This week I had the great privilege of sitting down with Andy Davis, serial investor and co-founder of 10×10 Capital, a fund that invests in early-stage black founders in the UK. Andy took us through some key questions founders should consider when fundraising.
How much equity should you give away early on?
There are a few things you should know if you’re a founder involved in fundraising today. Firstly, how much equity should you give away? In my opinion you should give away no more than 10-15% of your equity in the first round of investment. After you grow, you can potentially give away a bit more. You need to give away smaller amounts earlier to preserve your equity to have more later on.
It puts investors off when we see companies as they’re growing, and they’ve already given away a significant amount of equity in their business. It makes us believe that they won’t have enough left to be motivated to keep growing their business long term.
What kind of validation does your company need?
Validation is super important, but it shouldn’t be quantified by vanity metrics – for example the number of downloads for a mobile app. Validation means actual engagement with users. I don’t want to hear that you have 15,000 downloads and only 200 users. I’m not worried about the numbers. I want to hear about how much those 200 users love your product, and how they’re spending their time with you. I want to know who those users are and how you’re planning to reach more of them. That’s super healthy and positive for you in those early days.
If you’re a B2B company, validation should be a pipeline of pilot customers or actual signed and paying customers. Having people just on a waitlist, who may be interested is just not enough nowadays because the world is so competitive and it’s relatively easy to launch products, especially with no-code tools and a lot of things you can use to validate your products.
So, for validation, if you’re B2C, you want to have engaged users, regardless of the state of the product. If you’re B2B, you want to have some paid pilots ideally.
What questions should you ask a potential investor?
When you talk to an investor, you want to ask what stage they invest in typically. Pre-seed? Seed? Pre-product? Pre-revenue? Find out where they’re comfortable. You need to ask them how much they usually invest, how much they invested in the last few companies. You want to understand what their timeframe is to make a new investment. If they see you today, do they need a few more meetings with you? Do they like to invest over a three-month timeline or are they happy to make a decision in a day or a week?
Also ask them what they expect as a return. That’s a critical piece, especially if you’re talking to a fund. The fund may love you and obsess over the problem you are solving, but if they see how your solution will work economically and enable them to see the kinds of return they need then they will not be able to do the deal. Asking potential investors what kind of return they expect will tell you whether or not the deal is viable.
How to make the right introduction to an investor
Everyone says you need a warm introduction and that you should never call someone cold, but that’s not exactly true. There are some really good ways to cold DM or cold email potential investors. If I open an email and it looks like a book, I’m going to “come back to it later”. Who knows when “later” is? You want to make your email super succinct. It should be clear and I should be able to read it on my mobile phone, without scrolling. It should have a link or an attachment to your deck. Keep it simple: one line about what the business does, how much you’re raising and if you have any money committed. Then put in three to five highlights about the business and the best way to contact you. Nice and simple. Trust me, that’s the email to send.
The same thing with DMs. If you’re DMing someone, also keep it super succinct and take up maybe half a mobile phone screen. Tell them what your business does in two and a half lines with a link to your site and a link to your deck. Also be very specific about what you need. Tell them, “I need half an hour with you to discuss A, B, and C.”
Cold emails and DMs can work, you just have to know how to leverage them.
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