Paul Graham says “The future [of funding] is no fixed amount, no fixed closing date, and no lead.” In other words, the future of financing is continuous, not discrete.
This post explains how to raise a seed round with no lead, no fixed amount, and a fluid closing date. The process is called mass syndication, or a party round.
Paul proposes eliminating rounds altogether, but we’re not there yet. Mass syndication is a single continuous seed round and I think it’s the state of the art in continuous fundraising.
We originally offered this interview exclusively to AngelList applicants — now it’s available to everyone.
Another future
The future of funding is also finding the right investors for your startup, quickly. Not just picking from the investors you can get introductions to.
How? You want to get instant meetings with any investor you want. And you only want to meet investors who are genuinely interested in your startup. That’s what AngelList is for. One danger of this approach is that your round is oversubscribed.
Despite the name, you can use AngelList to request intros to any subset of investors on the list — you don’t need to send it to the whole list.
Leads aren’t going away
Fred Wilson writes “If you don’t want a lead investor, then don’t knock on my door because I don’t know any other way to be.”
This interview explains how to raise a seed round with the conservative assumption that a lead won’t step forward — but it doesn’t preclude you from changing course if a lead appears.
1. Interview
Video: Interview with chapters (for iPod, iPhone, iTunes)
Audio: Interview without chapters (MP3, works anywhere)
Transcript: Below
2. Outline
Here’s an outline and transcript:
- You can close an angel round with ‘mass syndication’
- Start with terms and valuation below market
- What you want in your term sheet
- What you don’t want in your term sheet
- Should you have a board seat for seed investors?
- This isn’t comprehensive term sheet advice
- Memorize the term sheet before your first meeting
- How do you set your valuation? Price it to move
- How do you bring up the terms in a meeting?
- Describe how the terms are investor-friendly
- A preferred round is a good way to set up good initial terms
- Does a small seed round need protective provisions? Pros and cons.
- Get feedback on the terms in the first meeting
- Drop names to build social proof
- Social proof works differently in a Series A round with VCs
- See if the “interest” includes a dollar amount, intros, and name-dropping (a.k.a. soft circled)
- When do you need a lead?
- Approach the financing as if you won’t find a lead
- What’s a lead investor?
- If they say “find a lead,” ask why
- How to create a deadline
- Raise the money when you don’t need it
- Send two emails to the angels
- Do a rolling close: the cash comes in just- in-time
- Mass syndication can fail if a very high social proof investor drops out
- Use AngelList and StartupList to get intros to angels
- What do angels look for?
- Advisors are good for getting your foot in the door, not in a pitch
- Get advisors by going to events or talking to entrepreneurs
- Before you raise a seed round, you need a product in the marketplace
- Use customer development and lean startup techniques to get to market with less
- Pitching hacks free chapter: Advice on getting investor intros
- If you need money to get something in the marketplace, pitch idea investors
- Pitch incubators or do your startup on the side
- What are the different types of seed stage investors?
- If you’re talking to a VC, make sure they really do seed stage rounds
- Potential concerns with pitching multi-stage and seed-stage firms
- Get intros to seed investors with AngelList/StartupList
3. Transcript
Music: Squarepusher
Nivi: Hi there, this is Nivi from Venture Hacks.
Naval: And Naval from Venture Hacks.
Nivi: And we’re going to talk about how to close an angel round, how to put together an angel round, or in other words, how to herd a motley crew of angel investors and turn those meetings that you’re getting into money in the bank.
I think we’re going to start off by talking about mass syndication, which is an approach that I think more entrepreneurs should be taking to close their angel rounds.
You can close an angel round with ‘mass syndication’
Nivi: I think entrepreneurs make two typical mistakes when they’re doing an angel round, and they come from what they’ve read online about how to close a VC round. So, there are two things.
One: they don’t name drop enough. They don’t mention who else is interested.
Two: and I guess more importantly, they’re looking for a lead, which you don’t necessarily need in an angel round.
When you put those two together and combine them with a term sheet that you essentially write yourself, you’ve got a new way to close an angel round which we call mass syndication, which I’ve done personally. And Naval, maybe you can talk about how often you see that happening, or if you don’t see that happening, or whatever.
Naval: It happens fairly often these days. Especially the Y Combinator companies, which are well trained by Paul Graham and crew, will exercise mass syndication a lot. So, they take the standard term sheet that they’ve been given and they go out and do a rolling close of various convertible notes. And it generally works pretty well.
The keys are that you have to set the terms and the valuation very, very reasonably. In fact, you have to probably price slightly below market, because otherwise the angels don’t trust you, then they want a lead who’s done the due diligence. You have to work with people that you have warm intros with, you have to name drop like crazy, and you have to create forcing functions to get the round to close. You can’t give people all the time in the world.
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This Xconomy article by Wade Roush does a great job of telling the AngelList and Venture Hacks story:
Angel investor