How to Start a Startup: Early Funding

Welcome to “How to Start a Startup,” a short series aimed at giving aspiring entrepreneurs a range of views about starting a new team, product, or initiative. 

This week, our panel of founders talks about their early rounds about funding. 

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This week in “How to Start a Startup,” @DigitalAsset’s Eric Saraniecki talks with entrepreneurs about their early rounds of funding.<br />
This week in “How to Start a Startup,” @DigitalAsset’s Eric Saraniecki talks with entrepreneurs about their early rounds of funding.

Michael Shaulov, CEO and Co-founder of Fireblocks:

"If you're a first-time entrepreneur, the best way is to get in touch with other entrepreneurs who are somewhat more successful and have them introduce you to their VCs or to their angel investors"

Can you remember what it was like to try to raise money the first time? 

Michael Shaulov: In 2008, I was one of the co-founders of a company that failed to raise its seed round and it was a very painful experience. We wasted months having conversations with VCs and angel investors and we didn't manage to raise anything. 

The second time, with Lacoon [Mobile Security], It was a faster process. I think it was more clear to investors that we were bringing our specific domain expertise to the table and the team was much more aligned with the problems we were looking to solve. So I think the story for the investors was more digestible. 

How did you get those first meetings? How did you get on a VC's radar?

If you're a first-time entrepreneur, the best way is to get in touch with other entrepreneurs who are somewhat more successful and have them introduce you to their VCs or to their angel investors. In my mind, it carries the most weight. 

We knew that there was basically a group of VCs that we wanted to talk with and we started the discussion. Most of those discussions were slow moving. There was one angel investor who was a living legend in the space of cybersecurity. His name is Shlomo Kramer. 

One of his friends told me, "If you want, I'll pass him your executive summary, he will send it to Shlomo." So we did that. Nothing. We didn't hear anything back from them. And then I heard from a different friend of mine that he had a friend who was working for Shlomo, and I asked him to ask him. 

And then actually he got the executive summary. I was in Israel. He was in San Francisco. We had a call, and then he put me in touch with one of his business partners, Mickey Boodaei, who was the CEO of Trusteer. And we came in and presented to them, and the rest is history. I think they gave us a term sheet within a week. 

I think that's probably the key, though: If you're in a specialized space like blockchain, most Tier One VCs don't have unique expertise in your space. They have a flow of tens or hundreds of really interesting deals. And the real question is, why should they bother? Why would they learn something that is potentially interesting but they aren't familiar with it? On the flip side, you go to an investor who knows your space and you pitch him the idea, it probably will take him five seconds to decide if it's interesting or nonsense. It's very intuitive. 

Do you think there's anything really critical to get right at the seed or the A round? 

We looked at both [equity and debt] options when we did the seed. At the end of the day, there isn’t a big difference between a note and an equity round at a reasonable valuation. When I ran the numbers, there was a difference, but it wasn't fundamental. 

I do think that dilution is important. So you should be concerned about your dilution and you should probably figure out how not to give up too much of the company. Somewhere between the 20%, 25% is probably reasonable for a seed round. 

I don't know. Maybe you can go to 30%, somewhere within that range — or maybe start with 20%, 25%, and then you can leave the round a bit open.

I don't think it matters for the seed round, and I think it really doesn’t matter for the A round. But where things become somewhat interesting is around the B round. That's where you run into issues if you didn't structure it properly. 

If the previous rounds were too aggressive, then in the B round, Tier One institutional investors are not only sensitive about their ownership but about the ownership of the founders. If the founder is more substantially diluted, that it's really scary for them because they're afraid the founders will abandon the ship.

Ben Milne, Founder and Chairman of Dwolla Inc:

"Eventually, you end up in front of somebody who wants to help you, which is sort of the entrepreneur superpower that only other entrepreneurs have"

When did you first raise money for Dwolla? 

The first funding round that Dwolla did was a $250 thousand pre-pre-seed angel note. 

I put in $50 thousand, which was part of a way of trying to maintain credibility with the outside investors who put in the other $200 thousand. And the terms of it were, “This is what looks like might be fair based on reading Inc Magazine and finding this podcast.  … Maybe this is right.”

