How to Raise Investment Capital

Informal notes & observations from my experience raising capital for D-Wave, Kindred, General Fusion and Sanctuary

A Wafer of D-Wave Quantum Processors, c. 2018. Photo by Steve Jurvetson

This is a series of notes describing my approach to raising capital for mission driven companies. The process I describe is based on my experience raising investment capital for quantum computers (D-Wave), robots that learn from experience (Kindred), fusion reactors (General Fusion) and embodied artificial general intelligence (Sanctuary). I have been on the front lines of 16 financing rounds, either running them or being a part of a financing team. Over these 16 rounds my colleagues and I have raised about US$350M in venture financing to build potentially world changing technologies.

These notes were assembled originally to help my co-workers understand how the process works, both as a psychological exercise and also tactically (what exactly do you do, and in what order). I’m sharing them more broadly because raising capital is hard, and I suspect many really great ideas never see the light of day because the people who have them don’t know how to fund them.

The world desperately needs new things, and the best ideas are often the hardest to finance. Hopefully you can find value in these notes, and build the world a new thing. Immortality serum won’t invent itself!

A Cautionary Note

When you raise investment capital, you are selling someone a piece of your company. Raising investment capital is a sale. You are selling your ownership for cash.

Ownership is precious. If you own your company, you own the output of your work, and you make all the decisions. When you raise capital by selling equity, you trade a piece of your independence for money.

Raising money is fetishized in Silicon Valley. Parties being thrown when a raise is done are not uncommon. But a raise is not something you should celebrate. You raised because you failed at Plan A, which is to figure out how to finance your organization without giving away a part of it, through revenue or other non-dilutive means such as government grants. It is something you do only if you have to. And not something to be celebrated.

Often, there really is no choice. If you are trying to build a quantum computer, a fusion reactor, or an AGI, it is very difficult to figure out how you’d do that without risk capital coming in from investors. I’m not saying raising capital from investors is a bad thing — it’s not. Just make sure you understand that you are paying a serious price for that cash.

Ten Guidelines

Once you have committed to selling equity in your company, and you are preparing for a capital raise, there are some important things to do and not do. Here are ten guidelines to follow as you make your way through the process.

0. Investors must believe that you are choosing who your investors will be, and it’s competitive. You are selecting amongst suitors who are competing to buy what you are selling. If the dynamic switches and investors feel like they are in charge, you are in trouble. This is very important. You must internalize the fact that you are interviewing potential investors for the job of being your investor. They are not selecting you, it’s the other way around. Being an investor in your company is a tremendously important job. Run the competition to find investors just like you would run a job competition for a critical hire.

1. You don’t set the price. Competition amongst investors sets the price. If you have a thing, and you’re selling it, in order to get the best deal, you need buyers competing to buy it. You can think your 1984 Pinto is super cool and worth a million dollars, but what it’s actually worth is what someone is willing to pay you for it. What drives price, and all the other things you’re going to want going for you, is competition among buyers. An early stage start-up’s value is not a number derived from a spreadsheet or financial facts. There is no magic formula for what an early stage company is worth. To create a good deal, the most important thing you can do is create competition among potential buyers.

2. Know exactly what you are selling. In order to figure out which buyers are most likely to want your thing, you need to really understand what you are selling. “A piece of your soul” is correct but not what I’m looking for. You need to be able to describe succinctly and with great passion what the thing you are selling actually is. Note that I don’t mean what your company is selling, I mean what you are selling to investors. These aren’t the same thing! Usually for early stage companies, what you are selling to investors is a future. An investor can turn their cash into a future that they prefer. What does that future look like? This is probably what you are selling to them at the early stage. What you are selling to investors is encapsulated in your pitch deck, which is a 10 slide, 20 minute description of what they are buying with their cash. We’ll talk about pitch decks later.

3. Understand what every person you seriously talk to wants. If someone wants to buy a Lamborghini and you try to sell them a minivan they will probably not be interested, and may possibly become very irritated for some reason. Making this mistake is easy in fundraising. Each fund and partner within a fund has certain things they really like, which you can find out by looking at their investments and history. If you bring a deal to someone where your deal isn’t what they like, you are wasting your time and theirs. Don’t talk to anyone before you have worked up at least a preliminary profile of them.

