December 14, 2020

How to Raise US$1.35M for Your Tech Startup During a Pandemic (A Venture Finance Academy Case Study – Introduction)

Case Study, Venture Deals Closing

1  comments

   minutes read

  • Home
  • /
  • Blog
  • /
  • How to Raise US$1.35M for Your Tech Startup During a Pandemic (A Venture Finance Academy Case Study – Introduction)
December 14, 2020
By Aery Advisors
Default AA Blog Post

A few weeks ago, in late November 2020, our founder Brad Furber travelled from his current WFH base in Basel, Switzerland to Kiev, Ukraine to produce a deep dive case study with Sam Cook.

The case study dates back to Spring 2018, when Brad met Sam at a startup conference in St. Gallen, Switzerland.  Sam was pitching his media agency services to “authors and experts”, and Brad agreed to hire Sam and his team to produce some video content for Aery Advisors focused on certain venture finance matters.  The videos were shot during the summer of 2018 in Warsaw, Poland.  While directing some of the video sessions, which were based on Brad telling the story of his “hero’s journey” (namely, the story of an visionary entrepreneur with a big idea that could change the world if only he or she had enough capital to attract, retain and motivate the right team to build it), Sam bolted upright from his director’s chair and exclaimed:  “Wow, it sounds like your telling my story!”

It started out as a simple request to help negotiate a proposed deal

Sure enough, about a year later, after Sam had moved his media agency business to Ukraine, Sam called to ask Brad to coach him through a negotiation with a non-dilutive source of capital offer that seemed almost too good to be true:  upfront investment to hire developers and build a minimum viable product, in exchange for just 10% of future revenues.  Brad was familiar with revenue-backed financing arrangements and, always curious about innovations in venture finance, Brad agreed to help Sam evaluate and design an appropriate deal.

As it turns out, once Brad and Sam got the prospective “revenue backed financier” on a call, Brad advised Sam that the deal being pitched was none too attractive.  In fact, it outright stunk.  But even though that deal was a non-starter, it was also the beginning of larger collaboration between Sam and Brad that continues to this day.  The model for that collaboration is now being employed with a number of other ambitious startup founders and business angels through what is now known as the Venture Finance Academy (VFA).

Deep dive - telling the story in five parts, video and transcript

We have created and professionally produced a five part deep dive case study, in video and textual form, that tells the story of how Sam and his team were able to take their big idea and make it a reality. 

In this case, the big idea was originally hatched inside a services based media agency (called James Cook Media) operating in Poland and Ukraine, and then spun out into a newly formed Delaware corporation (called Sanity Desk) in late 2019.  In this case study, you will learn how Sam and the SanityDesk team employed the VFA methodology, illustrating how, by putting the VFA theory and processes into practice, SanityDesk was able to, notwithstanding challenges posed by a global pandemic, successfully raise $US 1.35 Million of funding in a series of smaller rounds, culminating in an oversubscribed pre-seed round lead by several smart money angels and one micro-VC. 

We will be distributing this case study for free to subscribers of our newsletter over five weeks, and we hope you will take some time to watch and/or read each installment, starting today.  If you’re getting tired watching Netflix reruns already, try this freshly produced content with a view towards setting your venture finance goals and objectives for the New Year. 

As Sam and his team have proven, even during a global pandemic, there is no shortage of capital (“venture finance” in its many different forms) available to fund innovation and entrepreneurship.  We hope this case study will inspire you and your team to go out and get it in 2021.

If you prefer to digest the case study in video format, please click on the picture below:

If you prefer to digest the case study in written form, please continue reading below:

Sam Cook:

Hi, my name's Sam Cook, the co-founder and CEO of SanityDesk and also the executive chairman and founder of James Cook Media. And we're here today with Brad Furber producing a story, a case study story on how Brad helped me and the SanityDesk team raise $1.35 million in the midst of a global pandemic. It only took us, what, 16 months after I paid you to join, becoming the first inaugural member of the Venture Finance Academy, which is now a group that's going strong, where Brad helps coaches, founders co-founders on how to raise money. And Brad, I just wanted to, you know, first of all, have you introduce yourself a little bit and why did you found the Venture Finance Academy? Why are you teaching yahoos like me out there, cowboys like, me to raise money – as you so affectionately call me?

Brad Furber:

Yeah, I like doing it. So I've spent my whole career helping people in a variety of capacities raise capital. And the hardest part, I think, is that idea stage to, say, seed financing. And so, while, you know, I've been trained as a corporate finance lawyer, and I can go soup to nuts all the way through an IPO or an M&A, I think that that early stage, you know, where you have an entrepreneur with a vision trying to get the team, the nucleus of the team with some capital to try and take that big idea and make it a reality. That's the part that I, I feel really most passionate about, and I like working with entrepreneurs. That's why I do it.

