A Seasoned Investor Explains How to Raise Money

Of all the gender inequalities in the business world, these two facts really blew our minds: Only 10 percent of VC funding goes to startups with a female founder—despite studies (like this one in the Harvard Business Review) showing that companies led by women actually outperform their male-founded counterparts.

Entrepreneur/goop angel investor Amanda Eilian earned her reputation as an expert in this space working for big venture capital firms, then taking her own company, Videolicious, through five rounds of fundraising before becoming an investor herself. Somehow she balances that success with being a mother of four, so we felt lucky to pin her down for a (hugely informative) session of Fundraising 101. Below, Amanda’s incredible real-talk guide to fundraising, entrepreneurship, and getting women-led ventures off the ground.

A Q&A with Amanda Eilian
Q

Why have you chosen to invest in female-led businesses?

I’ve sat on both sides of the fundraising table—with a checkbook, and with hat in hand. I’ve learned that sometimes the best ideas, with the most capable founders, don’t get funded. In a very selfish way, I invest in female-founded startups because I think they are one of the most undervalued asset classes. Statistics show that female founders are more likely to be successful than men, but much less likely to attract investors. This is a real opportunity. And on a personal level, I suppose I want to pay it forward.

“Statistics show that female founders are more likely to be successful than men, but much less likely to attract investors. This is a real opportunity.”

A few months ago, I met with the founder of a baby clothing startup. She was new to the business world, but had accomplished quite a bit in her first year: She had beautiful products, a purchase order from a major retailer, and features in national magazines and blogs. Now that she needed to raise money to buy the fabric and pay the manufacturer for her first large order, her confidence had waned, though. Looking to raise $750,000, she had spoken to an investor from a local angel group, but he had been dismissive and intimidating. Her friends and family didn’t have that kind of money, and she had gotten no response to dozens of emails sent to venture capital firms. She had thought launching the product and getting her first big customer would be the hard part. When we met, she asked, frustrated and disheartened, A) why she was having so much trouble raising money, and B) where should she go next?

While nerve-racking and often exhausting, the truth is there’s nothing insurmountable about an investment process. But unfortunately, the odds are against us: According to TechCrunch, only about 10 percent of venture capital dollars go into startups with at least one female founder. This is perhaps not surprising when you consider that only about 7 percent of venture capitalists are women. The statistics are even more discouraging for minority founders.

“The odds are against us: According to TechCrunch, only about 10 percent of venture capital dollars go into startups with at least one female founder.”

How does that affect your startup? For your best chance at success, look beyond the most traditional funding sources. Female backers, for instance, might be more receptive, particularly if you have a consumer product in mind, since women control 80 percent of household spending. And when you do present to the typical coastal male venture capitalist (VC), it helps to have learned some of the lingo and the standard operating procedures. Talking the talk is a great way to break free of the fear factor. You’ll be surprised at how quickly you master the language when you make a daily habit of reading startup focused websites (like TechCrunch or blogs from VCs like Mark Suster’s Both Sides of the Table and Fred Wilson’s AVC).

Most media representations of entrepreneurs are young, white males in the high-tech industry on the coasts, chasing multibillion-dollar paydays. Do you think starting your own company is a realistic career path for women, especially those with families?

Yes! We need more women in startups. Statistics show women are actually more likely to succeed—according to a study by First Round Capital published in the Harvard Business Review, companies with at least one female founder outperformed all-male teams by 63 percent—yet so few of us start companies.

“Statistics show women are actually more likely to succeed—according to a study by First Round Capital published in the Harvard Business Review, companies with at least one female founder outperformed all-male teams by 63 percent—yet so few of us start companies.”

Let’s take a step back and look at the reality of being a founder. Admittedly, entrepreneurship has been overhyped in popular culture recently. Starting your own company can sound like a dream—no boss! But investors and customers are the most demanding bosses of all. So while you will likely have more freedom and flexibility than in a traditional desk job (no need to sneak out when attending a midday school performance!), you probably won’t ever be able to truly “unplug.” You will be the one responsible for everything—and “everything” rarely takes a week-long beach holiday.

I know many successful women who have families and companies and make it all work—I’ve had four children since founding Videolicious! But in full disclosure, you will need extra help—from family or paid caregivers or a combination of both. I am so lucky to have great support and a mother who takes the train every week to help with my children. Nevertheless, it’s not a commitment to be taken lightly. Make sure you are in it for the long haul. There are just enough overnight successes to fuel popular imagination, but the average startup—if it doesn’t fail altogether—is around for about nine years before some sort of successful exit, like a sale of the company or an IPO.

“Investors are greedy. If you stay focused and build a real business, people will want to invest in you and capture some of that reflected glory for themselves.”

