Ep 62 – Fundraising is a Marketing Game, and Other Non-obvious Insights

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About Brianna McDonald

Brianna McDonald is President, Keiretsu Forum, Northwest & Rockies Region. Since 2005, she’s been deeply engaged in the early-stage investment community. Her mission is to advance innovation and technology, embracing challenges with passion and perseverance and supporting innovators through time, expertise, and capital.

Since joining Keiretsu Forum Northwest & Rockies in 2018, Brianna has facilitated $325 million into 500 diverse companies and continue to nurture the early-stage ecosystem with NW Angel Fund. As a private investor, she focuses on clear capitalization plans, fair deal terms, and strong corporate governance, sharing nearly two decades of best practices with entrepreneurs and investors.

Brianna is also the Chair of the Innovation and Entrepreneurship Advisory Board at Seattle University, a mentor at the Jones Foster Accelerator with the University of Washington, and an active member of the International Women’s Forum, Entrepreneur Organization, and the Washington Athletic Club.

Episode Highlights

Why capitalization strategy matters for founders more than ever in the post Silicon Valley Bank era
How to use market research to create credible go-to-market strategies and believable financial projections
How to cultivate genuine relationships with investors for successful fundraising and support
Why managing and understanding the cap table from day one is key to minimizing dilution and maintaining control
What to watch out for before raising on “cheap” vehicles like SAFE notes
How to target the right investors based on your company’s growth trajectory.
Why the math matters – on your cap table, your valuation and your deal, and how it can make or break your company
How to build a solid plan for your startup so your company, your investors and you come out ahead

Links and resources

Keiretsu Forum: Global investment network with over 50 chapters and over 3,000 accredited private equity investors, venture capitalists, family offices and corporate/institutional investors.
Angel Capital Association (ACA): National advocacy and trade organization in the USA for angel investors and the early-stage ecosystem
Seattle Angel Conference: A platform that connects early-stage companies with potential investors, facilitating funding through competitions and building investor-entrepreneur relationships
San Diego Angel Conference: Similar to the Seattle conference, this event promotes angel investing in early-stage startups and encourages networking among entrepreneurs and investors.

Interview Transcript

Shubha K. Chakravarthy: Hi Brianna, we’re so delighted to have you today on Invisible Ink.

Brianna McDonald: Hello. Thank you so much for having me.

Shubha K. Chakravarthy: I am glad that you’re here. I’m really excited about the topics we have chosen today because it’s something that founders don’t get to hear a lot about. I’m going to jump right in because we’ve got a lot to cover.

Before we go deep, you’ve done a lot of early stage investing. I want to ask you one question which is, what is the single biggest observation or learning you have had through this investing experience that you didn’t expect going in about early stage investing or about startups?

Brianna McDonald: Thank you so much for that question. And yes, I’ve been investing in companies for longer than I’d like to say or longer than most people assume. The biggest surprise that I found with myself personally, I can’t fall in love with the product.

This might bring pause to people and they may ask “Why can’t you fall in love with the product?” What I have found over my history of investing in companies for about 20 years is if I really love the product, I can get derailed by what actually needs to be done.

The most important thing that I need in an early stage company I’m investing in is execution by the executive team. There also needs to be a substantial market that it can grow in. The product can always change.

If I really love the product, it can sometimes hinder me from being able to see things that might not be working well in other areas. So where some people talk about a three pronged stool of how they approach investing, I see the way to growth like a ladder that you climb and it’s with the executive team on one pillar and it’s with the market on the other. When you have both of those in place, you’ll be able to have a successful outcome.

Shubha K. Chakravarthy: I think that’s the most unusual answer I’ve heard on this podcast so far. It’s a very thought provoking one. Does that mean that if you fall in love with the products, it’s a danger sign or if you fall in love with the product, you kind of consciously draw back and can’t think about the product. I only need to think about these two parallel poles of my ladder.

Brianna McDonald: If I really love the product, typically it tends to be a CPG company that I’m looking at. Not always. Sometimes there’s a tech stack or something that comes into play that I really like. But for the CPG companies in particular and knowing just typically what those returns are down the road, which is usually three to five X revenue. Once they hit between 20 to 25 million in annual revenue, I will just support the company and fund the company by buying products. That’s what I do. I will buy products for my friends, for my family. I will send it places. I will provide the company with revenue which is really the best source of capital I could ever give them, and support the company that way.That’s something that really aligns with my values and it aligns with my investment thesis.