4. Scarcity drives interest. Part of your job is to create fear of missing out, which goes hand in hand with the perception of scarcity and the idea that getting into your deal is a privilege. This means you can’t seriously entertain a large number of investors. This one is hard to finesse in practice, but what you’re trying to do here is make it so the investment grapevine is all talking about your deal and no-one can get a meeting with you.

5. Find or generate a date that buyers need to act by for some reason. This one is also hard in practice, but what you want to do here is to make it clear to investors that they need to act by a specific date or they will lose the deal. An example would be that you are planning on demo-ing your product / tech to a competitor on day X and you let the buyer have some exclusive time before that to act, but after they will have to compete. This one is important because unless there is an inciting incident investors will always drag things out. Whatever you use here, make sure it’s real. Professional investors have elite bullshit detectors.

6. If a potential lead investor you’ve targeted comes back lukewarm, they aren’t going to do the deal. Often you really want an investor to say yes. When you ask them if they are interested and you get back some non-answer, or lame excuse about something, or they take a week to get back to you, that means they are not into it. If they are a possible lead, they aren’t going to lead. We’ll talk about leads vs. followers later, but if you are looking for a lead, investors that are interested won’t hem and haw, they will come out and say they want to do it. You can sometimes convert the hemmers into followers once a lead comes in. You may want them in for the cash, which is OK. But don’t waste your time on them if you are looking for a lead. Anyone who will end up being a lead knows they could lose the deal (see points 0 and 1) and will act accordingly.

7. Write a job description for your investors. Bad fit investors are a terrible pain in the ass. They can wreck your sanity and your company. You need to understand before you start the process what you are looking for in an investor, both what you want and what you don’t want. For example, if you are doing a thing that requires a very long basic science component, you don’t want a spreadsheet type focused on ROI and revenue. There’s nothing wrong with that type of person but they will be constitutionally unable to understand anything you tell them. Filtering investors to ensure you are totally on the same page is super important. Before you start the fundraising process, make sure you write down a paragraph or two about what an ideal investor would look like. Try to be as specific as possible. Remember point 0 — would you run a job competition without a job description? Note that this is internal and you’d never show this to them — it’s only for your screening process.

8. Set realistic expectations about raise timing and hit rate, and start your raise at the right time of year. Doing a raise typically takes 3–9 months from start to finish. I usually try to have at least 9 months of runway left when I start a raise, although this is obviously stage dependent. Nine months is a good compromise between having built as much value as you can and not leaving it too late if things don’t go well. Investors can use the fact that you are running out of money to put the screws to you and you don’t want that. You should also be aware that venture investors have fund cycles that mean that not all times of year are the same. While each fund is different, generally summer is slow, and everyone is gone in August and most of December. A fund raise is a complex thing that involves a lot of different busy people — not only the investors, but all their lawyers, accountants and due diligence people. You do not want your raise to need to complete in August or December. The best time to start a raise is January. This gives you 6 months to try to close a deal before summer hits. If you fail, diagnose why, refocus your team, turn down the burn rate to give you an extra 3 months (yes this may require making sacrifices, start with your salary, you’re the leader, act like it), and do a full reboot of the financing process in the September / October / November window. When you start the financing process, set your expectations such that you will likely have about a 1 / 30 to 1 / 50 hit rate, and expect some hardship for a few months. This may seem contradictory to the idea that you are selecting among investors, but it isn’t. You must retain the attitude that you are interviewing them, even as you get miss after miss. If you don’t keep this attitude you won’t get a hit at all. And keep in mind that absolutely having to focus on what’s really important is a blessing in disguise.

9. Be prepared for levels of rejection you have never before experienced. Your start-up is the best idea you’ve ever had. You are its heart and soul. Your colleagues are the best people you know. You are absolutely convinced that this is going to change the world.

When you show all this greatness to investors — the culmination of all your best thinking, and more or less an avatar of yourself personally — 29 out of 30 of them will pass. They will tell you that you haven’t explained it well, your team won’t be able to execute, your projections are way off. You yourself are not worth investing in. Your product will never work. Your go to market strategy is terrible. You will never be able to compete with Amazon, Google or (fill in the blank).

