13

Invite

“Who’s coming with me?”

—Jerry Maguire

• How to make an ask

• The different types of asks

• Types of investment asks

• Notes on closing

“All right, here’s the setup: I’m an angel investor that you’re pitching and it’s pretty clear that I’m interested and the meeting’s about ready to be done. Close me. You just see people try all kinds of random shit. They just don’t know how to handle that situation.”

—Jason Seats, Managing Director, Techstars, Austin

“Some of these people would sit down, and if they liked what I was doing, they would make as many as ten intros for me—very generous. It makes a strong impression when someone goes out of their way to help you.”

—Francis Pedraza, Founder of Everest

Few people like feeling needy. Asking people for things rubs against our delusion of self-reliance like sandpaper on eyeballs. And nothing gets most founders more uncomfortable than having to ask people directly for money. All of your personal baggage about money will surface the moment you start asking people for it. Suddenly, your parents’ nagging words about finances start replaying in your head. All the doubts about the venture that you’ve been suppressing force their way up. You’ve been playing entrepreneur long enough; it’s time to get a real job. People think you’re an idiot. You’re wasting your reputation.

What makes “the ask” so awkward for most people? Is it the fear of rejection? Of looking stupid? The fear that— deep down—the venture isn’t worth anything and isn’t going anywhere? Here’s the truth: if you really believe in your venture (and we trust that you do), then the best thing that could ever happen to an investor is the opportunity to invest in your venture.

This isn’t false bravado. Every investor knows that the odds are against the startups he or she meets. What investors want—what they spend their careers seeking out—are offers from passionate entrepreneurs who believe they are building ventures that will change the world.

The final step of the friendship loop—invite—is the art of making those offers. This step is rooted in a deep conviction that what you are asking for will make the person’s life markedly better. It is literally an invitation, a way to say “I think you’re really going to like this” and “let’s do something amazing together.” To invite others into your venture, you must first decide what your invitation will be. Then, you must break down that invitation into the very next step that the person needs to take. Lastly, and this is going to sound a little silly, you must script your invitation and practice it so that, when your nerves start going haywire, you won’t back out or do something bizarre.

How to Make an Ask

Decide What Your Invitation Will Be

Your invitation will depend on which stage of the venture you are in and who you are talking to. Early on, you may want only to keep someone in the loop—an invitation for someone to follow your progress through periodic e-mails or meetings. It’s not uncommon to find a cofounder or key partner during this process. You may invite someone to join a formal board of advisers, a group of experts you learn from and consult for wisdom on difficult decisions and problems to help you set the right course for your venture and sometimes serve as a pool for eventual investors. Finally, you can give the big ask: to invite someone to invest a specific amount into your venture.

As you consider your invitation, answer the following questions:

Break the Invitation Down into the Very Next Step

What happens if the person says yes? As obvious as that question seems, many founders forget to take the time to answer it. Words like “partner,” “advise,” and “invest” are ambiguous; doing them requires a series of much smaller and concrete actions.

Chip Heath and Dan Heath discuss the principle of clarity in their book, Switch: How to Change Things When Change Is Hard. Ambiguous goals, they say, are very difficult to accomplish. By breaking down your invitation into the very next action that you want a person to take, you make it much more likely that he or she will do it. We discuss the process of closing investors in detail in the next section.

Script and Practice Your Invitation

Why does nearly every entrepreneur know that he must practice the first thirty seconds of his pitch but never thinks to practice the last fifteen? Memorize what you plan to say when you come to that moment of truth. As you script the kinds of invitations you make, it’s helpful to keep in mind a few things.

Ask Investors a Question

As obvious as it seems, people often fail to make a clear and direct ask. It will feel awkward, but if you don’t put people on the spot and ask, “Can we count you in on this round for [x] dollars?” you’re in danger of getting a lot of fake yeses. You’ll be tempted to leave it at “Well, thanks for listening. Just think about it and let us know . . .” This is a terrible strategy. They will never call you back.

The time to ask is when they are in front of you and your goal is to get them to say out loud, “Yes, I’m in for $x.” In many cases, investors won’t even know (or ask) about the valuation or deal terms. For many, it simply doesn’t matter.

Tell Investors Exactly What You’re Looking For

How much money do you need? How many people are you looking to raise money from and at what levels? What do you want from them specifically?

Make Investors the “Missing Link”

People want to feel as if their contribution has a large impact. If you can present what you need in a way that makes their contribution seem like the final piece of a great opportunity, they’re much more likely to give.

Surface the Contingencies

The Techstars team teaches their entrepreneurs that if an investor is interested, he is “in,” barring some contingency. By directly asking an interested investor what it would take for him to be 100 percent certain he is in, you give him permission to talk explicitly about his hesitations and give yourself the opportunity to address them.

