Startup Fundraising: The Good, The Bad, and The Ugly

One year ago today, Smart Office Energy Solutions closed a $1.3M angel round of funding. We've accomplished a great deal since then - expanded the team, finished gen-1 product development, obtained all the requisite certifications for our hardware, and built a large sales pipeline - but I find anniversaries to be a good time to pause and reflect.

This is a presentation on startup fundraising I gave a few days ago to entrepreneurship students at the University of Wyoming. In it, I review the pros and cons of several different startup fundraising strategies, using Smart OES and my previous startups as specific case studies.

Startup Fundraising Strategies: The Good, The Bad, and The Ugly from Bryan Hassin

Toward the end of the presentation, I take a deep dive into Smart OES's three rounds. The quantitative analysis provides some interesting insights:

• We had a 0% success rate trying to raise funds from people who were not part of our networks. 100% of our investment came from people we knew or people to whom we were introduced.
• Former colleagues invested the most (in total invested, mean investment size, and median investment size) in my venture. The trust developed by working with or for someone is a real asset in early-stage fundraising.
• A similar trust clearly is formed in the academic setting as well because a good deal of our investment came through my school networks. Interestingly, Rice contacts invested more (in total invested, mean investment size, and median investment size) than did IMD contacts.
• Second-degree contacts became much more likely to invest over time. It is helpful, therefore, for startup founders to engage "smart" money (in this case, investors with connections to other investors) early on.
• Similarly, the value of repeat investors increased over time, demonstrating the value of engaging investors with the capacity to follow on.
• Geographically, investors in Texas out-invested investors in Switzerland 2:1. However, using my LinkedIn network size (1,100 contacts in Texas; 250 contacts in Switzerland) as a denominator, the Swiss outperformed the Texans on a per capita basis. Most disappointingly, we didn't raise a penny from North Carolina (where I have 300 contacts!) - and not for lack of trying.
• Unsurprisingly phone calls and in-person meetings were more effective than emailing or messaging on social networks in leading to investment.

We've just opened up a new funding round (with more than 25% already committed by existing investors!) so we're putting these learnings into practice to be better/smarter/faster this time around.

Financing Your Big Idea

Someone asked a question on LinkedIn about the best way to finance a new venture. What do you think of my response?

"By far the best way to finance a new venture is by customers paying in advance for your products that may or may not truly exist yet. Each dollar you bring in with this customer-centric finance approach provides more than a dollar of value by also validating your market (In the raise-capital-then-build-product-then-sell-product model there is a much higher risk that you will build something that no one wants to buy.) and creating a group of reference customers to help you sell even more product once you are ready. Recent crowdfunding sites like kickstarter (which is essentially a pre-sales tool) provide this benefit if you are targeting many, smaller customers. If your product is more enterprise in nature, though, you will need to do the selling yourself."

Winning

Last week was a great week that brought many accomplishments both professionally and personally. First off, I am pleased to announce that Smart Office Energy Solutions closed its second round of funding! While our first round comprised mostly smaller investors with whom I already had a personal relationship, this second, larger round was made up of more professional investors - both as individuals and as companies. Once again it is an honor to have had such faith placed on our shoulders and once again we will do everything within our power to ensure an overwhelmingly positive outcome.

And now, with this round closed, we've wasted no time in launching fundraising efforts for our next, much larger round. I pitched to two VCs last week and have already had very positive feedback/interest from one. As I have expressed before, fundraising is new for me and it is easy to become frustrated with the time and attention it takes. However, each of these small successes re-energizes me and keeps us moving forward.

Another piece of good news came in last week when we were selected as semi-finalists for the Cleantech Open, a prestigious nation-wide contest between cleantech startups. It is an honor to have been selected among such talented companies and we will work hard in the next round to live up to the "hype."

Finally, business meetings took me to Dallas toward the end of the week so I used the opportunity to squeeze in some time at The SHOP while I was there. I will detail that experience in a subsequent post but suffice to say that the incredibly intense workouts were exactly what I was seeking.

It was a great week so now I'm working on making this one even better!

Fundraising

I've been meaning to write this blog entry since the end of March, when Smart Office Energy Solutions closed our seed fundraising round. However, due to the intricacies of international wire transfers, it wasn't until the end of May that we fully received all of the funds that had been committed. Now, with that checked off, I'll share a bit of what I've learned about fundraising.

As most know, this was my first time leading a fundraising round. My first two startups were bootstrapped and, while my most recent startup did raise significant capital, there was another officer who led that process. Accordingly, I didn't know quite what to expect back in January when we announced our intentions to raise $100k by the end of March.

At first I didn't proactively market our offering, relying instead on those who heard about it via my tweeting, blogging, and status updates to approach me. By the end of January we had closed $20k but would clearly need to step it up to meet our goals.

In February I posted the opportunity to participate in my LinkedIn groups, which generated significant response. After several follow-up meetings we closed an additional $35k by the end of the month--over halfway there!

Come March it was time to be aggressive ("Be aggressive, be-be aggressive," as our HS cheerleaders would say.) so I began to target proactively specific individuals who would be good candidates. This generated great interest but only immediately yielded a few small investments. Coming into the last week of March we were still $35k short of our goal and I didn't really know how exactly we were going to bridge that gap.

I published a notice that we would close the round as planned March 31st and an amazing thing happened: all of the interested parties started lining up with commitments! In fact, by the end of March we had offers to purchase twice the number of shares we were offering! Maybe I should have announced the closure of our round back in January . . .

This response was thrilling! Because there were good uses to which we could apply additional capital, we decided to seize the opportunity but we ultimately capped the round at $150k. This had a nominal dilution impact and significantly strengthened our position.

I am very personally gratified that each of our investors chose to take a risk and invest in our venture. I know that, in many cases, this represents as much a bet on me as it does a bet on our business model. As such, I am working tirelessly to ensure that their investment grows in value and that this company realizes its massive potential.

The diversity of our shareholder group is interesting. Outside of the two founders, our shareholders include 6 alumni from Rice University, 2 family members of those alumni, 3 alumni from IMD Business School, 2 IMD professors, 1 alumnus from the Thomas Jefferson High School for Science and Technology, and 1 former colleague. The group includes residents of Texas, Rhode Island, Virginia, Argentina, Costa Rica, and Switzerland. I know every one of the investors personally and am proud to count them all among our extended team.

Closure of this investment round represented a very significant milestone for this company. It moved us past the point of no return. This is no longer just about an individual dream to make the world smarter and better; it now bears the support (and risk!) of several other stakeholders as well. We're in it together and I know we will realize our goals!