For all the success I’ve had in raising capital, this ALWAYS happens EVERY SINGLE TIME I go back to the venture market. It will happen to you. Know that the 29 / 30 rejection rate, and the words that investors will use to justify their rejections of your business, seem to be something like a law of physics. It’s not personal. Even if you do everything exactly right, you will still get the majority of people you speak to rejecting you.

I have two pieces of advice for you for how to think about the rejection that will come from fundraising:

1. Expect it. It’s not personal. You will 100% get rejected by the first 29 people you pitch. It’s just the way fundraising works. Think of it like the suffering you know is a part of running a marathon. There’s just no way to avoid it. Who is gonna carry the boats? You are.
2. Every time you get rejected, ask the investor for feedback. Consider it carefully. If after this careful consideration you think they may have a point, modify your pitch to take their feedback into account. Note that just because someone passes, and they give you a reason, it’s not always true that they are right, or even that it’s the true reason they passed. Investors are, in the main, very insightful people; listen carefully to their feedback; but use your own judgement about whether to change your mind about something.

Tactics — What to Actually Do

0. If this is your first raise, use a Simple Agreement for Future Equity, or SAFE, as the financing instrument. If you are a pro, still consider using one. They are founder friendly and can be used at any financing stage. Templates are here — I suggest using the discount and cap variant.

A SAFE is really a very Simple Agreement. It says you and the investor will defer choosing a valuation for your company for the time being. The money the investor transfers to you is effectively a loan with no collateral. In the future, when a company valuation is determined, the SAFE investors will convert to equity with sweeteners because they came in early.

Using the SAFE requires you to select four numbers — the discount rate; the valuation cap; and the minimum and maximum amounts of cash you are going to raise. The discount rate and valuation cap are the sweeteners for SAFE investors. Set the discount rate to 20%; if you do your job, this number won’t matter.

The valuation cap is the most important number to figure out. If the price of the next priced round is above the valuation cap, SAFE investors participate as if the price was the valuation cap. For example, if your SAFE has a valuation cap of $5M, and the first priced round values your company at $10M, the SAFE investors get approximately half the price the new investors get. Note that SAFEs are written so that SAFE investors get one or the other sweetener depending on which gives them the better result (ie the sweeteners don’t stack). This is why the discount rate shouldn’t matter. Your objective is to make your investors happy by getting a price for your next round at a higher valuation than the valuation cap.

The reason the valuation cap is the most important number to figure out is that it sets the minimum and maximum amounts of cash you will raise. The minimum number is the absolute minimum you project it would take to raise a subsequent priced round at double the valuation cap, and the maximum is the most money you’d take based on the dilution you’re willing to take on assuming the priced round is done at 1x the valuation cap. What I’d advise is that the maximum amount of cash you should take at this stage is 25% of your proposed valuation cap.

So the thinking you have to do goes something like this. Given a set of specific potential valuation caps (say $1M, $2.5M, $5M, $10M, etc), first compute the maximum amount of a raise for each (25% of those numbers gives $250k, $625k, $1.25M, $2.5M), and then figure out what the minimum cash you think you need to double each of those valuations by the time that money runs out and you do your first priced round. This is a difficult thing to figure out, but you need to do your budgets and projections and be realistic. Don’t be a valuation dumbass; think about the cash you are getting from investors as if it was your mom’s life savings. You want your mom’s life savings to double, don’t you? Let’s say you chose a valuation cap of $5M, and a max raise of $1.25M, and after doing your planning you really think you can get to a valuation of $10M from where you are by spending only $500k of investor cash, then that’s your minimum raise amount.

Be transparent with your investors about both the minimum and maximum amounts, and how you got to those numbers. Don’t take any money until you’ve passed the minimum threshold. Even though SAFEs allow rolling closes (it’s one of their major advantages), be good to your investors and don’t take any capital until you have the minimum amount to realistically double the value of their investment by the time you close the next priced round.

Once you’ve got your valuation cap selected, and the SAFE document from the y-combinator website, you are ready to start raising money!

1. Start an external data room. A data room is a place on the cloud into which you will place all documents a potential investor might want to see. I have used both dropbox and box for this. This will only be shared with investors who you believe might actually invest. There will be a lot of sensitive info in here, and you don’t want to give all this info away for free to someone who is not serious, or worse potentially looking to use it to help a competitor.

