Convertible notes and SAFE docs have become standard for pre-seed and seed rounds in Silicon Valley, but not enough startups are using them to their full potential.
Back in 2010, Paul Graham introduced the idea of “high resolution fundraising,” made possible by the rising use of convertible notes. Convertible notes made it easier to give different terms to different investors. You could give better terms to a more helpful investor or one that committed quickly.
On the other hand, traditional fixed-size equity rounds were low resolution because every investor typically got the same price and terms, no matter how little they’d helped or how long they held out.
Graham predicted that in the coming years, founders would raise more quickly using notes, and they would also be able to optimize the terms and minimize dilution. They would take some of the power back from investors who tended to hold out and wait to see who else was participating.
At Chameleon, we raised a $1.9M seed round in 4 weeks with high resolution fundraising. We progressively raised our valuation cap to break deadlocks and get investors to a decision point as quickly as possible.
What made high resolution fundraising so powerful was that we were able to align incentives and reward the investors who had supported us the most. That helped set the foundation for us to succeed with our investors for the long-term.
How to structure your raise and stick to it
Pulling off a high resolution fundraise requires significant up-front planning.
If you don’t structure it as a high resolution fundraise from the get-go, you won’t be able to give investors the notice they need for it to feel like a fair and rational process. On the flip side, this process isn’t for the faint of heart—you need conviction and preparation to make it work.
Here are the basic steps we followed:
- Start with a relatively low valuation cap: You need to make the deal look attractive to angels, so the investors who take a chance on you that early should get a good deal. If all goes well, this number will go up.
- Let investors know how long that valuation cap will stand: The time frame for the terms provides the forcing function to encourage investors to make a decision quickly. This saves everyone time.
- Prioritize your list of investors: Once you have an idea of who is interested, you need to prioritize your prospects. This will help you find a lead investor and land a champion to close out your seed round.
- Follow-up after meetings: Answer any questions that investors have and get the yes/no decision.
- Get docs signed and funds transferred: Making palpable progress will raise your spirits rather than doing a mega-close of every one at the end.
- Raise the cap for the next round of investors: Increase your valuation cap with confidence knowing that you brought in the previous set under comparable terms. Let outstanding potential investors and new contacts know of the increased valuation cap.
Don’t try to wing it—coming in with a plan is the only way to make high resolution fundraising work. This is a time to learn from other people’s mistakes, not your own.
Land a champion that will seed the process
Your champion is more important in a high resolution fundraise than in your typical one. That’s because you need an investor that offers more than just cash. You need someone that will generate so much investor interest in your company that the momentum will carry you from your starting term sheet to one with a higher valuation cap.
We found our champion in Auren Hoffman.
As an active angel, Auren typically puts in $25,000 checks—but he decided to put significantly more into Chameleon. He helped us strategize on how to put together a $750,000 angel round to start with. When it came time to raise, he opened up his massive network to us.
Getting Auren to invest was like having a demo day at a top accelerator. We were immediately set up to do 8 to 10 meetings per day just based on his network and influence.
Paul Graham wrote about high resolution fundraising from his perspective running Y Combinator and mentoring the best and most highly sought-after companies through the fundraising process. You need that kind of investor interest to make sure each round is constantly filling out so that you can continue to raise the valuation cap.
If you don’t get into YC (as we didn’t), build the best product you can and find your own champion.
Tool up for the onslaught of meetings
High resolution fundraising is all about momentum. To do 8 to 10 meetings a day, you need to send 10x that many emails and follow-ups every single day. That’s why you need to get extremely organized and tool up.
Here are the tools we used:
- DocSend for sending your deck: Gives you data on who is opening and what slides they’re interested in.
- DocuSign for sending docs: E-sign to get the process done fast and have everything in one place.
- Prosperworks for your CRM: Your email and call load is comparable to a sales rep. You need a tool to track who is in what stage of the process and who you should touch. In your CRM, segment your investor wishlist by Round 1, Round 2, and so on, based on the order in which you’ll reach out.
- Google Calendar for scheduling: I did all of the scheduling myself in Google Calendar to make things personal and show respect to investors. To make things more efficient, use Calendly or YourRemoteAssistant.
When you’re ready to get the ball rolling, split your potential investors into rounds, leaving the potentially tougher or more valuable ones towards later. Ping all of your Round 1 investors (who are easier to land) and start getting meetings set up.
To maximize your efficiency, investors should come to you, or you should do a video call. If you travel, you will lose a lot of time in between meetings. We got some space from Galvanize in SOMA, San Francisco, courtesy of Silicon Valley Bank.
At 8 to 10 meetings of 30 minutes each per day, you’re spending 4 to 5 hours of your day in meetings. All remaining time you’ll spend sending follow-up emails and scheduling meetings.
How to deal with pissed off investors
High resolution fundraising is still non-standard so you will get some push back. Some investors will view it as cocky and entitled, and that’s their prerogative—you’ll know quickly it’s not a fit and move on.
- One potential investor we talked with got peeved that previous investors got better deals than he would get. He wanted to know about deals specific people got. This was a red flag and we walked away.
- Another couple investors were unhappy that we changed valuation cap as its time expired. We stood firm on the valuation cap change and they pulled out of the deal.
To make high-resolution fundraising work, you have to be disciplined about it. You have to follow your own ground rules, otherwise you do a disservice to the investors that believed in you, adhered to the process and committed quickly expecting to benefit.
Stand firm on your terms and apply them equally to every investor to give integrity to the process.
Fill out your seed round with a VC and get back to work
Once we had hit our initial early target of $750,000 within the first week, we moved onto meetings with VCs. By this point, we not only had a solid angel round done, we had the data to justify a higher valuation cap than we would’ve if we’d brought them in first. That helped us bring on the right partner while minimizing dilution as a side benefit.
We spoke and met with 4-5 VCs, but as soon as we had an offer from True Ventures, we withdrew from consideration at the other firms. The partners at True told us that they’d heard from sources they trusted that they should invest in us. They were excited about the space and the product that we’d built, and wanted to come in for more than we initially had space for.
Six years after PG’s grand pronouncement about high-res fundraising, too many founders are still using convertible notes as if they were raising an equity round. They get all their investors in, agree on a valuation cap and terms, and then close the round and put the cash in the bank. They’re doing low resolution fundraising using high resolution convertible note and SAFE docs.
High resolution fundraising allowed us to fill out our seed round with a VC and get back to work on what we love doing—building the product.