Startup Grind Toronto had the pleasure of hosting Matthew Ingram (Fortune) to grill serial entrepreneur Andrew D’Souza for his secrets to fundraising success. D’Souza is a Canadian but what he has to say applies to everybody.
First, a Sanity Check
Those stories about how much easier it is to raise money in San Francisco than Toronto?
“It’s totally not the case” says D’Souza. “It’s really hard to raise money anywhere for everybody. This will be my fourth fundraising and it still takes 50-plus meetings. Most people say ‘no.’ You’ll hear a lot of nos.”
First, Create a Sense of Scarcity in Fundraising
In the bare-knuckle sport of getting a term sheet D’Souza says “you get something for team… (if) you know the person… have a relationship for a while. But really, it comes down to leverage."
“All VCs don’t want to miss out on something. So you have to think about ‘what is the best leverage that I can have?’” In D’Souza’s experience “you need to convince them that you don’t need their money.
“It’s like dating. As soon as you say ‘oh, I’m not that interested in you,’ they go ‘wait, wait, wait – what would you do with our money then?’
“The best way to do is to have a business that is making money.”
Read Next: The 7 Cardinal Sins of Fundraising & How to Avoid Them
D’Souza took advantage of this leverage when he raised funds for Top Hat Monocle.
“(It) was cash flow positive when we ended up raising, which really put us in the driver’s seat. (We could say) ‘we’re growing, we’re going to continue to grow, it would be great to work with you and grow faster. But if not, we’re going to keep growing until somebody else does.’”
Next, Create a Sense of Abundance in Fundraising
Think of it as Plan B, for the “companies (that) just need capital before they’re worth anything.” D’Souza says “in that situation, the second best way to convince somebody that you don’t need their money is to convince them that somebody else is going to give you their money."
“It’s creating scarcity. (There is) an advantage you’ve got coming from Toronto, and other places that are not Silicon Valley. (You can say) ‘we’re in town this week, we’re taking first meetings. We’ll be back in two weeks and taking second meetings. Then we’ll be back two weeks after that and we’re getting term sheets.
"It’s scary, because on that first trip you probably only know two people. (And) you’re going to tell everybody ‘this is what we’re doing, here’s our process, get on the train or get off.’
“The first two meetings will turn into more meetings and those will turn into meetings very quickly if you’re telling the story in the right way and you’re engaging folks. You have to believe it yourself. (To say with conviction) ‘here’s my process, here’s what’s going to happen’ and then you get people on that train. And then somebody blinks. Once you get that first term sheet then everybody else is like ‘Oh, no no no, wait, you should work with me instead.’
Myth or Reality: Local Investors Prefer to Follow
When Toronto founders gather, it isn't long before somebody complains that local investors are unwilling to be first movers. D’Souza disagrees. He says founders need to get better at creating and using leverage.
“I think it’s how you play it. When Canadian investors know you’re spending a lot of time in the Valley and you’re taking second and third meetings they start to get a little worried. And when US investors know you’re coming back to Toronto to take second and third meetings, they’re like ‘I don’t want to get scooped.’ So there’s a great opportunity to play them off each other.”
And Finally, the Back Channel
D’Souza works with “a few key people who know everybody really well. (They’re other) entrepreneurs… people in the ecosystem, (who say to potential investors) ‘Have you heard about this company, they’re about to get a term sheet. Seems like it’s going to be a really competitive deal. Do you want me to introduce you?’”
This back channel is an important part of the “little seeds you can plant to create that (sense of) scarcity.”
Says D’Souza, “It’s a dance. It’s a big chess game. It’s about sprinkling the right information. All of it is true information. Sprinkled from the right little birdies. It’s really important to have the right friends who know how to tell that story.”
“They Don’t Call it Hardware for Nothing”
D’Souza acknowledges that hardware is tougher to fund than software. He should know, he’s operated companies in both categories, raised funds for each.
When he was raising funds for Bionym, a biometrics device startup, “a lot of people couldn’t wrap their heads around the technical challenges,” says D’Souza. There were a lot of questions about the market too.
“When we got to the stage where we were going to put out a prototype it wasn’t a consumer-ready experience. That’s one of the challenges. Apple has set the bar so high for what a consumer electronic device will look like and feel like and do.
“One of the challenges is that you can’t A-B test hardware. You can’t iterate really quickly. (It's harder to) put a product in users’ hands... (if) they don’t like it, you can tweak it and push an update tomorrow morning. They don’t call it hardware for nothing.”
Does That Change the Strategy for Raising Funds for Healthcare Startups?
In one sense, no. You still have to create leverage. You have to convince investors that you don’t need their money.
What is different is that the probability is pretty low that you can use Plan A. Healthcare startups will tend to find that their choices are Plan B or Plan C. Healthcare startups tend to need money before they're worth something, a lot of money.
Plan B does work -- D’Souza employed it for a healthcare-ish startup: “Bionym was a very early pitch. (We told investors) ‘we’ve got this cool technology. We have some ideas of what we’re going to do with it. But no proof that anybody wants it’ … (and) we ended up raising a large round.”
Catch the full interview here, and check out Startup Grind Toronto for our next event!