And thankfully one of the investors was also an attorney and said, "Yep, this actually is directionally pretty fair, and we're in." And that was kind of a group of friends who knew my parents, speaking frankly, and had sort of watched me grow up and watched the first company. The goal of our first rounds was a certain amount of money to acquire a license in Iowa. It had a bonding requirement. So basically, it was X amount of runway to add maybe one-and-a-half engineers to help and test out the product legally with the license. 

So it was mostly to buy us time to prove Dwolla out and then raise more cash to launch nationally and get the rest of the licenses. We ended up finding a way to get to market through a different license structure and act as an agent, which now is becoming much more common, but then wasn't common. And we just ended up solving the problem differently with partners in Iowa.

So you were able to actually use more of that money towards building out your product instead of having to put it into the license?

Hypothetically speaking. But in reality, it just means we raised less capital. Instead of raising 10 million and using three of it for operations, we raised a million later on and used all of it for operations and got out into the market and then raised additional capital after that. But the capital we raised after that was a function of investor interest as opposed to an intentional fundraising.

So for your seed round, you went directly into your network of friends and family. And did you have to put the $50 thousand up to convince them? 

I think about the time that round came together or the original $250 thousand was about the time I was selling my first company. That was part of the conversation. And I wasn't asked to put the money in, but I remember the feeling of, “I want to be in this with everybody. I want to show and I want to demonstrate that I'm real about this. And I want to really make this my focus and speak with my feet and speak with my money and take this seriously.” And that was my way of maybe internally proving to myself that I was going to do this. 

You take the seed round, you move it into getting your licensed MVP up and running. And then you reached out to VCs. Is that when you started really reaching out to the first round of venture capital? 

It wasn’t quite that clean. I was really trying to spend all day either pitching to clients to sign up and use the software or pitching to potential investors. And that meant anyone who said they might be an investor or knew investors. I’d never met any of those people. 

And you just keep running in circles and taking whatever introductions you can get. Eventually, you end up in front of somebody who wants to help you, which is sort of the entrepreneur superpower that only other entrepreneurs have. There's this mentality of, “I'm going to help because I can.” And I got lucky and stepped into a group of entrepreneurs and bank CEOs who gave me free advice and introduced me to their friends.

Those introductions are like oxygen in the early days. And I found a pocket of really high-value introductions in Iowa, and then a pocket of high-value introductions through a conference called Big Omaha. That was really important to lots of us at the time and finding connections outside of the community, especially the people running the conference and their staff and introducing us to people outside of the community that were really deep in other startup communities.

It took a year or more to get that second million done, and I was fundraising almost full time. Probably 75%, 80% of the time, just lots and lots and lots of meetings and lots and lots and lots of nos and lots of offers to get penny stocks on the conversion from s****y investment bankers who would have an option to buy 90% of the company whenever they wanted. I got the worst term sheets in the world — even I knew they were a bad idea!

I was fortunate that when we did that early deal, we were given access to some of the legal and InfoSec resources inside our partners that we truthfully couldn't afford yet. And over time, as we got more sophisticated and raised more capital, we were also able to get a lot more professional about our paperwork, which also needed to be redone when we did some later deals to clean things up. 

It's interesting that you say that. I’ve spoken to others who are more cynical about it who say, “Pretty much the only thing you're ever going to get a value out of an early investor is cash.”

They were raising VC from the wrong people! 

My view of investors is they are the only people who pay you to be on your team. The relationship we have with our clients and with our team is totally different than that. And most of the time, it becomes clear what investors really truly want to work on building a really great business versus who kind of wants to flip it and get their allocation, or is not willing to dive into some of the nuances of the company or of the product. And I've been fortunate to work with a lot of different investors that have dramatically improved my life and my outlook on life and the outlook for the company and their contributions have gone way beyond money.

I think my perspective would be, “Wait, you want to pay to be on the team? And you flew to Iowa to do a four-hour working session with me? You're asking questions that are three layers deeper than what the guy running the $2 billion fund asked? How fast can I get you involved in this and when can you come back?” 

