Designing a Fundraise: Lessons Learned from Flatfile’s Successful Investment Rounds
By: Eric Crane
Tags: Pitching, Entrepreneurship, VC, Venture Capital, Fundraising

While 2020 will go down in history as memorable (we’ll leave it as “memorable”), Flatfile had reason to celebrate this year with a $7.6 Million seed round that we officially closed in April, just a few months after our pre-seed in July of last year.

Given the sizable seed round, I’m often asked questions about our fundraising and specifically, how we accomplished pulling together a seed round in such a short timeframe (about a month), right at the onset of the current global health crisis.

Below I’ve outlined a few of my lessons learned from Flatfile’s first two investment rounds.

Find creative solutions in the early days

At Flatfile, we created a new category: data onboarding. Any company that has ever had to import customer data understands the struggle of getting usable data into their system. When David (my co-founder) and I worked together at Envoy, we were frustrated by the data import experience, and further, that we had to build yet another bespoke solution to a problem we had solved before. So we started simple with the first version of Flatfile Portal: a drop-in data importer for your web app.

We were encouraged by the dozens of signups we saw after the first couple of months of 2018, but we also weren’t 100% certain if what we had was a standalone product that we could build a business around or simply a feature. We needed to develop our idea further and get help.

The biggest expense for any startup is hiring brilliant operators. We wanted talented people to help us launch, but we simply didn’t have the cash. So David came up with the idea of issuing SAFE notes: not to investors, but employees. We asked them to invest their time to get us up and running and that, in return, gave them a future equity stake in our business. Typically early capital from investors means you can then build your team; we circumnavigated that step.

We didn’t have capital but wanted to move the business forward between our founding and a pre-seed round. This creative solution required zero dollars, and earned us the most valuable resource of all: time.

Fundraising as part of a go-to-market motion

Speaking of time, when is it time to raise money? Just search on YouTube and you’ll find hundreds of videos, each with a slightly different point of view. My point is: it should always depend on your business.

For us, it meant proving two core theses of the business: that the market need for data onboarding was broad and that we could solve that need with our software. So we simply included fundraising as a part of our go-to-market strategy. We spent late 2018 focused on product development and user research. January was focused on positioning and customer acquisition. In February we publicly launched. And by March of 2019, we knew we were onto something: 25 paying customers, about as many unique use cases within that group, and a strong core team.

We kept our pitch deck simple and easy to iterate on. This slide is from the first of about 50 iterations.

But we didn’t go slinging decks across VCs’ inboxes. Cash is a means to an end, so we defined our end result first. We had proof of a broad market opportunity, willingness to pay, and a repeatable customer acquisition motion. What we were lacking was the ability to bring on a full-time team and fuel for our customer acquisition tanks.

That ruled out the accelerator route, as it’s largely designed to prove things we already had. Simply raising from angels by issuing notes over a broader period of time meant less market signaling and not enough cash to bring the team on all at once. Our ACVs at the time were too small to rely on customer dollars to achieve those objectives.

With this information, we knew that institutional VC was the best route for us. Those investors would be engaged with how we built our customer acquisition model, provide more capital at once, and take a more meaningful stake in the business.

Designing our first raise

By April 2019, we were ready to start pitching, but neither David or myself had any experience raising institutional capital. Given our product backgrounds, we approached fundraising with a product-oriented approach. Our planning broke down the steps as if we were creating or planning a product.

Right before pitching a “lead user” in San Francisco.

We found lead users — investors outside of our target list — to provide feedback on our MVP — the first iterations of our pitch deck. Growth funds and Series A/B specialists were excited about taking low-expectations meetings with us, and their feedback was invaluable.

Our growth engine for the fundraise was network driven, but highly intentional. We built a CRM in Airtable, where we took notes, advanced stages, and noted key value points for each fund and partner. We designed “forward emails”, making it easy for mutual connections to introduce Flatfile to investors without an obligation to take a meeting. And we also iterated constantly; after every comment, pitch, or dinner we took feedback and adjusted our messaging.

David describing how we built CRMs for customers and investors in Airtable.

When we had a short list of institutional investors who were interested in Flatfile, we took a formulaic approach to deciding our partner. We leveraged our product experience again during this stage, prioritizing investors based on the business case each one made for us. I created a simple weighted average ranking model in Google Sheets, listing key attributes by how much they mattered to us. Geography, fund size, partner engagement, and brand recognition were amongst the factors. Message me if you’d like a copy.

Fundraising can be an emotional and stressful endeavor. The more you can create a logical, steadfast approach, the more you can outsource small decisions. Build your intuition into the process and the process will reach the right conclusion for you. We closed our $2.1M pre-seed in 6 weeks of pitching, then got back to building the business.

Don’t obsess about timing — it’s not everything

We dedicated our pre-seed funding to prove out product-market fit as well as scalability of customer acquisition. So we planned our spend not around a “standard” 18–24 month runway, but rather around optimally deploying cash to prove out those value points.

By September of 2019, we got our first validation point. In one month we bumped our paid acquisition by 10x. We spent nearly 5% of our total cash on hand just on a single month’s worth of campaigns! But that doesn’t matter, we got to see results of that spend: 20x more signups that month than we had ever seen.

And by January of 2019, our second point was proven. After gathering feedback from all those signups, including the prospects that never activated, we adjusted our product commensurately. In 3 weeks, we bumped our ACV nearly 6x. And further, we realized what we were missing, which ultimately became our new Concierge product.

Our first pre-emptive offer came during the SG Global conference in February.

The process of proving both of these points naturally led up to another fundraising round. In this case, the round was pre-emptive. All those later-stage funds we had pitched the first time around were still close, and after a handful of meetings to share the results of our proof points from the last round, we had our first offer by mid-February.

To take back control of the fundraise, we designed the process, albeit much more quickly than before. We listed our needs, defined clear criteria for ideal investment partners, and pitched forward to refine our messaging. As a result, we built a $7.6M seed round in less than four weeks. Our last in-person meeting was on March 3; by the time we closed the round at the end of the month, the world was very different. But COVID was never a significant concern during the round: we had identified the right partners with our process, and they helped us pull even more capital into the round than we had planned.

If you build (your business), they will come

The lesson here is to focus less on standard timelines and more on building evidence that you’re operating your business successfully. We made the key evidence of success well known amongst current and prospective investors and let the performance of the business make our pitch for us.

We’re a bit obsessed with first principles here at Flatfile, and that has served us as well during fundraising as it has during product development. I would urge you to do the same for your business, and don’t be afraid to eschew standards if they aren’t the right fit.