Startup culture—and Silicon Valley in particular—can be very bro-y. As a pregnant woman attending tech networking events, I felt like an alien species. And once you have young children at home, you might choose to skip those networking activities altogether. There’s no getting around it: You will be an outsider and a minority, and some things will be harder than they should be. But here’s the good news: Investors are greedy. If you stay focused and build a real business, people will want to invest in you and capture some of that reflected glory for themselves. The problem we really need to address is the funding gap that blocks women from starting companies.

How do we start?

First off, decide what type of entrepreneur you want to be. You can raise $10 million from a venture capital firm and try to build a billion-dollar company, or you can start a local business like a dance studio, or you can have a side gig for supplemental income selling jewelry on Etsy. All of these forms of entrepreneurship are valid! But I want to focus on where the biggest gender gap is: institutionally financed companies. That is, startups that raise money from professional investors.

Do you need to raise outside capital? How much money should you raise, and when?

Small businesses, like those mentioned above, won’t have much luck with venture capital firms or even most angel investors. VCs and angels provide early-stage funding for new companies that are high risk but also high potential. Professional investors often need to see the chance of making ten times or more on their investment in a home-run scenario. So unless you foresee turning your dance studio into a national chain, you should look to other sources of funding, such as a Small Business Association loan.

But if you think your concept is the next big thing, prepare to go through several rounds of fundraising. You should budget for enough money to reach the next “milestone” in your business (plus six months of cushion for a new fundraising process). A milestone is some proof point that will give your company a higher valuation and help you raise yet more money. It could be a major new customer, an exciting product launch, or an impressive number of total users. The best time to raise money from outside investors is right before, or immediately after, achieving a milestone. If you are able to update investors with positive news, you will have momentum, credibility, and probably some FOMO—and they’ll have their checkbooks ready.

“Raise too much, and you are selling cheap. But raise too little, and you could go out of business if your bank account runs dry.”

As for the dollar figure, you might be tempted to raise as much money as you can. That’s understandable, but you need to walk a tightrope between the security of having a cushion in your bank account, and the downside of selling shares to investors “too cheap” (and therefore giving up more ownership of your company). Think about where you hope and expect to be one year from now. If you think you can launch a new product, land a big customer, or double revenues in that time, your valuation, or how much your business is worth, can increase 100 percent or more. At Videolicious, we’ve done five rounds of equity funding, each one at a valuation increase over the previous round. Think of it this way—raise too much, and you are selling cheap. But raise too little, and you could go out of business if your bank account runs dry before you hit your next milestone. In any case, I would advise shooting for enough capital to cover at least one year of operations, based on your expense projections.

What are the types of funding available for starting a business? And can you explain what an angel investor is?

Two of the main reasons women capture less capital than men are access and bias. New organizations and online platforms are starting to democratize part of the access problem for early-stage investments. Some of these platforms even let you turn bias around, by connecting with investors focused on funding female founders. It’s just a drop in the bucket right now, but it’s encouraging.

BOOTSRAPPING: Most founders begin by bootstrapping—that is, without any “outside” capital, just using their own resources (bank accounts, credit cards, home loans). But don’t be deterred if you don’t have a home to borrow against. Many founders hit up their friends and family. That’s how we started Videolicious; in our very first round of funding, we received money from my former boss in investment banking, and a former colleague of my cofounder.

ANGEL INVESTORS: If your friends and family aren’t an option, you may be able to find angel investors—typically successful entrepreneurs themselves, who invest modest sums to help get companies off the ground. Angels fill a role by stepping in to make very risky investments where traditional institutional investors are reluctant to pony up. AngelList is a great resource to find independent angel investors and can be searched by geography or interest area. We used AngelList early on for Videolicious.

EQUITY CROWDFUNDING: Equity crowdfunding platforms, like SeedInvest and CircleUp, have given founders many more ways to connect with angels. Both charge for the service, but with different fee structures. I know entrepreneurs who have had good experiences with these platforms. It’s a matter of deciding what fee structure you are most comfortable with.

ANGEL GROUPS: There are also many well established angel groups, including some great options exclusively for female founders or female investors, such as: Golden Seeds, Astia Angels, and 37 Angels. Other angel groups that have sprung up are made up of school alumni (HBS Angels Alumni Association, MIT Angels), or city-based (New York Angels, Boston Harbor Angels). Just like dating, this is a numbers game—the more angel investors and groups you meet, the better your chances, especially since most startups rely on multiple angels.

VC FIRMS: As noted, venture capital firms have a lot more money to dole out—but it comes with conditions, and some smart entrepreneurs avoid VCs altogether. VC funds generally invest in lots of companies, with the expectation that many—or most—of them will fail. They expect only a handful of “winners,” but they need those companies to win big. VC-backed companies are encouraged to take big risks—this is shoot for the moon, and forget landing in the stars; better to fail trying than to be a small success. That may be your vision, but just be aware. Non-VC sources of funding are growing rapidly, so you have other choices.