I think, at least when I'm talking to investors, I'm trying to talk to people that I think I would want to work with for the next five years.

In some cases it might turn into working with them for 10 years or even longer. It's a long game across multiple opportunities that we're all in the middle of. Don't get me wrong, it doesn't always work. But I can look back on every board member I've ever had and every individual I've worked with at every investor and found at least one point in time where they put themselves out there to help me.

Arti Arora Raman, founder and CEO of Titaniam:

"This time, I wanted to wait a little bit. I wanted to make sure that that value is built out sufficiently so that we get the valuation we deserve"

What was your mindset the first time you tried to raise money? What did you set out to do? And how did you get some of those very first meetings?

I viewed funding as a success point in itself, which I think a lot of first-time entrepreneurs do. It’s like your first point of validation. 

My co-founder and I tapped our networks. He was well-known, so we got in front of the line easily. And because we cared so much about getting to that milestone, we didn’t prioritize other things such as the evaluation we received, or how much more funding we thought we would need down the road. We didn't do that. But that's not a bad thing, either. I think that's just your priorities at the time based on where you are in your entrepreneurial journey.

For me the first time it was just about getting funding, and we did it really fast. We got it in less than a week. 

Titanium is not funded. This time, I wanted to wait a little bit. I wanted to make sure that that value is built out sufficiently so that we get the valuation we deserve. 

Without revealing any specifics, when do you anticipate you’ll start to raise? Are you going to start to approach VCs through your network? Are you going to approach seed investors? How do you think that you're going to go about doing that?

To that end, I have been “planting seeds” for a while. I built a lot of the details of my idea by talking to people. A number of them are from the venture community. So there's a fair number of people who know our company exists while we haven't asked them for money yet. 

And I'm weighing the advantages of seed or series A because we are further along than your average seed company. I think if we can get a little bit more customer traction, I might go for an A. 

But that's a label. I think at the end of the day, it's about how much money at what price and so for evaluation.

What are you aiming for? Are you optimizing for a valuation in this round, or will it be a dilution effect? Or some combination of the two?

Those are tightly correlated, right? I think the only way to boost that in our favor is to have a strong valuation. Then we could raise enough not to worry about raising money for a while and then build out the company. 

And because we've gotten good at bootstrapping this far, we think we can go to the point where we have a few customers — between two and five — that will stand up and validate the product and speak to potential investors and other customers. So that puts us in a much different position than we would have been had we gone with just our core algorithm or even the beginnings of our product. 

So that's where I want to be. And I feel like I'm almost there. And once I'm there, I'm going to shoot for as high the money raised to valuation ratios as we can command.

Have you considered taking money from your customers, given that they're early customers and they really bought into it or will you strictly go with VC money?

I've definitely considered it. If we can get to revenue that starts paying some of our bills, we're going to see how far we can stretch that because we have customers in trial. So if we convert them, that definitely starts looking interesting for us. Because it's security and there are definitely the lighthouse-type customers that other people follow — for example, in financial services, technology, and high tech. 

Daniel Chait, CEO and Co-founder of Greenhouse:

"Ultimately, we had to write checks to the business to get it started, and I had to kind of BS my way into getting some angel money"

What’s your advice on the earliest rounds of funding? 

My message on first funding is, it's impossible! At least, it's brutally hard. But if you're willing to overlook the odds, you can do it.

I can't tell you how many failures I've had raising money. When we started with Greenhouse, I kissed so many frogs. I had so many people said no, I tried so many hacks, and I basically had to fake it till I made it. Ultimately, we had to write checks to the business to get it started, and I had to kind of BS my way into getting some angel money.

Then once we were off to the races, it was a little bit easier. There was a period there when we were a super hot company and raising money. But that period ended, even as we grew and matured. 

Once you have numbers and less of a dream — as soon as you've got a real business — it gets really hard again, unless you're one of these magical money businesses. 

It’s an insider's club. It's heavily tilted toward people who have already sold businesses and the venture-backed community. It's incredibly biased. The numbers are stacked against you in so many different ways, it's really demoralizing. 

