By SUSAN LAHEY
Reporter with Silicon Hills News
Kerr spoke glowingly of the help, support and advice he got from Capital Factory. He talked about building relationships with various angel investors over coffee, lunch or drinks until he gave them the ask. And he gave interesting tips: For example he suggested telling angels he’d love to have them invest even a small amount just to get them involved, and usually they upped the number because the investment he suggested seemed too small.
And the company wound up with $1 million seed round.
By contrast Utz Baldwin of Plum (formerly Ube) said finding funding for hardware like his lighting system that can be operated by your smart phone has found few Austin funders. It did, however, raise nearly $1 million on Fundable.
Finally, Cotter Cunningham of RetailMeNot explained that funding had been a little bit different for his company because his business model entailed buying existing businesses, which is an easier sell in some ways than getting funding for an idea alone. He got a $30 million round.
The panel, moderated by Shari Wynn Ressler, founder and CEO of Incubation Station, explored the process and hurdles of getting funding in Austin. All the panelists agreed that raising money is pretty much the CEO’s full time job, which can be a challenge.
For one thing, as Baldwin said, there were parts of developing the user experience he really wanted to get more involved with because it’s part of the business he enjoys. But he didn’t have time because he was busy raising money. Kerr said his team initially resented the fact that while they were doing the work of creating the company, he was wining and dining investors. Once he got the money though, they forgave him.
Beware the Soft Yes
“It was a little tricky with our model,” Cunningham said, “because it’s difficult to raise money and do an acquisition at the same time.” On the one hand were the funders doing their due diligence and collecting data and on the other were the selling businesses asking “Are we going to do this or aren’t we?”
Kerr said he kept the amount Written was asking for small, so that it looked like they were close to success. Then as more money came in, he upped the raise amount.
Cunningham and Kerr worked on building their networks, asking “Who do you know?” Baldwin wound up raising money from people he knew might be interested in the idea. After a ten minute phone call to a retired Cisco executive, for example, the exec gave him $150,000.
People who initially say no might change their minds if you make tweaks to the product that they suggest or if someone else takes the lead investment position, panelists said. Cunningham said “You have to be persistent. “Some of the people who gave us money told us ‘Until you called four times we weren’t paying attention.’”
But when making the ask, you have to know exactly how much money you want and exactly what you’re going to do with it. You also need to have practiced your pitch “a million times.” Cunningham said. And it’s best not to shoot for your most likely big funder on the early pitches. Practice on less likely candidates so you have it down when you’re shooting your big gun. That was a mistake Kerr made, going to Austin Ventures with his first pitch.
“In a matter of seconds I became uninvestible when they asked what we were doing with the money,” he said.
All the panelists experienced “the soft yes” which is not a definitive no but a “let’s keep talking” that never results in anything. Entrepreneurs need to guard against the emotional roller coaster of thinking a soft yes is the same as a yes.
Baldwin said that after his company won a People’s Choice award at DEMO, Sandhill Road (investor central in Silicon Valley) opened its doors to them. But one investor would say “You don’t want to be a hardware company, you want to be a software company” and another offered suggestions about the company’s business model. Baldwin was changing up the pitch deck after every meeting and he wound up with a garbled story.
“You have to nail that pitch. Exude absolute confidence in what you’re doing, demonstrate absolute domain knowledge and ask at every meeting if there are any red flags. ‘What do you see in this that would keep you from investing in my company?’”
Know Your Investor
While a hardware product like Plum’s, has trouble finding funding in Austin, the others talked about the difficulty of getting funding from outside Austin because investors often want to be able to keep a close eye on the companies they’ve invested in. But Cunningham said he’s had success pitching the benefits of Austin, such as a much lower attrition rate than that of Silicon Valley.
“In Palo Alto, most of the companies have a 20-to-25 percent turnover rate. Someone will be sitting in the office saying ‘I just got a call from Twitter and they’re willing to offer me 50 percent more than you’re paying me. In Austin that doesn’t happen. Our voluntary attrition is under five percent.”
Any form of investment takes a lot of investigation, panelists said. Friends and family may cough up the money but they’ll call every week and ask how their money is doing or require reports you wouldn’t normally have to generate, which is a time suck. There are numerous angels in Austin who go to all the meetings but invest very little. And there are some investors who are more trouble than they’re worth. It’s important to call their references and find out if they’re the kind who like to call you up at midnight with a question.
Entrepreneurs structure deals differently as well. Baldwin said his Fundable investors were happy with uncapped convertible notes and responded to discounts for early investors. Kerr, though, said all his early investors expected caps.
All the panelists said it was crucial to hire the best attorney available, not to scrimp or hire a relative. Kerr suggested finding an attorney who would work for equity.
At the end of the session, one audience participant asked where a new Austin startup could go to find more information about funding and Kerr recommended Capital Factory, which he had mentioned several times through the session. Claire England of Tech Ranch stood and asked a question, prefaced by the comment: “There are a lot of resources out there besides Capital Factory” to which Kerr responded that he wasn’t trying to be an advertisement for the incubator/accelerator.
Baldwin leaned over, looked at Kerr’s Capital Factory t-shirt and said “Nice shirt.”