Shubha K. Chakravarthy: Awesome. The first thing that stands out to me about your approach is this concept of capitalization strategy and a capitalization plan. It’s not something we talk about enough. I’ve heard you say that fundraising is all about selling pieces of a company, and I don’t think founders fully grasp this concept. What do you mean by that and what does it mean for founders?

Brianna McDonald: I think inherently we have some challenges in the market. Any founder that’s listening to this right now, founder or investor especially if it is in the year of 2024, you will understand and probably have lived through these challenges in the market that were really derived from what came in 2021 with really high valuations and really awful deal terms. Not a lot of execution required to get those fundings in the door.

Unfortunately, with the market correction and the self assisted suicide as one of my dear mentors would call it of Silicon Valley Bank, it has left us in a very precarious situation coupled with inflation that has made things very challenging for founders.

Going back in history, I think it’s more important to understand how we got to this point and why we’re here today. Back in the early zeros, when I started working in this space and I wrote my first check into a company in 2006, funding companies was incredibly different. People would do equity rounds of funding. They would maybe need just a little bit more capital to get to their next valuation inflection point. They do a small bridge. They do another equity round of funding and you’d be able to work through the cap table like that. First thing I want to ingrate in founders is that the cap table is the foundation of your business.

You have to understand the cap table and everything at the end of the day comes down to math. It comes down to math with valuation. It comes down to math with ownership and how much ownership you have. Every single capital raise you do, whether it is in an equity round, a convertible note or a SAFE impacts the foundation of your business.

And until you fully realize that, you will not be able to be effective as a CEO and understand your overall growth strategy of the business. You’ve got to have a plan in place. We got rid of planning. It all got dramatized and glorified by media and VCs coming out there saying what it should be. We got away from writing a plan understanding that just like you see a product in the market and you’re looking to sell that product to a customer, your company is the product. You’re selling it to people. I don’t think people understand that. They don’t get it. And at the end of the day, I’ve seen too many founders get to the end of the road and they end up with a goose egg because they worked so hard for all these years and they sold off all of their business.They had nothing left for themselves because they actually didn’t have a proper plan in place.

Shubha K. Chakravarthy: Which is a really important point and I remember the statistic that says 75 percent of the time investors don’t take any money away from an exit, which obviously the founder is the first investor in some sense. I get the high level plan that they don’t have a capitalization plan and therefore they end up with too little or nothing but specifically are there things egregiously or very obvious that stand out in terms of the mistakes that you see founders making on this?

Brianna McDonald: I think we got away from building profitability. We got away from actually building a great business to become profitable and actually have that be the goal. It was more of no, I’m a great fundraiser so I can get to this next fundraise and I get to this next valuation inflection point. The reason why 70 percent of those early stage investors and founders don’t see anything is because the VCs typically come in at the growth stage. Although we’ve seen them move downstream as of late, and they have really egregious deal terms, and they’ll kill a deal if it doesn’t meet expectations.

They’ll also come in and cram down everybody to be able to get what they want. This is the problem is that people, founders don’t understand why they’re going to which investors at what time. The amount of cold emails I get on a daily basis. If you take anything from this podcast today, please just do the research because there’s different funders at different stages that do different things that can help grow your business and add value to your cap table.

They can support you. They’re invested in you. They believe in you to go grow and build this business. Find those people. It’s hard work. You’ve got to build out a marketing plan and understand who these people are. A lot of early stage investors are completely desensitized. Because I get at minimum 30 emails in my inbox on a daily basis asking for capital. I get reach outs consistently on LinkedIn asking for capital. Not one of those does anybody actually take time to go to my website, read what I do, understand me and how I show up as a person.

I’m just seen as a money bag and if that’s the way you’re going to go about it and you just need the money, not all money is created equal. You’ve got to be able to build a proper capitalization plan backwards to forwards of how you get to profitability and then work back. How do you get there? Where do the increases come in? When do you need those capital injections? How much of your company do you want to sell? Are those deal terms? It’s incredibly important and unfortunately, attorneys get paid whether they fail or succeed. That’s a really cheap SAFE note. The attorney’s going to get paid no matter what.

Shubha K. Chakravarthy: You talk and your points are very well taken. I want to ask you about your capitalization plan but I want to ask you one thing about something you said. You said you get these completely non discriminating requests for funding whether they’re suitable for you or not. What’s an example of something that right off you know hasn’t taken into account who you are?

And what’s an example of someone who really understands who you are and you’re a perfect fit? Like, how do you tell the difference between those two emails, for example?