Here is a starting folder structure, and what goes in each. In your case some of these might not apply, or you might have other things not covered here. Consider this a starting point to get you going. Note that it may look like doing this is a lot of work. It is. But once these things are in place they are the substance behind your pitch. And you will look like you’ve done this before.

1. People: Create a slide deck with one page per person on your team. Each slide has a bio, a picture, and links to anything important / relevant. Get your team to each do their own slide, but make sure everyone follows a slide template you like. Do a slide at the beginning of the deck that is a summary of important information (leadership, headcount, number of people in different roles). (By the way, this is a good idea anyway for your team, especially in the age of distributed work. It used to be the case everyone knew everyone else because you saw them every day. This is no longer always true.)
2. Images and Video: Any images or video that help tell the story. This includes third party stuff like appearances in the media.
3. Technology: Relevant journal articles authored by the team, white papers, media about the technology, anything where a credible third party says your tech is awesome, etc.
4. Product: If you have one, put all your marketing / sales material here.
5. Market Information: Most venture investors put the size of the market you are going after first in how they evaluate you. How big you can get is limited by this. Put any information you have about the addressable market size in here. This could be market research reports, information you’ve collected yourself, information from competitors’ sales.
6. Competition: Any information about companies and / or products you consider to be competitive. Showing that you know a lot about what’s going on in your world shows maturity and credibility. Don’t downplay competitors, try to be honest when appraising them. If you can find a list of valuations of companies at a similar stage to yours (and who their investors are) that you consider to be direct competitors, put that in here.
7. Corporate Legal: Incorporation docs, employment contracts, NDAs, legal agreements you have with suppliers / partners, basically any contract the company has.
8. Financing Information: Any documents outlining the terms of the investment deal (eg the SAFE template would go here). Don’t put any information here about other investors (eg signed SAFEs, that’s internal information).
9. Patents: Any patents you have filed for or have granted.
10. Financials: Audited / unaudited financial statements going back to the start of the business.

Note: Don’t put your pitch decks in the data room, as you will customize them for each investor.

2. Start an internal data room. You will be generating a lot of documents, spreadsheets, and the like during the financing. Create a place where it will all go. I suggest using a G Suite folder. You aren’t going to share any of this outside the company. Here is a starting point for what goes in it:

1. A spreadsheet containing a list of all the potential investors in your orbit. This includes everybody — even investors that you don’t think are good fits (you can sometimes help each other somehow, which may help you later on). This spreadsheet will be the master document you will work from to plan strategy, remember who you talked to when, track who is hot, warm, cold or dead, who has committed what to the round, and the like.
2. For each investor on your master spreadsheet, create a document with all the information about them that you can find by doing background due diligence. This includes links to all the web content about them (LinkedIn is a good place to start, personal websites, news articles, interviews) and information related to their investment history (what have they invested in, which boards do they sit on, what do the companies they’ve invested in do). Most professional investors have done at least a handful of interviews — you need to read the print ones and watch the video ones, take notes, and put those notes in the document. The main objective of this due diligence is to create a profile of the investor so you can understand (a) are they likely to find your story appealing; (b) is the structure of your deal in the sweet spot of their investment mandate (funds have constraints and restrictions above and beyond what the partners might like to do themselves); (c) how to tailor your pitch and approach to push their specific buttons; (d) increase your credibility and memorability by making it clear to them you’ve done your homework like a pro; and (e) find out about any potential negative stuff. This last one is particularly important if they are outside of your circle of trusted contacts — you don’t want to inadvertently bring a toxic person into your company. Most really bad things about someone will come up in an internet search. Sometimes a cursory search is not enough, for example if it’s an inbound angel investor with a really common name. In cases where you don’t think you can work up a good profile, you will need to ask them questions directly in order to flesh it out. Don’t be shy. Remember being an investor is a critical job, don’t feel bad grilling them. You don’t want to find out about a skeleton in the closet after they join. Or have a reporter point it out.
3. All of your pitch decks. As the process unfolds, you will end up creating a lot of pitch decks. As you pitch more and more, the pitch will evolve and get better and better. In addition, each generation of pitch will be shown to different investors and each investor will get a tailored pitch, and you will need to save snapshots of every pitch you deliver so you can go back later and remember exactly what you showed each investor.
4. All the assets that you will be using a lot to build your pitch decks. This includes slide templates, brand assets (logos etc), interesting data and data visualizations, and images, graphs and videos you use a lot.
5. The investor job description you wrote. So you know where it is and can check it against the list you’ve got in the master spreadsheet.