Sam Cook:

Just to bring out a little bit of your background here. How many angel investments have you made in your career yourself personally?

Brad Furber:

It's, it's tough to count because I've been doing it in a variety of capacities for about 26 years. So I had a fund where we backed a lot of early-stage companies, in Seattle and we did about probably 70 or 80 through that fund. And I was one of the managing members. And then since then I've invested in several venture capital firms, and then I've also directly invested as an angel in several dozen. And so when you add it all up, I suppose I've been exposed to close to 200 early-stage. I mean, it depends on, you know –so for example, if you invest in an early-stage, say, VC fund, you get exposure to a group of maybe 10 or 12 from a fund. But, but for me, I've been doing it for about 25 years. And, yeah, it's, it's been interesting.

Brad Furber:

And the other thing is I've been doing it on four different, in four different countries, continents or countries. Well, the USA is where I started, but then moved to Europe and lived in the Nordics for four years and got exposed to Denmark – Denmark, where I lived in Copenhagen, Denmark. But a lot of the work I was doing was all over Northern Europe. And then from there, I went down to Australia and to be honest down there, I was working for a university and set up an innovation center. And I wasn't that active as an angel investor in Australia, but I was involved in creating an environment for startups. And then after that I moved to Switzerland, where I've been for the last three years. So Brad, we were, we were talking about

Sam Cook:

before this interview about the odds. Okay. And I asked you to do a little bit of research and the odds – and I like to say this to people that, and you told me this before I got into it, and I didn't quite believe you before I started, but, but you said, "So you want to raise money?" And I said, yeah. And you said, "You know, this is going to take you six to 12 months from the time you say go," I thought maybe I could do a little bit quicker. I'm good at sales. And I thought we were kind of far along in our product, but 16 months later, I'm just closing the first round. So you're definitely right. So why is raising money so much harder than selling and why is it pretty much the hardest thing you'll ever do as a...

Brad Furber:

Well, okay, so let's just talk about you. It's, it's true that, you know, it's taken you 16 months to get an oversubscribed round. Yeah. But honestly, you first started taking money about a year ago. That's right. So actually 16 months ago is when I got my first. So you've been kind of taking it down in small chunks until finally it's like a snowball. It's like a, and now you have a fully developed business plan. You have a much better, a much better story, a better team, and a group of investors who feel comfortable and confident working together. So it takes a while to get to that point where people are confident that, okay, we're going to do the full pre-seed round, which is where you're at. And we're going to shut it down, let you guys execute and then go back to the market in maybe another six to eight months where you can prove that you've taken the funds and you've, you've, you've built something.

Brad Furber:

So most startups fail. And the other thing, sophisticated investors know that. Yeah, absolutely. So, you know, and there's also a difference, I think, in mindset between different ecosystems, different cultures, I think in the US, it's go big or go home. Yeah. You know, we're just, we're going to go all in – we're shooting for the moon. Moon's not big enough. We're going to Mars. And and if we fail, that's okay – we're going to fail spectacularly. And I think the US mindset and the capital markets are okay with that. But what I find, you know, particularly in Europe, it's a lot more conservative. And so you might have people who raise less money, but they're also less likely to fail. Right. And so the failure rate, I would say in the the US market might be higher, but the, the the fruits of home runs, the home runs, are, are way bigger here in Europe. And I think also in Australia. When I was in Australia, people tend to be more conservative, both the investors and the entrepreneurs. So the failure rate goes down. But, but it's typically...

Sam Cook:

What are the general failure rates? Well,

Brad Furber:

Okay, so, so to statistically... I'd say, I mean, some people would say 70 or 80, but I would say of startups that are serious about trying to rely on third-party capital. We're not talking about small businesses here. We're talking about real startups that are going to try and scale. It's probably on the 80% range, failure rate, 80%. So a real...

Sam Cook:

So there's, there's people who don't know investing, who who think, "Oh, yes, this is the next big thing." And they put their money in. They may be surprised when it fails or maybe they overestimate the odds, but anyone like you, you just know in the back of your mind that I've got a four out of five chance, this isn't going to go anywhere and you just got to be okay with that.

Brad Furber:

You don't go in that way. You go in thinking, okay, I believe this is somebody who can execute and go to the moon. But when it doesn't happen, as long as the entrepreneur and the team gave it their best shot, they didn't give up without a fight. If it ultimately ends up that the company needs to shut down. I mean, I don't really hold a grudge. I mean, sometimes the entrepreneur goes into like a 12 month, you know, state of depression or despair. And I'm like, it's like losing a family member. Yeah. I mean, it's... It can be difficult to, to recover, but yeah. So I think if you go through the, if you go through the cap table, you've got the early stage, which is where hopefully you haven't committed yourself to too much overhead where you're going to crash and burn quickly.