Brianna McDonald: One will be titled “Dear Sir.” I love that. So as president of Keiretsu Forum Northwestern Rockies, there’s a For Entrepreneurs page. It explains our whole process. It has everything listed there. It has a place to apply. It talks about exactly what’s going to happen at every stage.

Literally no one does that. Please invest in my company. Now, the types of emails I really like getting that I respond to. I do have a stock email. If people send me that, I will send back a stock email in response. If I think it’s something that could be viable but they need to work through the process.

They need to go do the research. Why do you want to raise capital for my group? Are you just trying to get me? Because I have a process and it’s proven. I’ve done it for 20 years so I’m not going to change from that process. Sometimes warm introductions are really helpful, because then they know me. So those are usually the best ones, because they know who I am, they know how I show up.

Still at that time, I’m going to pass it on to the right team member. I only have so many hours in a day running the network I do. I can’t look at everything. I’d be endless. I offer up training and other things where people can get some insight. Just do some research. If you want to raise capital, who are the best funders for you right now in your area, outside of your area? Why do you want them? What kind of expertise do they have? And I’m just a firm believer that thoughts become things.

Shubha K. Chakravarthy: Got it. I want to go to the question. This topic of capitalization plan. You mentioned earlier, you got to have a plan. When are you going to get profitable and then work back from there? Can you walk us through how a founder who has never done this before, how should they put this together? What are the things needed to keep in mind?

Brianna McDonald: The first thing is that it starts with market research. If you get back to the first leg of my ladder, it’s the market. What’s your lowest hanging fruit? Where do you start? What are your cost of goods? It’s basically building out your five-year financial plan and what that looks like.

How much revenue you could potentially bring in, how many team members you need to hire at different periods of time—everything goes into that. And it’s just a plan, right? But at least it shows some thoughtfulness that went into how to get where you are.

When I talk to founders all the time, especially when it comes to presentation training, understand the financial projections are just that they’re financial projections. For me, it connects directly to the market slide earlier because it shows me what their go-to-market strategy could look like.

The fact that they’ve actually thought about the market and how they grow it. You can’t just talk to 20 people and say you understand the market. You’ve got to be able to have really great market research to be able to understand product-market fit and be able to continue to iterate on that as you grow.

It doesn’t matter what sector you’re in. Whether you’re selling a medical device product, a technology product or a CPG product, you have to understand your market and how it’s going to work.

Shubha K. Chakravarthy: What does that look like? Like I come to you, how do you know that I’ve done? What are the parameters of good market research or a good first building block of your capitalization plan?

Brianna McDonald: The first of it is walking me through the market and how their go-to-market plan would be. So, this is usually the biggest missing piece in any entrepreneur’s presentation and it’s typically what most people are funding. Any founder, asterisks, make sure you include your go-to-market plan. It’s meaningful. It’s who the potential first customers are.

Why are they the first customers? What kind of revenue can they drive? And how does that lead to more customers? Is it through word of mouth? Is it by demographic? Is it by location? Is it by sector? Whatever it is and I just want to be able to understand the full market.

How many people they’ve talked to, what they understand the need is, what their background is that brings to the table that fully understands the need in the market. Because they really need to care about what that customer needs in order for it to grow. Me as an investor, I’m caring about what the business is going to do to grow and become profitable. But to be a great CEO, you always have to be thinking about the endpoint, that user, that customer, the onboarding, the seamlessness, understanding the changes of behavior and how difficult that can be.

Thinking about all of that and being able to work through the overall market strategy and who’s on their hot list, who’s currently their customers. Do they have an LOI? What’s their pipeline look like? Do they have connections to people in the pipeline? What kind of extra support do they need in the pipeline? What kind of team members do they want to bring in that could open up doors in the pipeline? Just what the vision would be to be able to grow the company.

If they get this amount of capital injected this year and this amount of capital injected 18 months from that point. This amount of capital injected three years from now. It’s going to help the company scale up, hire more team members, build up more products to be able to reach those greater markets that might be further out of reach in their financial projections.

Shubha K. Chakravarthy: If I could paraphrase what I heard you say, so you can tell me if I got it or not. It sounds like you started with the market because obviously there needs to be a big market for this to be attractive, right? Then you’re working back from that market and saying, okay, now tell me why it’s credible that you’re going to go access this market, right?

Every element of that, every step of that process needs to be credible. I’m also kind of connecting the dots here and saying, you tell me which customer segments you’re going to go after first, and then which ones you’re going to go after next. Now obviously, you’re going to tie it back and say, Okay, am I seeing that story reflected in your financial projections?

