Techstars’ Cohen Opens Up About Attracting Investors, Raising Money
What can a cute puppy in a pet shop window, couples therapy, and dating teach entrepreneurs trying to raise money from investors for the first time?
Plenty, according to Techstars founder and CEO David Cohen.
Cohen—who also is an investor with more than 400 deals to his credit—gave a talk Monday night about finding funding and working with potential investors.
Less a typical presentation than a guided Q-and-A, complete with role playing, the talk was a version of one Cohen gives at Techstars. Only instead of addressing the founders of the 10 or so companies that made the cut at the Boulder, CO-based accelerator, Cohen was spreading his message to a few dozen local entrepreneurs who packed the Techstars headquarters.
The event was part of the “Seven Weeks of Awesome” series Techstars is hosting in advance of the May 4 deadline for applications to its Boulder program, which will begin July 15.
Cohen’s wide ranging talk touched on everything from convertible debt to the dangers of a poorly executed AngelList campaign. Here are some takeaways from his remarks.
About that puppy…
It’s up to entrepreneurs to attract the attention of potential investors, and ideally not just one, but many, Cohen said. Having multiple options sets up a favorable dynamic for entrepreneurs, creating a situation where investors are afraid of missing out.
Cohen likened it to being “an unbelievably cute puppy” that draws a crowd outside a pet shop window. Not only is the dog attracting attention, but potential owners begin to worry about someone else making the purchase before they can.
Investors are often susceptible to the same worries, plus having such evident interest in a company creates the impression it has built up momentum, which is crucial to getting investors to commit.
“You have to, when you’re raising a round, manage the momentum,” Cohen said.
Failing to do so may be one reason a startup might join AngelList with high expectations but see few results, Cohen said. A company might promote itself well enough to attract followers, but make the mistake of doing so before it has raised enough to convince angels it’s a good investment.
Each week it lingers on the site without making progress, the worse its prospects and reputation become.
“If you make noise when you have nothing, you’re just advertising that you suck,” Cohen said.
His advice was to set a reasonable target for how much you want your startup to raise and raise a third of it before launching an AngelList campaign.
A magic threshold?
Something good seems to happen for startups once they succeed in getting enough commitments to account for one-third of their round.
Cohen said that 80 percent of Techstars companies that have raised one-third of their seed round before demo day go on to hit or exceed their targets. On the flip side, only 20 percent of the companies that haven’t reached the one-third mark by demo day are able to pull it off.
Cohen’s tip: “When you raise money, ask for a manageable number that’s about three times what you have committed. That’s the shortcut, it’s like magic.”
“Investors like to invest in companies with momentum,” he said. “A third, it turns out, is real momentum. Half is a lot of momentum. There are a lot of followers, especially angels, that will come in only once there’s significant momentum in the round.”
Cohen conceded that reaching that milestone isn’t necessarily easy. “Getting the first third is actually the hardest,” he said. “It can take four months to raise the first third, then the rest can take a month,” he said.
A corollary to that is that entrepreneurs might want to aim a little low when setting their goal for their seed round.
That’s okay, he said, because experience with Techstars and other startups has shown that companies that successfully hit their target often raise more than they originally expected.
“Almost everyone who successfully raises money raises more than they set out to initially,” Cohen said. “Asking for less can get you more.”
The art of the soft commit
Investors can be a lot like dates—they like to get to know a person before making a commitment and often like to be courted. But try to get serious too quickly, and it can scare them away.
That’s why eager entrepreneurs should take it slow and look for something less than a full commitment in the early days of their relationship with an investor. It might mean fighting their gut instincts to close the deal right away, but it’s a better way to go.
“The idea is you want to reach a soft commitment,” Cohen said. “Soft commitments are a very, very powerful tool.”
Cohen said the key feature of soft commitments is they come with “specific, well-understood conditions.” If the entrepreneur can’t meet the conditions, he or she should expect the investor to walk away from the deal.
Determining those conditions is a key part of the negotiation. For that, Cohen recommends entrepreneurs learn about reflective listening. It’s a technique often recommended by therapists to make sure couples are on the same page. In the case of entrepreneurs, it means “playing back” key parts of a conversation to make sure there are no misunderstandings over conditions, terms, and next steps.
It’s also a lot like traditional salesmanship as you work through sticking points to close a deal, he said.
Soft commitments can open doors for entrepreneurs, Cohen said. For one thing, they can lead to introductions to people in the investor’s network. They can also allow an entrepreneur to tell others an investor has committed, helping to build up the momentum necessary to raise that crucial first third of a round.
Raising money is hard. Find people who can help.
For all his talk of puppies and dates, Cohen’s ultimate message was one of caution.
“The takeaway that I hope you all get is this stuff is really easy to mess up,” he said. “You have to surround yourself with people who have done this before, because you’re at a massive, massive information disadvantage.”
“Seek people that have real experience in this, either as advisers or… investors that are just on your side,” he said. “Leverage the network you have to find people to help you with this. It’s hard.”
Cohen ended by volunteering to review term sheets of deals he isn’t a part of to help founders understand if they’re getting offers that are inline with the rest of the market.