Raising Money in London Almost Killed My First Startup
We planned to move my first startup from San Francisco to London in 2014. Social media marketing in Europe was 1–2 years behind the US. Techstars London invested in us, and we already had a toe-hold in the market. The new financial partners were in place; we had $600K “committed”; and our families were excited to move. We were going to absolutely crush it!
Then all of a sudden, the dream was shattered. The round fell apart as we approached closing. This nearly killed us and was the second time we’ve escaped death.
The Decision to Move
I know what you’re thinking: Why the f*ck would you move out of the mecca for startups?!? We moved to London in March 2014 to join Techstars. We fell in love with the city and the startup community. The market we were going after was 1–2 years behind the US. Then our visas ran out, and we had to move back to San Francisco in July.
We didn’t fundraise after demo day. Our product was early and we had a cash in the bank. For the next 4 months, we were heads down coding and talking to customers.
In October, a prolific UK angel was in town and we talked about raising a round in London. He committed to leading two days later. We booked flights and an Airbnb for all of January 2015 to raise money.
Meeting with Investors
The plan was to raise $225K. The lead investor helped build momentum by making tons of intros and getting angels excited about us. By the time we landed in London, he asked us to save $125K between him and a few friends. Our story was simple:
- San Francisco startup wanting to move to London - Ex Google, Yahoo and UC Berkeley engineers - Techstars vetted - Hockey sticking MRR graph
Meetings with investors were pretty straight forward. I filled up the calendar with 5 meetings a day for 3 weeks straight. Each meeting was simply shaking hands, showing them our metrics, and letting them know our allocation was almost full. In fact, we were completely full within 5 days.
The lead investor encouraged us to get it closed quickly and not try to do anything fancy. He warned us that investors were always looking for the next hot startup.
We were that hot startup. We felt unstoppable. Almost every investor we met wanted to be a part of the journey. FOMO was real, and we leveraged that perfectly.
Getting Too Fancy
All the meetings were already set up, and I figured it wouldn’t hurt to see what it would look like to raise more. This led us down a path that just wasn’t recoverable.
We had planned on taking money only from angels. We never even considered raising from institutional investors. However, a fund wanted to invest. The team seemed smart and was product focused. They wanted to match the amount the angels were investing. So we now had $450K and the dynamics changed.
We were no longer going to raise a small amount of cash and stay lean. We were gonna slam on the gas pedal. We worked through the financial projections on the use of the money. So I turned around to the fund and explained where we could get with $600K.
They were onboard, and I let everyone who committed know about this new plan. Everyone was excited about being part of something big. Like I said, we were unstoppable. Our last meeting was with all the partners of a top VC firm.
All Downhill from There
If the VC firm invested, we were looking at a $1M seed round. They passed and that was okay. We never wanted to raise that much money and we never told anybody about the million dollar plan. However, it was time to get everything legally sorted out.
We hired a UK lawyer and accountant to collaborate with our US counsel. A standard US-style term sheet was drafted and circulated to the investors. The lead investor’s lawyer tore it apart as it looked nothing like the UK-style term sheets.
Holy crap! Week after week of marking up the term sheet and all of a sudden 2 months have passed. Investors were getting bored waiting for all this paperwork to go down, but we’re super close to getting this all closed. Some people have signed and wired money in.
The Money Just Vanished
Uh-oh, the fund who was going to put up half the round tells us they were no longer investing. Getting the legals together was too slow for them. They gave us a small window to get this closed, and we missed it.
I had the fun task of telling all the other investors that we were going to raise only $300K now. There was a group of people that were still happy to invest. Thank you for your support! Since we took so long and with the fund out, some other people dropped out of the round.
At this point, we were looking at less than $200K. That hot start-up was suddenly not looking so hot. The lead investor wanted us to lower our valuation; we racked up $30K in legal fees trying to get the round done; we almost ran out of cash in the bank; the charges hit on our personal credit cards for the fundraising trip; and our growth slowed down.
A Million Things Raced Through Our Heads
Where do we go from here? Is this situation even salvageable? What do we tell our wives? We took a step back and tried to look realistically at our current predicament. We needed to find a way to give our company the best possible chance at succeeding. Moving to London no longer made sense, as we would need to pay for the relocation of our families, immigration fees, UK branch setup fees, desks, etc...
To be frank, we were pretty distraught, depressed, and frazzled at this point. Fundraising was the top idea in our mind for 3 months, and it almost killed us. I have to say that Ryan and Kyle from Keen were super supportive during this time (a big thank you to the Techstars network.) They encouraged me to think about just starting over.
Once we stopped holding on to the London fundraise, we knew exactly how to give our company the best chance at succeeding.
That meant staying put in San Francisco, keeping our burn low and returning to our exponential growth. We did end up raising cash using a SAFE in four days.
The key lessons learned:
1) Don’t get too greedy with raising money. Take what you need, close the deal, and get back down to building the business.
2) Fundraising is a huge distraction. Try to batch the process in a short timeframe. Then get back down to building the business.
3) Failed fundraising rounds happen all the time. Accept it. Get back down to building the business.
About the Author
Sherman Lee is the co-founder of Rocco.AI – your AI-Powered Social Media Marketing Assistant. He worked with over 3,000 global brands on social media strategy as a first time founder with GoodAudience.com. That led to a crazy business adventure around the world. From almost getting kicked out of Techstars London to building a remote/distributed team, he now finds himself tinkering with AI in Hong Kong.
Originally from San Francisco, Sherman studied computer science at UC Berkeley and got a high paying job at Yahoo. He spent 5 years heads down in big data and machine learning. The content platform team he was part of scaled from 0 to 600M users. With a rare combination of machine learning and brand experience, he is going to disrupt the social media industry.