Because that helps me understand whether you have a plan behind it whether there’s meat behind your claim essentially and that’s going to tie to your fundraising to say, Okay, now let me see if your fundraising makes any sense because I can be assured that you’re actually going to execute on a plan that I believe to be credible and has a shot at tapping this market.Is that a fair characterization of everything except the capital raising plan?

Brianna McDonald: Capital raising plans need to be thoughtful. Founders need to understand the implications of capital raising and what goes into it. Not all money is created equal and not every investor is created equal. Really focusing on what you want and why you want it is critical.

I am so tired of hearing that someone used a SAFE note just because it was cheap. I appreciate that capital is strapped in an early-stage company but using a vehicle solely because it’s cheap is the wrong answer. I would encourage anyone listening to ask themselves this: when they bought something cheap, did they actually get the value they needed?

Everything needs to have a strategy for why it’s being done and founders need to understand the implications. Founders must read their deal terms to understand how they are implicated by the deal terms and how the investors are implicated. If they’re going to raise capital, it’s a founder’s responsibility to care about their investors.

Because I tell you who doesn’t care about the investors: the attorney. The attorney doesn’t care at all. The investors aren’t the attorney’s client. Once again, attorneys get paid whether the startup succeeds or fails. It’s essential to tap into the entrepreneurial network, wherever you may be.

Entrepreneurial networks exist. They exist online and in different cities. There are resources within these entrepreneurial communities. Go out, network with other founders and investors—not to ask for money but to understand what’s happening in the market.

Ask questions like, What are you currently seeing in the fundraising market? Is it a tough market? An easy market? What kind of deal terms are being used? Why would you choose those deal terms? Leverage this insight and get a couple of great business advisors who have built and sold companies before.

It’s important to understand why you would use a convertible note to start because there are pros and cons to each vehicle. Unfortunately, in the current state of the market, SAFEs and convertible notes are so cheap that we just got done fixing a cap table that brought in $18 million of capital across 11 different SAFE and convertible note vehicles—with not one round of equity.

Now, try doing the math and figuring out what the ownership stake is. Go back to understanding: How much am I going to own in the business after this SAFE note?

Is it a pre-money SAFE? Is it a post-money SAFE? Or if it’s a convertible note, understand that with interest, it usually ends up converting at a higher rate than the cap due to interest. There are implications there that affect the founder’s ownership. Founders need to understand the inner workings if they’re not going to do an equity round and ensure that proper protections are in place.

If you’re going to sell X amount now, how much are you going to sell in the next round? And the next round? This is incredibly important in the A, B, and C rounds because that’s when most companies fail.

It’s because the burn rate is so high, they have so many customers, and they need the capital. Investors keep moving the goalpost down: Oh, but if you were just here. Then they end up getting a deal that crams everybody down because they need the capital so badly. They have jobs to protect. They have people to employ. They have to make payroll and get their product out the door.

When the dollar amount goes up, the stakes go up. If you haven’t built in proper plans or hurt yourself upfront, it’s going to implicate you down the road.

It’s about thinking properly. You must build a company marketing plan. It’s more than a capitalization plan. It’s about Who do you want? At what time? With what deal terms? You choose. You’re in the driver’s seat as the founder. It’s your business.

Shubha K. Chakravarthy: You raised so many points. I want to take time to kind of dive into each one by one because there are a lot of founders who may not be familiar and they may be hearing this for the first time.

First, let’s talk about this concept of capitalization plan, right? When you laid it out first, what I took away was you have a plan. You’re going to an investor with a credible plan that says, Hey, I have a reason to ask you for this money, right? Let’s say we’re talking pre-seed or seed. We’re not going to A, B, or C at this point. What is a good capitalization plan? What do I need to check for myself as a founder that says, Okay, now I have a good capitalization plan? What needs to be in that plan?

Brianna McDonald: It just needs to be thoughtful. That’s the biggest work that needs to be done. If I ask you a question about a certain number in a certain year, you can tell me who the customers are, why they’re there, how much they’re buying, how many team members you have. It’s just being able to talk about it that you’ve done the research and that it’s not just numbers thrown up on a screen that you don’t fully understand.

If you sat down with an investor and you went through your presentation and said, Look, here’s my capitalization plan and how it works out. And this is the amount of capital I need right now. I’ll do this round here and this round here. Then I should hit profitability. The business will either be able to fund itself or we might do one more subsequent round to get to exit, whatever that might be.

