7 capital raising themes that didn’t change between 1999–2022.

In January 1999, as a new founder I raised $250,000 from friends, family and an incubator in Orange County, California. The entry stamp on my Pakistani passport was 13 months old.

What started off as an offbeat Christmas eve conversation set the tone for the next three decades years of my life.

In January 2022 I went back to investors to raise capital to start a digital life insurance company. In some ways the two experiences were remarkably alike. In others remarkably different.

The book that follows has been shaped by these experiences, similarities, and differences.

First, a look at things that haven’t changed.

Connections and warm introductions.

They worked in ’99 and still work in ‘22.

It is easiest to raise from investors who know of you or know someone you know.

I worked at Goldman Sachs, graduated from Columbia Business School, traced roots to tech, Bombay, and Karachi. All the money we raised, all serious conversation, came from warm introductions.

The incubator was run by the firm I did my internship at 14, 16 and 19. First checks were written by friends and family. Serious investor conversations and offers came through people I met at Columbia or at work.

22 years later, all serious conversations and commitments still come from warm introductions.

You can use cold calls and direct messages to practice your pitch, but warm introductions or shared threads convert at a higher rate. A cold call term sheet is like a lightning strike. Everyone is heard of one, may even be witness to one, or seen pictures of some, but the odds of being struck in a year are 1 in 500,000. Perhaps I exaggerate, but even 1 in 500 is not an improvement.

Fish where the fish are.

Founder focus on valuations

I know there is a part in our mind where valuations are important, but valuations shouldn’t drive conversations.

In May ’00, we walked away from $2.5 million at $7.5 million (post-money) because we thought the valuation was too low.

In February ’01, we couldn’t raise $50k to extend our runway by 5 months.

Focus on the long game. The long game is your runway to product market fit and profitability. Not ego, vanity metrics, or what your next-door neighbour raised at last month.

I am not suggesting you hand over everything to a shark on a platter but keep an open mind and be flexible. Valuations are dynamic. They change as market conditions change. Our preferences and positions on how much we are worth should change with them, but they don’t.

Toys and bleeding edge of tech.

Toys were important in ’99 and they are still important to most founders in ‘22.

We delayed our launch by a year in ’99 because we wanted to deploy using XML/JSP/Tomcat vs ASP. I wasn’t a Microsoft fan. I thought ASP was unstable and the future would have no space for it.

I thought using a futuristic tech stack would give us an edge. I was wrong. The future edition was buggier than the old school option. The choice made us miss our launch and funding window.

We see the same notes today when founders meet tech stacks. Tech stacks are one part of the value equation for a business, they are not the complete equation. There are basic elements a business has to get right before tech starts to weigh in.

The music.

We didn’t expect music to stop in ’01. When it stopped in January, we didn’t notice till May. We thought it would restart again in September. It didn’t. It didn’t start for the next 2 years.

When the music stops, the resets are going to take longer than your liquidity pool can last. Don’t count on being lucky or the music restarting, just for you.

If it does, it’s a lightning strike.

Do your math assuming the funding funnel has or will run dry. Sometimes that means you pull down shutters, lock your dreams and run for cover. The only exception is follow-on funding rounds.

Follow on rounds.

Even if your investors have deep pockets, will they commit to follow-on rounds?

If they do, will you take a down round?

You are likely to go to market about four times before your model hit sustainability. Are your investors playing a fad or will they stay for the full ride?

Pick investors with enough dry powder and commitment to do a follow-on round. A down round is better than an abrupt truncated runway. A committed investor who understands how hard it is to make something work is better than a high profile one.

Your call.

Fund horizons and forced exits.

A wall that hit us in ’01 and ’08 and still bites in ‘22.

Remember, you are running against a schedule. You have 8–14 years to make it work and hit the exit.

Where are you on that timeline? You will be culled if you are too far from the gate.

Numbers game.

Remember the 1 in 500 odds.

Work the phone, feed the funnel, seek out warm introductions, force the odds.

Fund raising is a full-time job. Don’t delegate it. Don’t outsource it. Don’t ignore it. There are no shortcuts. If you have the numbers, you can make a lightning strike work for you.

All the Journal and FT stories about a founder hearing no 80 times before hearing a yes are true. These are the teams that made the front page. But not us. You and me, ordinary folks, will be in the thick of triple digits before the math works for us.

Numbers need time to work their magic. Give them a fair chance. Be prepared for a long and hard slog.

Now, a list of things that have changed. But first a qualifier.