3. Start working on your opener and closer pitch decks. There are two kinds of pitch deck; I’m calling them openers and closers. Both are important, you will need both, but they are different, and understanding why you need both is an important insight into how to be successful at raising capital (and more generally in storytelling and selling anything).

The opener pitch deck is the one an investor who knows nothing about you or your company first sees. The goal of this first type of pitch deck is not to get an investor to put money into your company, it’s to get another meeting. This is the hardest piece of collateral in the entire fundraising process to generate. Structurally for this one you will follow the Guy Kawasaki 10/20/30 rule: 10 slides; no longer than 20 minutes to present; no text with font smaller than 30 point. You will desperately want to break all of these rules. Don’t. Kawasaki’s rule is terrific advice, and applies to all communications and selling. The process of describing your company following these rules will sharpen your own understanding of how best to tell your story.

Here are several reasons why you will want to break his rule, and why you shouldn’t.

It is really difficult to put yourself in the shoes of someone who is looking at your company for the first time. I still have a lot of trouble doing this, even though I’m actively trying and have a lot of experience with this sort of thing. You probably have been thinking about your thing for years. It’s natural for you to take for granted a long list of things that the viewer of this deck has no context for. As hard as it is, you really do have to try to be super empathetic here and picture an investor who knows absolutely none of the background to your story. While this isn’t an exhaustive list, here are some pieces of advice:

1. Never use industry jargon or acronyms
2. Try to think of what it’s like for a very smart person with none of your background context to follow your slides. One thing I sometimes do is think of a PhD level scientist in a totally different discipline to what you do (say a zoologist or something) as the audience — write your slides for that person
3. Internalize that the reader doesn’t care as much as you do, and they will probably spend AT MOST five minutes skimming the deck if they get it via email, and will pay attention for AT MOST 20 minutes if you pitch it in person; this means any points you want to make have to be super punchy and obvious; don’t be coy, say what you came to say in straightforward easy to understand language
4. Never make typos or grammar or spelling errors. Do I trust you with my money if you can’t figure out how to use a spell checker?
5. Always be transparent and clear about who you are, what your company’s mission is, and what you want. Don’t beat around the bush.
6. In your pitch, you have to find a balance between not overselling and not underselling. If you oversell you will lose credibility both right away and in the future when you don’t deliver. If you undersell you are making yourself look worse than you really are. This is another thing that’s hard in practice; one tip is to think about how someone else who knows you and your company well might tell your story (ie channel a third party). This sometimes helps be more objective about things. Another tip is that you typically want to err on the side of under-promising in the short term and over-promising in the long term. The reason for this is that people (including you and your team) tend to do the exact opposite; when you do this you will slant your story more towards what is actually likely to happen over both timescales.

The second type of pitch deck, the closer, is the one you pitch when the investor is ready to make a final decision. The goal of this second type of pitch deck is to close the deal. This one is generally quite a bit easier to do well than the first type.

The second type of pitch deck differs from the first mainly in that you will tailor the pitch specifically to the investor you are pitching, and you focus on what the message should be to get them to see your company as a good investment. The way this situation usually arises is that you have had some back and forth with them, generally starting with you pitching them with the opener pitch deck, and then some back and forth, probably including sharing the external data room, and now you are going to close the deal. If the investor is a fund, you will probably be pitching a committee. In this case, your primary contact is likely already onside and wants to do the deal, and needs their investment committee to greenlight the investment.

There is less structure to the closer deck than the opener deck; the reason is that you are going to create one closer deck for each investor you get to this stage on. Remember the 1/30 hit rate I talked about earlier? If you get to this stage, this is one of your few chances to get that elusive hit. You have to bring your A game to each of these.

I can’t be as prescriptive about the closer deck as I can about the opener because of this. But here are some pieces of advice to follow.

