5 Steps to Creating an Early-Stage Fundraising Strategy with Angela Lee, Founder of 37 Angels
Angela Lee is Associate Dean & Chief Innovation Officer at Columbia Business School and the Founder of 37 Angels, an angel network that invests in early stage startups and activates and educates new women angel investors. Lee shared her keys to developing an early-stage fundraising strategy at the 2017 PE Intensive in New York City.
1. Figure out how much you need to raise.
Lee advises early-stage founders to set out to raise enough capital to cover 18 months of operations. “A mistake founders commonly make is they decide that whatever their current operating costs are, they should just multiply that by 18,” says Lee. “It’s really, really important that as you’re thinking about costs, you are having the costs ramp up with milestones in production.”
Lee’s advice to founders: break up the 18 months into three, six-month stages. “[Determine the costs] taking place in each of those three stages, and don’t forget staff costs. How much does a salesperson cost? How much does a marketing person cost? It’s really important not to just take what you’re spending now and multiply it by 18, but really thinking about [what will happen] as your company grows.”
It is also important for early-stage founders to demonstrate to investors how they are going to spend the new injection of capital. Lee cautions founders against putting too much of the fundraise towards product development. “If you have 80 percent of your round going towards product development, it’s not a red flag, but it’s like a light yellow flag,” says Lee.
“Ideally, we as investors are injecting money in to grow your company, to sell more products, to get more customers—not so much to do product development,” she continues. “It’s fine if maybe 20-25 percent or maybe a third of your round going to product development, but we want you to be lean in the way that you’re building your product and grow the company.”
2. Decide if you’ll raise from Venture Capitalists or Angel Investors.
According to Lee, the primary difference between angels and venture capitalists (VCs) is the decision maker. On the VC side, you have General Partners (GPs) and Limited Partners (LPs). The GPs raise a fund on behalf of their LPs. “It’s just like a mutual fund, so all of the decision making power comes from that GP.”
In contrast, with angels, the decision making power is distributed amongst each of the angels. “When I invest $25,000 or $50,000, that is money from my savings, and so the decision [about where I invest my money] lies with me,” explains Lee.
Early-stage founders will see some differences between VCs and angels because of this. One of those being the extent to which sector influences the VC’s or angel’s decision to invest in your company. “In my experience, VCs have a tighter investment thesis—they have a fiduciary responsibility to their LPs that they’re only going to invest in [certain sectors], whereas angels aren’t beholden to anyone.”
As such, Lee advises founders to research the sectors in which certain VC firms and angel networks invest so they don’t waste time pitching to investors that aren’t interested in their company’s industry. That said, founders shouldn’t rule out an angel investor solely based on the sectors in which they’ve previously invested. “I say that I’m an ed-tech and healthcare-tech investor, but if you look at the 16 companies in which I’m personally invested, there isn’t a lot of rhyme or reason— I’m invested in companies that I like,” says Lee. “Angels can be more flexible because [we’re] investing [our] own money.”
3. Prove you understand who your customer is.
“What we as investors look for is that you can describe your customers in three ways,” says Lee. “Demographics, psychographics, and use case.” Demographic information includes whether customers are urban vs. rural, how much money they make, how educated they are, their age and gender, etc. Lee describes psychographics as the magazines your customers read, or the stores where they shop (are they a Trader Joe’s, Whole Foods or Costco customer?)
Lee sees founders trip themselves up the most when demonstrating use case, but it’s so important. For Lee, it’s important early-stage founders know the use case for their customers—the problem they’re solving for those customers and how the customers comes to them for the solution. Once founders know the problems they’re solving, they’ll know where to find customers, and they’ll also know how to communicate with your customers effectively.
4. Demonstrate traction.
Lee provides a few examples of how founders can demonstrate that their startups have traction. “Landing pages are a great example of how you demonstrate traction without revenue. Build one and it allows you to tell us investors, ‘I don’t have any customers yet, but I have 10,000 people on my waiting list who are just itching for my product’.”
A letter of intent is great for proving traction without revenue on the B2B side, and it can take the form of a signed letter from a future client or an email. “What it tells me is that someone is obviously willing to pay for your product. It also tells me that [you know what features] these clients are willing to pay for.”
Crowdfunding campaigns are also useful ways to show investors that there’s interest in your product. “If you have a successful Kickstarter campaign, that’s great. It means that you know how to market, you communicate well,” says Lee. “[Crowdfund] thoughtfully, as it becomes a part of your [total] fundraising campaign.”
5. Pull together solid numbers using good metrics.
“In terms of metrics, most [investors] are going to focus on number of customers, amount of revenue, and percentage growth,” says Lee. “Seed-stage investors want to see 30 percent month-over-month growth, which is aggressive.”
Different metrics apply to different industries, so Lee advises founders to use the metrics that make the most sense for their company and their sector. “Investors are going to ask what metrics you’re focusing on, and why those metrics are important. You should have a thoughtful answer to [those questions].”
There are also two numbers that every founder should know, according to Lee: Customer Acquisition Cost (CAC), and Customer Lifetime Value (CLV). “You should know how much it costs you to acquire a customer, and you should know that on average that customer stays with you for three months and spends $76, [for example]. Paying for customers is absolutely fine, so long as that ratio between CLV and CAC is at least 3:1. A ratio of 5:1 is better, but 3:1 is the bare minimum.”
Photo credit: Amanda Gentile
Lee’s advice comes from her #PEIntensive17 workshop, “Demystifying Angels, Seed and Friends and Family Fundraising.” Listen to the entire workshop on Episode 43 of our podcast, and subscribe to #theTools on iTunes, Google Play or SoundCloud.