If you're not geared up for that on the way in, I think you might be discouraged and disappointed by how irrational and difficult the process really is.

If you have already raised venture capital and returned money to venture capitalists — or even not returned it! — you're in the club. Raise $100 million and sell for $50 million? As long as you've been through that cycle, investors will tend to look at you as “fundable”.  If not, it’s waaay harder to break in.

Coming from a NY-based, non-VC backed business, entering the Sand Hill Road crowd I found myself in just a very different world. What I realized was I do have a lot of privilege and a lot of assets and a lot of ways into this club, but the key is you've got to get in. So I just looked at it very plainly, like okay, here's what I have going for me. When I show up in the room until I open my mouth, I look like I'm part of the club - I’m a middle-age white guy. I have a technical background, so I can sort of sprinkle some of that in, I can sound like I'm part of the club. Then I literally joined an angel investment group and started doing some angel investing, which was a giant waste of time and money but it got me in the club.

Marwan Forzley, Co-founder and CEO of Veem:

"I think people underestimate how hard it is to raise money, especially the first batch. And especially if it's the first time you're doing it"

How do you think about a first funding round? How do you think about the size of it or the investor base — or how do you even start to get those first phone calls with people?

It varies by founder and by company, but I'll give you my approach: Generally, I don't raise money unless I have customers. You're going to have to tough it out and build the first MVP on your own. So you have to factor in that calculus when you start. 

You may not be able to raise any money until you have some form of a product that customers are using and providing feedback about. And generally, when you do that, you want to make sure that the customers are a big reference point. They're going to be in the sales process with you. 

I mean, you're going to sell to them to get them on the platform, but they also are going to be a big reference point for investors. Investors want to understand, “Is there any verification for this idea?” 

To have a customer stand up and say, "Look, I believe in this. I will pay for it," does 90% of the work. When a customer says, "This product solved my problem this way, and I'm willing to pay for it this much," you have a very good chance of closing capital.

In the beginning, you're probably doing all sorts of pricing incentivization to get someone to use your product. So do you have investors that ever push back and go, “Yeah, but that they're only interested because of the price point?”

It's about making sure you agree with the customer on the pain point you're solving for — and communicating that to the investor. 

Giving an attractive price to your first set of customers is expected. I think it's more important to articulate the pain that you're solving for, and have a customer second that.

Can you remember the very first time you tried to raise money? How did you start?

A lot of it is talking to people who have gone through it before. Telling all of them, telling them what you were working on, telling them that you're going to be raising capital and who do they know? Explain the idea, and find out if they're comfortable making introductions. 

Generally at that stage, what matters is people referring you to other people. 

A couple of founders have characterized the system as a circle you're either in or not. And if you're not in it, there's no entry point, referral or otherwise. You can get a meeting, but you won't necessarily get their money. 

I don't think that's accurate. I think people underestimate how hard it is to raise money, especially the first batch. And especially if it's the first time you're doing it. 

They’ve read that this company raised $200 million, that company raised whatever. And so they think it's that easy: “I just show up, I pitch and I get some money.”

Generally, if you haven't done it before, you're in for a shock. You'll find out pretty quickly that you have to be tenacious, and you have to stay the course and stay pretty hard at it too until it actually generates capital. And it's exhausting.

That's where the disconnect is. It's not so much that the system is rigged and it's all a club where you can't get access. I believe that it’s a question of expectation. 

I think the first of everything is difficult. But, I mean, it's not like it's not been done before. It's just you have to stay the course and have persistence to get the first batch. And then it gets a lot easier — second time, third time, whatever — because you have some track record to work with. 

Do you think there's any big mistake that someone could make in the earliest rounds the first time? Anything that they should really be aware of?

You want to make sure that the people that put money in are going to help you out. At that stage, generally, it's people that know the space, know the industry, or have an inclination that there's something here that you're solving for that's important. And you want to get help so don't just take money because there's money. Take money because somebody can help you think through things, build things, solve problems with you. That makes a big difference. 