“VC-backed companies are encouraged to take big risks—this is shoot for the moon, and forget landing in the stars; better to fail trying than to be a small success. That may be your vision, but just be aware.”

CROWDFUNDING: Before raising outside financing, though, ask yourself if your future customers can fund your business. That’s what crowdfunding platforms like Kickstarter and Indiegogo do—they allow anyone interested in your product to pre-purchase it, letting you use the money to launch, with the promise that you will deliver a product in a specific timeframe. Another great thing about crowdfunding sites is that they’re like free focus groups, letting you test market demand; before spending another minute or dollar creating a better ice cream scooper, you can see if anyone actually wants to buy it. Crowdfunding platforms are best for consumer goods, so if you have a business-to-business idea, you might need to look elsewhere.

What type of funding should founders raise? What’s the difference between common equity, preferred equity, convertible notes, grants, and loans?

Broadly speaking, there are two types of financing: equity, which is selling shares of your company, and debt, which is borrowing money that your business will eventually need to pay back. With equity, you are parting with a piece of your company’s future earnings, and some level of control, forever. But debt can be more difficult to raise, because banks generally will open the vaults only if your company has steady earnings or you have collateral (something pledged as security for repayment, like a house or inventory). As a result, most startups opt for equity.

COMMON EQUITY: This is the most basic form of equity, with no special rights or privileges. Common equity is sometimes called “sweat equity” when it represents the shares founders have earned through their hard work instead of buying them for cold, hard cash./li>

PREFERRED EQUITY: Outside investors usually insist on special protections that make their shares safer than the common shares. This type of ownership is called preferred equity. The specific perks vary but usually include “first dibs” on any profits from the company.

CONVERTIBLE NOTES: One very common early stage instrument is actually a bit of an equity and debt hybrid: a convertible note, a loan that automatically converts into shares of the company at a certain point in time, usually at the next fundraising round, and usually at some predetermined discount to the price of the company’s shares in that round. This option allows everyone to punt on the valuation of the company. I initially invested in a convertible note when I backed The Wing—at the time, the founders only had an idea and a name (since changed!) for a women’s work and community space, which was hard to put a value on. I agreed to invest money at a discount off whatever the next round of investors was going to pay. This type of investment is also often called “bridge equity” because it is a bridge to your next financing. But if that fundraising round doesn’t happen by some agreed-upon time, the loan will become due, making it slightly riskier for the company than equity.

GRANTS: Grants, money that you do not have to pay back, are not widely available for startups (sorry!). They’re usually restricted to non-profits or specific categories of founders (veterans, particular geographies). Lines of credit, like LOANS, are typically reserved for more mature businesses, as are peer-to-peer lending platforms, like Lending Club and Funding Circle. The Small Business Association website has a good list of grant programs and loans if you think you might qualify.

What do you need to show an investor at the first meeting? What kinds of things will an investor ask for during the diligence process?

Much depends on the stage of the business, but for the very earliest, pre-launch companies, you should have a presentation (aka “pitch deck”) that lays out the below.

The Pitch Deck
THE BIG IDEA: Your grand goal and ultimate vision for the company.

THE PROBLEM: What problem are you solving? What is the big opportunity?

THE SOLUTION: How does your product solve that problem?

MARKET SIZE: If you are selling organic dog food, how big is the dog food market, and how big do you think the organic slice is? The bigger and faster growing the market, the better.

TRACTION/PROGRESS: What progress have you made on product, sales, or anything else?

TEAM: Your background—and that of any other team members and any hires you have identified to bring on board with the fundraising round.

COMPETITION: Who else is selling organic dog food? Will you also compete against premium dog food?

PROJECTIONS: I generally think these are overrated for brand-new companies. Investors likely won’t value your year-five sales projections when you haven’t even launched a product yet! But a budget is a necessary exercise for you; by writing down your expected revenues and expenses, from production costs to rent and salaries, you will have a better sense of how to manage your business. Add in some assumptions about total market size, and your ability to penetrate that market, and you will also get a reality check on the real potential of your business, helping surface some important business model issues.

INVESTMENT: How much money do you want?

USE OF PROCEEDS: What do you want the money for?

ADVISORS/INVESTORS: This is definitely a chicken and the egg problem, but investors find comfort in seeing other smart investors and/or advisors already committed to your company. Use your networks to find someone with some success in your industry who may be willing to take an advisory role in return for stock options and the chance to be part of an exciting company.

What are the key terms to look for when negotiating a financing proposal?