Brad Furber:

So hopefully you keep it the burn rate pretty low, but then you raise the, say, the pre-seed round. Maybe you raise a half a million or something. And now you up the burn rate. Now that you're kind of committed to this, unless you've got revenue. And a lot of companies don't because now you need to raise the next one. And then as you go through it, so you go through the, the pre-seed stage. We can get into the details of what that means. The seed stage, the series, a Series B Series C, the further you get in, like at Series C, I think at that point, the failure rates are actually pretty low. You might not become a public company, but at least the company probably is going to be able to orchestrate some kind of an exit. Maybe it's a trade sale or something like that.

Sam Cook:

Yeah. And you're just talking about the different rounds pre-seed being now, what comes right after you run out of your own money or your friends and family? That's typically up to a million or two million now in the US. Seed is now four to six million. Where you're, I guess, planting the seed in the market and seeing if it grows pre-seed as you're building the product, building the seed and the dividing line, those, those two rounds is typically when you start doing revenue. Right. Well,

Brad Furber:

So, some people would say, if you were to look at what a series a round was in, say, 2010. So if you look back 10 years, what today we would call a seed round 10 years ago, you would call it an A round. Yeah. And part of the reason for that is that in this market – and keep in mind, we're, we're into a pretty long bull market and there's a lot of capital coming from angels, super angels and micro VCs. So the traditional VCs have moved up to say series ABC and the angels and the micro VCs are doing more of the pre-seeds slash seed.

Sam Cook:

So there's a, there's kind of a macro trend going on here where I would say now, and correct me if I'm wrong, that angel investment and venture capital investment in tech startups is becoming way more mainstream. And there's just a lot of money coming from traditional wealth sources, like family offices and, and, uh, real estate and all kinds of other places saying, "Hey, the returns are looking really good here for the last 10 or 15 years." So, so do you see that trend accelerating now due to the global crisis? Or how do you see that in 2020?

Brad Furber:

You know, I tracked the statistics pretty well. I think when the COVID crisis hit, people became more conservative in the pre-seed stage. So maybe some of the people that are, I guess, you'd call tourists in the industry, kind of said, well, I'm going to, I'm going to sit. But the pros, the people that do this for a living, they haven't, and the statistics show that the amount of capital in, say, Series A and beyond is, is continuing to grow. And I think the recovery within the, say, angel pre-seed, at least what I'm hearing and I'm involved with some angel investment networks, it really, it's recovered. I mean, it may not be a hundred percent of where it was this time last year, but it's not far off.

Sam Cook:

Yeah. It was tough there for a few months. We'll talk about that in our case study here, but it is coming back. All right. So, final thing, we're going to get into this case study and the way I want to do this for your audience, people considering working with you in the Venture Finance Academy is: you have four pillars of raising money. The things that every founder needs to master in the order that you present these things that I've gone through. So I can, I'm going to ask you about each pillar – a summary of it because you have all of this in great detail inside the Venture Finance Academy, where you have long videos on each topic and worksheets, and you know, all the resources, because you're, you're a lawyer, you're an investor – all the resources anyone can need to actually do this, but I just want to go, you know, kind of crest the waves on these things. Then we'll just talk about my experience with you, coaching me through this so that people listening to this can understand the application of the principles and how they may be in a similar situation or need similar help from you.

Sam Cook:

We'll just go through that. And then hopefully by the end, anyone watching this, and I'm just going to say, as the first first Venture Finance Academy student and graduate, I'd call myself almost now, that it, it has been a great experience. I just wanted to bring that out and I'm, I'm not shy about plugging the program myself because it's just been such you know... I definitely wouldn't have raised money without it. So let's... Why don't we summarize those four points and then we'll get right into the first point

Brad Furber:

First, you should master the foundational knowledge. Okay. Right. What, what if I wanted to raise capital from any third parties? What are the say, 10 or 12 most common ways that I could do it? Yeah. So it's like, you go to a restaurant, this is what's on the menu. All right. After you do that, then what's important is you need to, what I call, get your house in order. So, you know, a lot of times you're an entrepreneur and it's kind of messy. It's your house, it's your bedroom, it's your garage. And it's okay. You're okay. Living in your own mess, you know where everything is. But once you ask a third party to come in, that's a different deal. You don't want them to stay in the guest bedroom for a few minutes. Seriously, you know, you've got to clean up your house and you've got to tidy it up.