I’m just throwing out a scenario. A type of thoughtful approach with an investor is so incredibly important because what it shows to me is more than the numbers themselves. The numbers are there for you. The numbers are there for the founder and for the business and for the health of the business.

What it shows the investor is that you’ve done the work. And this is someone I actually want to invest in. Wow, you care a lot. I can get on board with this. So it becomes a part of the company marketing plan. You don’t build the capitalization plan for me. You build it for you to build a great business and actually own something at the end by the time you’re done.

Shubha K. Chakravarthy: What I’m hearing and again I’m just trying to flesh this out is that it’s not just about the details of the business, right? For example, let’s say I have revenue milestones or whatever the case might be, some market access, market share whatever the case might be. I’m able to speak to you intelligently and say, Hey, I think this makes sense because I’m going to have this kind of channel access. I’m going to do this kind of volume and therefore I have a reasonable shot at achieving this kind of revenue.

That’s part one. Then, what I’m hearing you saying—correct me if I didn’t get you right—is not only do I stop there but actually I’m able to have a conversation with you as an investor that says, Therefore, I need capital at this stage, this stage, and this stage that are going to correspond to me adding more and more value to the startup that I have.

And that’s something that I’ve thought through both in terms of, Here’s how much money I need, at which point in time, what am I going to use it for? And then to make a case to you as an investor to say that there’s value that’s going to be added at every stage where the funnel comes in with additional capital.

Brianna McDonald: Here’s the thing. Execution at the end of the day. You can still have a great market but if you have a team that can’t execute, my deals still go to zero. My investments still go to zero. It’s really about the connection with the team, the thoughtfulness and the work done with the team and how the team wants to work with me as an investor.

I will say this and I say this all the time if anybody comes to one of my presentation trainings or anything else, I am one investor. This is how I think about a deal and this is what I have built from my 20 years of investing in companies and what is important to me as an investor and what I look like.

Unfortunately for all the founders out there, the other angels—they all have their own reason for investing too. That’s why it’s so important to understand the types of investors you want involved and what they’re going to bring to the table. They bring value to you. For me, investing in super late-stage companies, I’m not going to add a lot of value there. I don’t have that capacity. I don’t know what I could do besides sit on a board. I could look at some of those things but where my bread and butter is really in that seed A, B rounds like that growth stage, that hard stuff where my expertise lies.

That’s where you can use me in those stages. When I write a check into you, I build relationships with all my founders to be supportive. I want to be a person they can call when things get hard, the entrepreneur should not be afraid to pick up the phone. We’re all here to support.

Shubha K. Chakravarthy: Got it, which you set me up exactly for the next question I want to ask you. One thing first of all, fundraising is a moving target, right? What used to be seed is now pre seed. Can you talk like today’s market?

Brianna McDonald: I laugh because Seed used to be series A. When I was in investing, like in 2006, it was Series A. So yes, I aged myself. But today, we know it’s going to move. Like today, what should a founder expect at pre seed, seed, maybe Series A? Understood.

It keeps moving and in the state of the market that we’re in right now, I sometimes talk to pre-seed and seed funders and they still want revenue. I’m like, really? You want revenue here? Personally, I think pre-seed is pre-revenue. It’s like an idea I’m building. I may need to build an MVP. I’m working and iterating through things. It’s really not a big team. It’s a lot of betting on the team. In terms of my diligence, there’s not a lot of other things that can be diligence besides the market and the team. The product is still being developed.

With seed, it’s: okay, maybe you’ve launched into beta. You’ve got some early traction. You’re maybe heading towards revenue, growing and really understanding product-market fit and where it fits. Then, once you get a leg on that. You’ve got revenue in and then you see kind of that growth trajectory. That’s when A comes in and really helps to accelerate that growth into B and to C, etc.

That’s the way I view companies. However, I just got off a call with an investor in New York and he’s like, well, we invest in early stage like really early stage. And I’m like, okay, what does that mean? That’s usually the next question I ask any investor I’m talking to: what does that mean to you? Because it is so nuanced. And he’s like, oh, Series A. I don’t think of the really early stage as Series A, right? But that’s what he sees as a really early stage.

It’s making sure that there’s a lot of nuance in terms of perspective and being able to lean in and ask questions and just get once again a really good understanding of the market where they’re at. At the end of the day, the most important thing is people invest in people they know and trust. If you go at it from a relationship-building process with these investors and you’ve done the legwork, people will write you checks. It’s just what happens.

