Complete Guide to Raising Capital in Emerging Cities
I've been to a lot of emerging cities that don't have the kind of $ that San Francisco and New York have. My experience has been that these are vibrant and growing ecosystems that are continuing to birth exciting startups and innovation.
Occasionally, I would hear a sentiment that we don't have enough capital in town, and not enough capital wants to come to our town. While the former maybe true, the latter is just a misunderstanding.
As a founder, unless you are serial entrepreneur with exits, you can never, no matter where you are, count on the capital coming to you. This is a) not a thing b) such sentiment isn't something that entrepreneurs can have.
You need to hustle, and nerd out to get funding!
At 2048 Ventures we are deeply convinced that Emerging Cities have massive advantages in building startups.
Increasingly there is a lot of talent willing to live outside of Silicon Valley, Emerging Cities are a lot more affordable, there is growing talent pool across engineering, marketing, customer service, etc.In this post, we aim to give you a playbook for raising capital and starting on the path of building your business outside of Silicon Valley.
Friends and Family
We've written here extensively about sources of capital, including friends and family. No matter where you are, if not awkward, friends and family should be your first stop. Even a few $10K checks would go long way and will prove to other investors that people who know you believe in you as a founder.
Local Founders
At the earliest stage of your journey you should connect with other founders in town. Focus on the ones that raised capital both locally and from out of town investors. Grab coffee with them and download their brains. Learn everything you can about a) Local Investors b) How they went about external investors.
Do not skip this step.Getting information from founders who have done this before you is going to give you massive information advantage. Also, if these founders like you and your idea they will offer to introduce you to their investors. That is the absolute best way to get expand your network and to get the introduction.
Local Angels and Local VCs
The first stop should be angel investors and VCs that are in town. The advantage to speaking with them is you will be able to get feedback and concerns on your pitch without have to hop on the plane. If you like someone and they like you and commit to your round or you can get the whole pre-seed done in town even better.
What you need to think about is a few things. First, do not talk to all angel and VCs in town, that doesn't make sense. Read this post I wrote and this one from my friend Jillian Canning on how to target investors. As a rule of thumb:Only talk to active angels who write 4+ checks a year.
Avoid angels who write 1 check every 4 years. Remember, fundraising is a numbers game.Only talk to VCs who a) write checks that make sense for your round. That is, if you are raising $500K and VC has $300M fund they will not be a fit because their minimum check size would be north of $3M.
Make sure you understand focus area for every investor, whether Angel or VC, if they are not a generalist, and only invest in specific verticals - avoid talking to them if they are not focused on your space.
To sum up, really think through WHY this specific investor would be a fit, focus on hitting relevant investors and maximizing PROBABILITY of getting a check.
How to target Angels and VCs in other cities
Now let's talk about raising capital in other cities. The simplest answer is you need spreadsheet, patience and planning.
First, start by researching angels and VCs across cities who invest in your space. That is, instead of geography, you focus on their field of interest. Take a step back to think about it, and you will realize that it actually makes much more sense to raise capital, whether locally or out of town, from people who are interested in your space.
Use AngelList, Crunchbase and Linkedin to research investors. Look for startups in your vertical who got funding, and see who backed them. Work all the angles to build your spreadsheet - find investors and validate they are a good fit and find startups and reverse engineering who invested in them.
Secondly, and this is critical, figure out a way to get a warm introduction. I don't believe that it is a good idea to cold email angels or VCs who are out of town.
To get a warm introduction, either find a contact on Linkedin or find a company they invested in, connect with the founder, and then ask them to pass a forwardable introduction without endorsement. I understand that this process is not fast, but I believe it will be the most effective. Note the key thing, make it clear that you are not asking the founder to endorse you, just to pass the note.
How to fundraise remotely - hint - there is no such thing
Once you build your list of investors and got the introductions, you are ready to setup meetings. My suggestion is to start with a video call before meeting in person.Video is a lot better than a phone call, so suggest 20 mins video call.
Do not ask for 1 hour or even 30 mins. Make it an easy and quick ask, 20 min video call. Easy asks are easily granted.When pitching via video DO NOT load your deck and walk through it. It is a terrible way to pitch and to make a good first impression. Instead, focus on your background, vision, problem and what is unique about your solution.
Make an impression with YOU not with a deck.Be very clear about where you are located. Obviously do not hide that you are in another city, that would not go well. In general, being non-transparent with investors is always a bad idea.In the end of the pitch ask if the investor is interested in meeting in person, and what materials they would need to continue their diligence.
Plan to be on the road and needing to visit investors, especially if you are raising from VCs - they will almost never invest without meeting you in person.
Plan for travel and think through your schedule BEFORE you start raising. For example, plan on doing 1-2 weeks of back to back first video call pitches, then a week on the road, then maybe second wave of first video pitches and then being on the road again.
I've seen founders just move temporarily to a city where they are trying to raise capital from whether SF or NYC for weeks during the second stage of the raise. I think it is a really good idea. By being in a city for a week or longer you have much better chance of lining up your meetings and pushing the raise forward.
Obviously it doesn't make sense to fly out for one meeting, but if you are in the city for a week or more, you can line up a bunch of meetings and get through them.
Things to not do and not to say
You are in town tomorrow or this week, can we meet. This is absolutely the worst, insulting thing to say to an investor. You revealed that you are not prepared, do not respect their time and don't understand how VCs allocate time. Book meetings at least 2 weeks in advance.
You are in town just to meet this investor. That's desparate and total TMI.
Make a big deal that you are out of town. This is the whole point, it should not be a big deal. You do not want investors to fixate on this.
Show inflexibility when it comes to travel. For example, if VC asks if you are open to flying out to board meetings to meet with them, you should say YES. This is a no-brainer. Historically a lot of VCs would not invest in companies out of town because of travel. While today it is not as big of a deal, still make it easy - say you will fly out every 6 weeks or every quarter.
Ask an investor who are the other investors you should meet with. This is a lazy ask, avoid lazy asks, you can research this on your own.
Talking points about where you are based
Most importantly, show pride and enthusiasm about your home town and explain why you feel your city is the absolutely best place to build this business.
Talk about your network, access to affordable talent, specific businesses that are local that you will sell to, access to universities, great outdoors, etc. Talk about WHY you think your town is the best place for you to build this specific business.
And if you are working on a distributed company where people will be in different place explain why this will be an advantage, talk about how you will build culture and recruit the absolute best talent.In other words, plan ahead, share your vision and turn question marks about Emerging Cities into your unfair advantage.
Reach out to 2048 Ventures
And lastly, in case you haven't figured this out yet, I am a Co-Founder and a Managing Partner at 2048 Ventures. We are geographically agnostic firm investing across North America. We focus on founders with a first-time founder mindset who are creating companies differentiated through technology.
So if you are building something amazing and would like to talk to high conviction investors who move quickly and lead rounds across the country please reach out to us.