The transition didn’t just happen across two decades, by itself. The seeds were sowed in 50’s and 60’s by our parents’ generation and the generation before them. I often contest the claim that we did it on our own and by ourselves. We didn’t. We are where we are not because of our brilliance but due to the commitment of earlier generations.

Change is slow and takes time and effort. Very few remember the first strike on unbroken ground but first strike is where it starts. Credit where credit is due.

Handshake deals.

I have raised capital 5 times. 4 were handshake deals.

The money was wired into our bank without signed documentation. A gentlemen’s agreement. The paperwork followed later.

Handshake deals still happen but are getting rarer.

Access.

In 2000 conversations only happened when we were physically present in NYC, Chicago, Boston, LA, SF, and Dubai.

2 years. 6 cities. 9 serious conversations.

In 2022, the math has improved by an order of magnitude.

3 months. 70 pings. 35 active leads. 54 responses. 37 meetings.

Multiple cities and time zones but managed on two desks. One at work, one at home.

There has never been a better time to raise money. But only if you are a qualified founder, meaning

a) You can work the process.

b) Have credentials and network.

c) Are as determined as a pit bull.

d) Are flexible and sharp enough to pivot; and

d) Have back up to survive the winter of funding.

We are on the map.

Three generations and a long list of individuals have worked hard to put us on the map.

In 2000, despite a back-office team in Pakistan, our primary revenue generating market was North America.

In 2022 the primary market in our pitch is Pakistan.

Support Network

Need a template for NDA, work for hire contract, intellectual property lawyer who takes equity, local tax accountant familiar with Delaware LLC, reference check on Armenian investors? Warm intro to someone’s cousin at Sequoia Capital.

Stuff dreams were made of in 2000. Live in 2022.

Mindset

In 1999, when Ammi asked me about my post-MBA plans, she couldn’t parse how I planned to pay NYC rent without a job.

In 2022, when I tell her I am raising $6 million at $18 million (post-money), she doesn’t even blink.

Ammi is a 75-year-old conservative desi mom. It’s like asking her to try sashimi or Kobe beef.

The mindset wasn’t just an issue with parents but also with kids around me at FAST NUCES, IBA, and LUMS. My classmates and friends’ thoughts I was nuts. Some still do.

There is a question I ask my students when I teach the entrepreneurship course.

“Ask yourselves what is the difference between you and your peers at Stanford, Columbia, and MIT? You are just as smart, hardworking, and driven.”

The only difference is that they think they can, and you think you can’t.

30 years ago, I thought my peers outside Pakistan had an innate advantage. It took me a decade to figure out that it wasn’t true.

This new generation already knows it’s not true. It’s just mindset. They don’t carry the baggage I did. They have gone critical. They just don’t know it.

That is all I had on comparing experiences across two decades of raising capital. There is one last bit of advice that I would like to share before I let you go on to read the materials that follow.

Just after the ’08 melt down, I ran into this smart founder I had once mentored. They are on their way to make a big mistake. I tell him don’t. He asks why?

I say because I lost my shirt doing this, you will too.

He says, just because you were stupid and unlucky, doesn’t mean we will be too. Ouch! But fair enough.

Stupid and unlucky?

Given a choice betting on smart and lucky vs stupid and unlucky, which one should you bet on as a founder? Bet on being unlucky.

The odds are higher that your first path, your first choice is off. That you will have to start all over again. That things will not work out. That you will leave a deep hole in the ground.

Be prepared for it and you won’t be blindsided. If luck does smile at you, treat it as a bonus.

I know it doesn’t make sense. Optimism is our life blood as founders. Be optimistic. But don’t ever take luck for granted.

Lows workout but it gets hairy and scary before they do. If you are not ready for that part of the ride, you are not ready to ride. It is a fine mix, a delicate balance. Optimism and paranoia. Side by side. Schizophrenic to put it mildly.

We achieve balance at the point where capital, valuation, runway to launch, dilution and our ability to read tea leaves meet. There are no well tested rules of thumb. Such as for every dollar you plan to raise, raise 2.

Every now and then, you will feel both lucky and smart. When that happens, remember to give luck equal credit. Yes, there are rare exceptions who will even leave luck feeling empty handed when it comes to a final showdown. But that is not going to be you and me. Don’t ever count on that.

Smile back if destiny smiles at you. Put your head down and work through it if she doesn’t.

Extract from Founder Puzzles, 2nd Edition. A founder tool kit for making smart decisions, building products and raising capital, faster.

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