Let Investors Break the Silence

Part of making it easy to say yes is making it difficult to say no. Don’t make it easy on them by filling in the silence. Once you’ve made the ask, do what a friend advised us: pause and take a long, slow sip of water.

The Different Types of Asks

Questions to Ask Yourself

Where am I in my road show? Are you one or two signatures away from finishing the round, or are you hoping to get that first signature? You will need to frame your ask around the phase you are in.

At what level do you want this person to invest? Do you want her to lead the round? How much money can she reasonably invest, based on the types of deals she has done in the past? Decide on a specific number, like $50,000, $250,000, or $1 million.

Is this person really interested? What kind of questions is he asking? Has he been engaged, nodding his head, or has his body language cooled? By the time you ask for money, you should have a good idea of the investor’s interest level.

DEEP DIVE

Script for Progress Updates

Thanks to Austin health care startup Filament Labs for letting us use their newsletter for this script:

Types of Investment Asks

Your ask is a tailor-made request, targeted at the individual you are talking to and based on where you are in the funding process. Consider these five types.

1. Testing the Waters

Scenario: You’re not yet ready to raise money. You are concerned about gauging an investor’s interest and building the relationship for further down the road.

Script: “We’re going to be looking for investors. Is this something you’d be interested in when we’re ready to raise capital?”

2. Partnership

Scenario: The potential investor’s expertise is just as valuable as his or her money.

Script: “It’s clear you have a passion and expertise in this industry. You are exactly the type of partner we will need. Will you consider joining me?”

3. Working with People You Like

Scenario: You sense a strong amount of interest from someone who values impact as much as financial gain.

Script: “Hey, I really like you guys. I think we’ve got a great opportunity. Why don’t we do something amazing together?”

4. Hard Charger

Scenario: You have limited time with a decisive, high-value prospect.

Script: “I’ve got a big ask for you. Will you invest $1 million?”

5. Momentum

Scenario: You are more than halfway to funding your current round.

Script: “We’ve already succeeded in finding much of the funding we need. There are still a few spots left. I’d love for you to close us out. Can I count you in for $1 million?

Notes on Closing

The Elements of Closing

These are the basic elements of most closes. Keep in mind that not all investors will require you to move through each of these hoops. Some may just want to know where to wire the cash.

Verbal “yes.” An investor tells you he or she is in.

Term sheet. You receive a term sheet—a document outlining the basic terms of the agreement. VCs will always give you a term sheet, some angels will, and other funding sources will have different ways of outlining the agreement.

Due diligence. The investor (and you, if you’re smart) goes through a formal process of research.

Signatures and money transfer. You sign the final documents and the investor transfers money to your account.

Due Diligence: What Needs to Happen before I Can Close?

The due diligence process changes with every investor, but there are a few common areas you should pay attention to.

Legal and Accounting

From a legal and accounting standpoint, you’ll need to make sure you have completed the following steps before you enter a closing conversation. Of course, as with anything law-related, you should always consult a lawyer. (In other words, this is not legal advice, we’re not lawyers, don’t sue, so on and so forth.)

Incorporate as a Delaware C corporation. The short answer for why you should be a Delaware C is that investors prefer it.

Handle post-incorporation issues. Specifically, set up your articles of incorporation, bylaws, vesting schedules, and intellectual property assignment.

Collect any tax filings and past financial statements, if you have been a company for more than a year.

Get a startup lawyer. Ask the people you meet with which lawyers have good reputations with entrepreneurs in your city. A few big firms are Wilson Sonsini Goodrich & Rosati; Walker Corporate Law Group; and DLA Piper.

Due Diligence Documents

You’ll want to gather the following documents.

Financial history. Previous tax filings and any historical income statements.

Articles of incorporation. The proof that you are an official business.

Bylaws. A legal document that describes how decisions are made in the venture.

Org chart. A list of everyone employed in your venture, the roles they play, and who they report to.

Financial model. Twelve months to three years of future revenue and expense projections, along with the assumptions those projections are based on.

Cap table. How the ownership pie of the venture gets split up—a table with a list of owners and the shares each owner has.

Your Due Diligence on the Investor

Due diligence goes both ways. Here are some tools and questions to answer as you research a potential investor.

Places to Research

Questions to Ask Investors

Tell me about a time when a relationship with an entrepreneur you invested in went sour. What happened?

Questions to Ask Their Portfolio Companies

Would you take money from him or her again? What’s the biggest asset they brought to the table other than money?

Signatures and Money Transfer

This is the simplest part of the entire fundraising process. Your lawyer will draft the documents you need to sign; you can upload them to an electronic signing service like HelloSign or DocuSign, create a business bank account (if you don’t already have one), and send the wiring instructions via e-mail, along with the links to the documents.