1. Know as much as possible about every single person who will contribute to an investment decision. In your internal data room you should have a document for each person you’ve identified in this category. Google each person’s name, and document everything interesting you can find. If you can find their pets’ names, write that down. It is remarkable how much you can find out about people by doing this. If they have done video presentations, watch every single one and make notes. Note: this isn’t just the people who are the obvious ones. Understand how decisions are made in every case and make sure you have done this with everyone. Also, if you have been corresponding via email, make sure you do it with everyone you have spoken to. Executive assistants often are critical to the culture of an organization and very important parts of investors’ lives; make sure you do this with everyone.
2. Use this information, together with your interactions with the investor up to this, to take your opener deck and modify it to address anything that may be top of mind for this particular person or group. Not all investors care about the same things with the same weight. No matter what, ask your primary contact what you should specifically emphasize, or points of concern they have when you are going to do the closing pitch, and address these points head on. This will be your last chance to either clarify something or change someone’s mind.
3. One thing you can effectively do to create a closer deck is modify the opener deck by keeping pretty much the exact same deck as the opener in the main pitch, but adding a (potentially large) number of appendices that address specific topics that may come up for different people. Think of these appendices as going one or two levels down in detail in areas that the investors may want to understand. This is the sort of material you really wanted to put in the opener but had to leave out.
4. Try your hardest to keep following the 30 point font rule in your appendix material and more generally in the closer deck as a whole. It really will help you understand how to communicate more effectively. Use a lot of images, video and (sparingly) charts if they help tell the story. You are going to be speaking words to these people, the words don’t have to be in text on the slides except as a guide for you to remember flow and potentially sharpen a specific point. Also don’t use more than 5 slides and 10 minutes to run through any section of your appendix material. If an investor asks a question about something (and you knew it was coming because you did your homework) you want to give them a concise and punchy answer that shows not only do you know your stuff, but you are well aware that whatever the subject of the question was is an issue and you’ve thought it through.

4. Pitch the people on your list from least desirable to most desirable. Recall that in your internal data room you have a master list of potential investors. I suggest ranking them in order of least to most desirable and approaching them in waves, with each wave being a chunk of them. For example if you have 100 names on your list, order them and then in your first wave approach the 10 least desirable investors, then in the second wave approach the next 10, and keep doing this for (in this case) a total of 10 waves. Note that ‘least desirable’ doesn’t mean they are bad people or anything, there are many reasons why you might order your own list. Maybe you really want angels and not funds — if that’s the case pitch the funds first. If you want funds more than angels, do the opposite.

The reason for this is as you pitch more, your pitch will get better. Here’s how this works. Say you approach and pitch the investors ranked 90–100 in your first wave. You find things out about how to make the pitch better by doing it, getting feedback from rejections, and understanding what kinds of questions people ask.

After you are done with your first wave, collected feedback, modified your pitch, and figured out how to answer all the questions you got, you go to investors ranked 80–90 in your second wave. Now your pitch is a bit better and you are more prepared to answer questions. You will find out yet more things about how to make the pitch better, expand the list of questions you’ve got, and have gotten yet more feedback from rejections.

Keep doing this. By the time you get to the tenth wave and the 10 investors you really want, I guarantee you will have already gotten every question you will ever get, you will have good thoughtful answers prepared, and the pitch will have benefited from nine previous waves of feedback and iteration. You will be ready to give your absolute best against the group you really want. The first 90 approaches / pitches are just practice.

Some Summary Thoughts

Hopefully you find these notes useful and they help you raise capital. If any of this has been helpful in a capital raise, please reach out to me and let me know!

Some random thoughts to close:

• Aim high. The world needs people with unrealistic ambitions who attempt to do great things.
• Expect setbacks, but don’t accept failure. There is a weird toxic idea floating around that ‘failing fast’ is good. It isn’t. You will have setbacks. But failure is always bad, and unacceptable.
• You do not have to ask permission to do what you really want to do. The world is filled with people who will tell you to not follow your dreams. Ignore them.
• The future is not fixed. If you want a particular future, you need to take personal responsibility for making it happen.
• Expecting someone else to create the future you want is risky. There may be people who want a very different future than the one you want, and they are not sitting around waiting for it to happen.

Good luck, and godspeed :-)

Onwards!!!