’ve been doing pitch competitions for 20 years. I can’t take someone and teach them to do what Jamey does with theater. It shouldn’t be about that. It’s important, but it shouldn’t be about theater. I’ve had people get 25 million dollars in funding because my CEO and my investor both had fathers in Vietnam. And that connected them. At Modscore, we’re doing video pitches. We’re scripting you out so there’s no random chance that you have a bad pitch. And by doing that, and showing seven simple questions, even when they go off and do their own pitches, now they’re prepared and they know how to do it.
The second thing is, 100 percent, entrepreneurs don’t understand that you’re selling your company. So, you only need to know one thing. Doesn’t matter how much of the company they’re buying, there’s a thing called protective provision. A VC, you can’t raise capital, sell the company, or do anything without their permission, whether they own ten, twenty, or forty percent. And if you get the wrong guy with the wrong fund, and the wrong amount of money, who puts you on the wrong trajectory, you’re dead.
HARVEY: Even if you’re in a smaller fund and don’t have those provisions, if the person calls you every day and rides you about specifics, and they haven’t done anything on the internet before, and they’ve only run a factory, they may actually pull you down. And if you end up with six of those guys, you’re dead.
ABERMAN: An entrepreneur who isn’t thoughtful, isn’t tactical, is sloppy and goes about things in a halfway manner is not likely to raise capital.
FUNGE: I think that’s right. You see lots of these. Theater and presentation is important, but being a founder is really hard. It can be very frustrating. One of the very basic tests, though, is: can you really do what you say you’re going to do, at a high quality level? It comes across in small, subtle ways, and the details matter. You just have to pay attention to the details, and not everything has to be super fancy or polished, but you have to pay attention. It’s super easy to say to just go out and raise money when you’re ready, but how do you know when you’re ready? And so, there’s a delicate process of bulletproofing yourself with trusted investors or entrepreneurs to harden yourself and find out.
MODICA: I’m a contrarian. Around the D.C. and East Coast, it’s all about revenue, and they say you can’t raise funds without it. I’ve broken this several times, and seen Silicon Valley funds spend way more on similar projects. So, there’s people who are winning out there, and the winning guys are going big and doing things based on a future vision.