Brad Furber:

So the house in order stuff is just being respectful, frankly, to your guests in this case. And that means, okay, if I want to raise some... Here in Europe, as I see this a lot here, it's less of an issue in the States, but maybe you incorporated in Romania, for example. Nothing wrong with that. Romania is a great country – really smart people – but let's say that you've now opened the menu and said, "Oh, actually what I want to get are smart angel investors from the United States. That's what I want." Or UK, or from the UK or, you know, wherever. Is that going to get it done? Or do you need to basically say, I may need to get my house in order, by incorporating in a different jurisdiction and picking the right entity and sort of thinking this through, because we're going to get into the, the compelling offer, which is part of the third part.

Brad Furber:

So the second part is to position yourself so that your house is in order. Everything's tidy. It makes sense. Skeletons are out of the club. No skeletons, no dead bodies in the backyard. I mean, seriously. No deadbeat partners. I mean, I mean, come on, entrepreneurship is messy and sometimes people have issues that they need to clear up. So that's the second part. Now the third part is, it's really a combination of empathy mapping. So let's say again, you've decided maybe you don't want to raise equity. Maybe you've decided that you want to do non-dilutive financing, and you're going to try and, and do some kind of revenue-backed note. Now this is for companies that actually have revenues. So, you know, you might have a nice little business, that's generating some revenue, but you've never taken outside capital. And you say, okay, well, how can I get some additional capital to help me grow? If you decide, for example on revenue-backed notes you need to create an offer and approach the sources of that capital that's in the ballpark,

Sam Cook:

Or you're just going, I mean, you, say, create a compelling offer. It's Hey, "I, you know, I want to go raise money from angels," which is typical. For most, most startups are going to go through that route. How do I put something out there that's going to get angels to bite on the offer? Basically it

Brad Furber:

Has to be, yeah, it has to be in the ballpark. So is the valuation

Sam Cook:

Normal based on where you are based on your team, all those different things, right?

Brad Furber:

Yeah. So you're trying to create, and you might create a couple of different offers – call it a minimum viable offer. You test the offer, just like you would test a service or a product in the marketplace and see if you can get anyone who's nibbling. And if you get feedback, which suggests that for whatever reason, you know, hey, it looks like you've been smoking weed or whatever. Then you've got to take that. Is that, is that right? Or is he smoking weed? But you can usually, if you test it with enough people and you have the right advisors, hopefully you don't waste your time. And frankly you don't waste their time because there's nothing worse, frankly, as an angel, to look at, you know, a deal that's just half-baked. Okay.

Sam Cook:

and then the last principle. So, so principle number one is the understanding the, the, the strategic layout of the ... foundational knowledge. Foundational knowledge: what are all the different ways you can go find money, a number and understanding that and picking which pools or couple pools you're going to test. And we'll talk about that. I tried many of them. Number two: house in order. You know, getting into the right jurisdiction, right agreements, making sure you've got no skeletons in the closet, no deadbeat partners – neat and tidy house. Okay. That's number two. Number three, creating... You own the IP. You own the IP. Exactly. Number three is, is creating a compelling offer, making sure your valuation is normal in the ballpark investments. If it's equity. Yeah, exactly. Yep. And then, the last one, last principle. The last one's

Brad Furber:

just sales and marketing. Yeah. You know, and so it's, it's, it is great. And it's, it's funnel marketing. If you really think about it, if you've said, look, I'm going to try and raise money from this particular source. I mean, you might have to just stick in with the prince frog. You might have to kiss a hundred frogs or more, to find your prince. I mean, that's just the reality. And especially when you're asking people to take this very early stage risk on an unproven team, maybe an unproven business model. You know, you've got to be a little crazy – just like I think you've got to be crazy to try and do, say, a tech startup. You've got to be a little crazy to invest in them. I mean, seriously. I, I, I certainly

Sam Cook:

called my company SanityDesk for a reason. The inside joke is the insanity desk inside of our team. But, yes, it is a little bit crazy looking back on it and seeing how far we've come on it.

Want to read or watch next part of this Case Study? Subscribe to our newsletter below

Subscribe to Venture Finance Newsletter!

Join community of 5000+ startup founders who getting weekly venture finance market newsletter

If you believe that this blog post is valuable to others in your network, please like and/or share it by clicking on the buttons below.


Tags


Aery Advisors

Default AA Blog Post

Follow me here

About the Author

Aery Advisors helps founders, funders and teams turn big ideas into reality by helping them become investors-ready.

Have anything to add?

Leave your comment below

You may also like

Term Sheet Battle – DTU – 2021

Term Sheet Battle – DTU – 2021

The G&T Sessions Podcast with Andrew Turner and Brad Furber

The G&T Sessions Podcast with Andrew Turner and Brad Furber

Want Liquidity and Capital Resources? Sell Your Online Business. Here’s How.

Want Liquidity and Capital Resources? Sell Your Online Business. Here’s How.

Subscribe to Venture Finance Newsletter!

If you would like our Blog and want to receive future research and articles about startups and venture finance, please subscribe here