Any tips on how to vet someone for their ability or willingness to do that?

You can find out what you're dealing with from their interactions, the quality of questions, the knowledge of the industry, the way they're approaching the topics at hand. You can tell whether they're helpful, they have a point of view, and whether that point of view is additive or not. That all starts to be helpful in determining whether this party you're talking to is going to help you out or not. 

But generally whoever writes the first check is someone who believes that you have solved something in industry that they're familiar with. (I'm talking about the first real check, not necessarily your uncle or your mom!)

Nimrod Lehavi, Co-founder and CEO of Simplex:

"Someone told me once that business plans are like hotdogs; whoever makes them don't eat them"

Tell us about the first seed round at Simplex. How did you think about how much you were going to raise, who you were going to raise from, or when you are going to raise? 

It was a horrible s*** show. We started off looking for a few hundred thousand, and then some small Israeli VC offered to do a million and a half, and then two million. And I had a couple of angels who wanted to put money in from the start. 

And the VC ended up not investing. They dragged their feet through the term sheet; it took them six weeks to sign the term sheet. The two weeks before closing, they said, "You know what? It’s not going to happen." 

So then we signed with the two angel investors at a lower valuation with some penalties and a time bomb: If we don't raise another amount by six months, they’d basically get double their equity. 

We almost ran out of money, and then we managed to get some money in two cycles from the Office of the Chief Scientist in Israel. 

In my next ... whatever ... I would either not raise funding at all, or I would raise from a really good VC who can follow up easily. No angel investors, no micro-VCs, nothing like that.

Ultimately, you need either the markets to completely believe you or the large investors to completely believe you. I'm totally not saying that those investors are better or smarter or understand the market better, but they can follow up and they're less willing to fight you over their cut of a nonexistent cake than angel investors in smaller VCs. 

Their model is that 50% are going to completely get wiped out. Most will return the investment itself. So they're fine with it. It's in their model. It not like they're trying to squeeze you out of another 5% as a penalty or some bulls*** like that. I mean, the amount of overhead going basically to waste because of small investors and angels is insane.

They're trying to figure out what the angle is for them?

No. They bring zero value, and they take a lot of energy. A lot. I think it's even worse with ones who believe they do bring value. No, because first of all, you trust them and you look up to them and you find out they don't understand anything about anything you really need. Maybe some of them will somehow manage to give you some intro, but nobody's going to do your work for you. 

I don't believe in fairytales, just like I don't believe in the fairytales of, I raised $20 million in funding with a PowerPoint. F*** you. Not going to happen. I can't perceive it as something that actually happened.

So how deep into Simplex were you when you started to raise money? Did you already have your MVP built or defined? How deep into your delivery roadmap where you?

I didn't even have my co-founders when I started speaking with people! I guess I was cocky. I was so certain I was going to get the proper team and the proper product. 

And it's kind of an axiom that actual financial companies actually require licenses and stuff like that. You’ll need a lot of money because licenses cost a lot and legal costs a lot. So, it was clear that we need funding, and without funding it's not going to get done. So we worked a few months without funding. But it was clear that we were going to. I mean, hadn't we gotten any funding, we would have shut down. It's not something that we could have run out of someone's garage.

About a year. Basically, we estimated milestones so we could raise the next round. I was completely off by every estimation. In 2017, I was off by orders of magnitude, down instead of up: In 2017, I hit the numbers that I actually quoted in 2014, to everyone's surprise. 

Someone told me once that business plans are like hotdogs; whoever makes them don't eat them. So, not many could do their own business plans. We did some predictions about stuff. We were probably wrong about everything. We made some assumptions with regards to the growth of the market, as well, that really we were completely mistaken.

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What’s ahead

In the weeks ahead, we’ll explore these high-level topics: 

  • Startup Series 7: Hiring first few employees
  • Startup Series 8: Life beyond the first few months

Each post in the series comprises a short set of questions about a specific topic. Our participants will offer their own views and we encourage you to add your voice to the discussion.

Do you have your own questions for Digital Asset’s panel of entrepreneurs? Please write to us at

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