You might think that having created and sold one company would give you a big boost when it comes to fundraising, but Sean Byrnes of Outlier AI says you can only count on your resume to get you so far.
“I don’t care how many times you’ve done it before, how much success you had,” Sean says, “fundraising is always difficult. It’s easier to get that first meeting with investors, but that’s where it ends.”
Sean’s first startup, Flurry, helped clients collect useful data. (Ed. note: Flurry was was acquired by Yahoo for $300 million in August of 2014). His current company, Outlier AI, helps customers figure out what to do with data, using artificial intelligence to analyze small shifts that have the potential to reveal big opportunities.
“Today, everything generates so much data: sales processes, marketing, payment systems, accounting systems,” Sean says. “A lot of companies have a hard time knowing where to look.”
Sean and his co-founder figured out how to make the analysis simple and quick, but then they had to start fundraising for their fledgling company. They reached their goal of $1 million within six months. A little over a year later, they went on to raise $6.4 million of Series A venture funding led by Ridge Ventures along with First Round Capital, Homebrew, Susa Ventures, 11.2 Capital and SV Angel.
Luckily for us, Sean doesn’t think his experiences in the fundraising makes him an outlier. Here are a few nuggets of wisdom from his interview on the “How I Raised It” podcast:
1. Screen for compatibility
When Sean raised funds for his first company ten years ago, there was a pretty defined path — you marched up and down Sand Hill Road with your business plan until you found an interested investor. Now? It’s a bit more like speed dating.
“It used to be a cookie-cutter process, which was very frustrating,” Sean says. “Now you can follow a kind of ‘choose your own adventure’ path, as there are a lot more funding sources out there, but it requires you to do a lot more work to find the right investor.”
Sean’s criteria are pretty simple: industry knowledge, experience and involvement. He looks for investors who are ready for a long-term relationship.
He avoids investors who have jumped into AI because it seems like the next big thing, as well as investors who might be too eager to “have some quick exit so they can raise their next fund,” he says.
“There are a lot of funds that just throw money at you, wish you good luck and hope you come back with more money in the form of returns,” says Sean. “So it’s important to find someone who really wants to be involved.”
2. Probe vs. pitch
“If you’re a first time founder, you’re in sell mode. You’re like, sell, sell, sell,” Sean says. “Take a breath and ask investors a few questions. How much of their fund is invested? How many more investments are they going to make this year? How long does it take them to make a decision and what is their process?”
According to Sean, life cycle of the funds themselves are just as important as the experience of the investors, and the only way to figure that out is to ask the right questions.
“Maybe you find a firm that’s really interested, but they’ve already finished investing in their last fund and they don’t actually have any money,” he says. “So it ends up being like customer development — trial and error. I don’t believe there is a fast or easy path to it.”
3. Cash is cool, but terms are king
“Terms are are always more important than the amount of money or the valuation,” Sean says. “As founders, we get kind of obsessed with the dollar signs on the piece of paper.”
In his work coaching entrepreneurs through Velocity, a University of Waterloo accelerator program, he says he was able to help avert a few horror stories.
“I saw things in those terms sheets that literally horrified me, like veto rights on any major company decision,” Sean says. “There’s lots of terms out there that are nonstandard and somewhat frightening.”
Sean says to make sure you’re having conversations about boundaries before you ever get a terms sheet, or you might not have a choice. The good news for investors today is that the process is pushing toward increased transparency.
“In the age of AngelList, there’s a big incentive to have ‘standard terms,’ so it’s going to be a rare investor who tries to introduce these crazy things,” says Sean.
4. What’s that cologne you’re wearing…is it “Desperation?”
When you’re looking for your perfect match, it’s important not to be too needy.
“It’s better to raise when you don’t need the money,” Sean advises. “Because if you really do need it, you’re in a difficult spot, and investors will intuitively sense that and use that against you.”
Sean also advocates maintaining as much independence as possible.
“I believe in raising as little as possible because I think that’s how you control your own destiny,” he says. “I think a lot of people get very excited by handling big valuation numbers and raising a lot, because it is an ego boost to say, ‘I just raised ten million.’ But really all you’re doing is constraining yourself and reducing optionality in the future.”
5. VCs rock — put them to work
“Just as a general rule in life, people will very rarely do things unless you ask them to, and that’s true of venture investors as well,” says Sean.
He treats his investors like board members, sending out monthly updates so they stay engaged in the daily operations of his company. He makes sure that there isn’t too much of a power imbalance in their relationship.
“It takes a lot of self confidence to say, ‘I’m not trying to win your approval,’” Sean says. “The best CEOs and the best founders make that shift, because they have to.”
6. Raising capital and growing a startup is harder than it looks
“If it’s difficult, it’s not you,” Sean says. “It’s just difficult.”