An interested investor will present you with a “term sheet,” a document outlining the provisions of the proposed investment. These term sheets are almost always “non binding,” meaning they are not a legal promise to invest. There are hundreds of different stipulations that could show up in a term sheet, and that’s what a good lawyer is for! This is one of those times when it’s crucial to invest in legal advice from someone who has handled a lot of transactions and can tell you what is typical—or aggressive—for your situation. Still, even the best lawyer can’t make up for having an investor you simply don’t trust. It’s always critical to review, ask questions, and negotiate your proposal; a good investor will make this process so much easier.

A Quick Checklist of What to Look For
Valuation
How much is your company worth? The higher the valuation, the smaller percentage of your company investors will own. A “pre-money valuation” is the amount of money investors think that your company is worth today. A “post-money valuation” is the pre-money valuation, plus the money you raised, and possibly the value of additional options. For example, if you and your investors agree that your company is worth $4mm today, and they want to invest $2mm, your pre-money valuation is $4mm and your post money valuation is $6mm. You are selling one third of your company for $2mm.

Options
An option is the right, but not the obligation, to buy shares of a company at a predetermined price. You will need options to attract high quality talent as you grow, so it’s important to negotiate with your investors just how many shares you’ll set aside.

Legal Fees
Is the investor asking the company to pay for any of their legal fees?

Governance
Your board of directors legally controls the company, and investors may ask for one or more board seats. It’s unlikely that early stage investors would expect to have the majority of board seats, but going forward, be aware that if you lose control of the board, you lose control of the company.

Preferred Stock
The most important term to focus on is the liquidation preference. This term comes into play when you sell the business for less than originally anticipated: The investor, naturally, wants to protect her investment and so will ask for a liquidation preference, meaning first dibs on cash from the sale. Usually that liquidation preference is for the invested amount. In other words, if an investor kicks in $5 million for 50 percent of the shares, and you sell the company for $6 million, the investor would take $5 million, and you would get $1 million. Sometimes investors demand twice the amount, or more—meaning they have to double their money before you get a penny!

Convertible Note
A convertible note, as explained above, defers valuation of the company and gives investors a discount off the share price in the next fundraising round. To make sure they don’t get stuck paying a sky-high price if your company really takes off, they often negotiate a “cap,” which is the maximum price they will end up paying, even if new investors pay much more.

What are the most important things to look for in choosing an investor? Do you need to like your investor, the way you would a partner or an employee?

First, do not accept money from investors who cannot afford to lose their investment. Your Aunt Sarah may have great intentions in offering to put $100,000 into your startup, but you don’t want the guilt trip that most certainly will haunt you if you lose her nest egg. You also don’t want Cousin Rory calling you daily for sales updates. Starting a company is a very high-risk endeavor, and every investor should be willing and able to lose their entire investment.

Beyond that, focus on reputation, network, expertise, and deep pockets.

I recently met with the founder of a consumer products company who had posted photos of the March on Washington to her company’s Instagram account. The product has a female empowerment angle, and the photos felt brand-appropriate. She soon received a phone call from one of her smaller angel investors, demanding she take the photos down. He felt the posts were too political and threatened to pull his investment. Legally, he could do no such thing, but he certainly could (and did) cause anxiety and at least one sleepless night as this founder struggled over how to respond. I share this as a cautionary tale about what you don’t want in an investor! Although cultural fit might not be on the top of your list when you need money, the wrong investor can cause outsize problems. While your potential investors are looking into your background and checking references, you should return the favor. It’s essential to get intel on any possible lead investors who would have control or blocking rights. One of the best ways is to speak with the CEOs of other companies they have funded—both successful and unsuccessful companies. It’s a standard request, and a solid investor should have no issues giving you those names.

An investor with a deep network in your industry, with your target customers, or with other investors can be immeasurably valuable. If I like a company enough to invest, I will introduce the team to several other investors who share my interests. With the right backer, your financing round can go from undersubscribed to oversubscribed very quickly. Joanne Wilson (Gotham Gal) invested in Videolicious, and she has regularly made amazing introductions to customers—including one that led to a large contract with a Fortune 10 company. If you are lucky enough to have options, choosing an investor with a large network always pays off.

Expertise is obvious enough—an investor who has worked at or with similar companies may be able to help you avoid common mistakes.

Lastly, deep pockets. You are probably very focused on closing this funding round, and maybe you even have dreams that this will be the only capital you need to raise. Regardless of how that turns out, it’s helpful to have investors who can support you beyond your initial cash needs. If there are bumps along your path to success, your existing investors are much more likely to support you than an outsider. And if you are doing well, they will be your best allies in future rounds. So whenever possible, try to include investors with the ability to be in it for the long haul.