“They’re not customers until they pay, otherwise they’re just cheerleaders.”
What do these three things have in common?
- Getting derailed in due diligence by a well-meaning customer
- Being chased out of a Chinese restaurant in Calabasas
- Selling a portfolio company to Atlassian for $1 billion
They’re things that happened to our panelists from today’s virtual event: Ryan Denehy (3X founder, 2X exited to public companies) of Electric and Farooq Abbasi (Founder & GP at Preface Ventures, investor in DX which just sold to Atlassian for $1 billion).
I was excited about this conversation because I wanted to tease out the fundraising lessons learned from multi-time founders that could apply to first time founders. Ryan and Farooq did not disappoint!
TL;DR:
- Prove the product works first, then hit the fundraising trail
- The “right” metrics for Series A aren’t about hitting a specific revenue number
- Be aware of the “napkin math” that every VC will run on your company
- Authentic momentum beats manufactured urgency every time
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Fundraising Is Not a Shortcut
Ryan lamented that too many founders spend more time thinking about how much money they need and who they’re going to pitch than actually figuring out what customers will love and how to sell it.
“Too many entrepreneurs associate fundraising with this badge of honor, or this sort of requirement to be taken seriously.”
Farooq also shared the downsides of a ‘fundraising first’ mindset:
“It comes with a tremendous sort of responsibilities…you’re buying a home with an expensive mortgage—it feels like a badge of honor…but it comes with a new kind of milestone to sort of climb.”
The Strip Mall Reality Check
After spending four years at the acquirer of his first company, Ryan launched his second company, in the retail analytics space. They had just 12 customers after nearly a year of building and selling the product. Every VC firm they pitched rejected them. The reason for these rejections, according to Ryan, came down to this:
“If you can’t prove (to a VC) that you can get hundreds of customers with a fairly small budget, why would anybody give (you) money?”
So Ryan hopped in the car with his intern, and they hit the strip mall circuit to do some customer discovery. Highlights of that trek included:
- A chef at a Chinese restaurant chased him out (apparently they had beef with Yelp).
- And a copy machine sales guy may or may not have motioned toward a gun.
For three months straight, Ryan grinded, iterating on the pitch and on the product with his team. What came out the other side? They eventually hit product-market fit, signing on a couple hundred customers.
Once it looked like the model was working, VCs became much more interested. But despite the investor interest, they kept the operation capital efficient, raising only what they thought they needed. They sold to Groupon just a few years after that, with Ryan and his co-founder owning nearly 60% of the company.
Aside from customer quantity, diversity of customer type can also be a compelling signal for an investor. For example, Farooq invested in Context AI when they had just three major customers—one airline, one PEO payroll company, and one large tech company.
Know Your Investor’s Napkin Math
So how do you figure out what a VC really cares about, before you pitch them? Farooq was kind enough to let us share his “Seed Stage VC Napkin”—inspired by the framework from Point Nine Capital–that shows what metrics actually matter at each stage.
The critical insight? “Know thy partner,” as Farooq put it. He’s shocked that even experienced founders don’t ask basic qualifying questions:
- How many boards are you on?
- What are your last five investments?
- What’s your fund size?
Let’s talk about that last one for just a moment. If there’s a structural mismatch between what you’re expecting from your investor and the size of check you’re expecting them to write, it likely won’t end well, and the best case scenario is that you waste your own time and that of the investor. So be sure to do some internet research to get a feel for fund size and typical check size before deciding whether or not to reach out to a given firm.
Here’s an example of how Ryan qualified an investor who was interested to write a check into their Series B at Electric. They had two term sheets—one from GGV Capital (now Notable Capital), and another from a partner they really liked at a fund that was known for later stage investing. After getting the term sheet, Ryan called the partner directly and asked:
“How many other deals of the 30 companies in your portfolio of your last two funds, how many Series B deals have you done?”
The answer? “You’d be our second one.” Ryan walked away from that term sheet. Why?
“For (a firm) who’s used to a growthier, later stage investment…we still (have) a lot of stuff to figure out. I don’t think they’re gonna have a great time being along for that ride from the B to the C to the D when they normally come in at a Series D.”
That investor appreciated Ryan’s candor, and they stayed in touch.
What Actually Gets VCs to Move Fast?
Ryan’s answer:
“The two things that have legitimately catalyzed fundraises time and again is just being able to beat and raise.”
Translation: If you tell investors “by the end of the year, we hope to go from here to here” and then you actually exceed that target, they lean in hard. As Ryan explained:
“Any time that I’ve been able to go back and say, you know, oh yeah, we actually did double that, and so we’re gonna raise the forecast for next year… people get really, really excited about that”
The second signal? Organic word-of-mouth. In Electric’s early days, they had venture-backed startups as customers. Then VCs from those portfolio companies started reaching out: “Hey, I heard you guys are way better than a local IT provider, hearing great things from our portfolio, we need to talk.”
And Farooq pointed to frequent, substantive communication as another way to demonstrate momentum:
“Hey, we landed X customer. Or hey, this question you had in our meeting where we talked about the following, here’s how I’ve been thinking about that, and here’s the hire that compensates for that weakness.”
What doesn’t work? Manufactured urgency. “No one wants to work with a bullshitter.”
I also asked Farooq what a founder should interpret as buying / investing signs when working with a potential investor:
- They ask for your phone number (Farooq’s favorite tell)
- More frequent communication and deeper questions
- They’re pushing the conversation forward, not waiting for you to follow up
- They’re not afraid to offend you with tough questions
Ryan backed this up with his experience as well:
“While VCs see a lot of companies, they don’t see a ton of companies that they are actually interested in investing in. When I think of every investor who’s led every round in any of my companies, they have been pretty prompt and diligent and intentional with their follow-ups.”
Want to dive deeper into any of these insights? Watch the full conversation above. And if you’re building something in enterprise infrastructure or AI, Farooq is actively looking to meet founders raising smaller rounds with less dilution—reach out at farooq[at]prefaceventures[dot]com. Ryan is also happy to chat about these topics at ryan[at]electric[dot]ai.