Shubha K. Chakravarthy: And I want to ask one clarifying question on your comment earlier about financial plans and projections. You mentioned that the financial model is really important, right? A lot of the projections but obviously in pre seed there’s a lot of areas where they just don’t know what they don’t know. They don’t know what they’re doing. To some extent they have a hypothesis. My question was, do you expect plans even at that level? And if so, what level of detail do you want to see in the financial projections at the pre-seed and seed?

Brianna McDonald: I want to see. I want to see projections. The market research should be done, regardless. To understand and go out and build a company and to raise capital from other people, you need to understand what is actually going on in your market and what it could be.

Now, it could very well be wrong and off but at least the fact that you’ve done the early groundwork on it and have talked to people in the respective industries, or demographic, or location or wherever your go-to-market is. Wherever that lowest-hanging fruit is that you can bring in as early revenue and be able to scale that out, needs to be done. There’s no I can’t do this. There is a market for it somewhere. The market can’t be everyone, either. It has to have a scaled growth process to be able to understand what the humans behind the company can handle at the different stages of the company growth plan and cycle.

Shubha K. Chakravarthy: Got it. It sounds to me like even if it’s a pre seed stage, I as a founder have to have a clear hypothesis that this is my first set of customers, this is why it makes sense. This is why I chose them. Here’s how I’m going to sign up my first 10 clients or sales, whatever your case might be and therefore based on that I’m going to extrapolate. Obviously things can go differently. They go wrong but at least I have a hypothesis which I can back up.

Brianna McDonald: Yes. It’s not just built off of something from an idea conceptually in their head. It’s the fact that they’ve actually done the proper market research at the beginning to actually go and grow the business effectively to begin with, right? If you want to go and just bootstrap it and do it which I encourage all founders to do. I encourage bootstrapping at the early stages.

It’s hard. It is really hard to grow a business and have another job that you’re running and have family and have all of those things. But at the end of the day, you set yourself up for so much more success by owning all of your business than having investors to report to. So do that work before you ever bring in a cent of capital.

Especially on the pre-seed side, we’re looking at 12 to 15-year relationships. People might sit there and go, No, it’s three to five years. No. I know this. If you’re lucky, maybe set year seven, something will happen.There are always anomalies and outliers. With what I have seen in the market for a successful company to exit, it is like 10 to 15 years. Then you’re stuck with these investors for that long. Make sure you want to be married to these people.

Shubha K. Chakravarthy: For a while. Which brings me to the question of, who are the right investors or funders at each stage and how do you recommend that funders target the right set of investors and the right sources of capital as they’re going from pre seed to seed to series a but especially in the earliest stages?

Brianna McDonald: They need to be out in the ecosystem in their communities. They need to do the research. There’s tons of research out there; there are books written on it. My husband’s partner wrote a book on investors in Silicon Valley—which I don’t love. The Valley is a bit of a bubble, an anomaly, which is fine.

It just is what it is but it’s just people’s different perspectives. Understand why people choose to invest in companies. I think that’s the most important thing of the accredited households in the United States, there are millions of accredited households. In the United States, 2 percent write checks into early-stage companies. Of that 2 percent that do direct investing, 1 percent writes checks greater than $10,000.

You’re looking for people who have very high-risk tolerances that want to be able to help innovation grow. These typically can be found at angel groups and others. There are definitely resources here in Seattle or down in San Diego. We have the Seattle Angel Conference or the San Diego Angel Conference. They help to grow angel investors and really early companies can apply to go through that.

There are competitions. There are things—leverage student programs. If you’re at a university, go through business plan competitions and things like that. There are lots of different ways to participate and get to know other investors that aren’t just them immediately writing you a check. You’ve got to do your research just like you would do your research on your product or your business and grow it. You have to do your research. I can’t give that information to anybody. It’s really hard to raise capital. The VCs make it even worse.

In the private investor realm, there is a lot of opportunity to be had with high net worth individuals and going into angel groups and finding those backers. But it’s still really challenging to be able to go in and get them to respond, because everybody’s busy. They do it in their free time so they usually have other things going on and a lot of competing priorities. You’ve got to find the right people, and it just takes time. That’s why plans are so important.

Shubha K. Chakravarthy: Your points are very well taken. Right. So, definitely, work is needed. You need to wear out the shoe leather, as they say. What are the characteristics I should look for as a founder to say, “Hey, this might be a good fit versus this might not be a good fit”?

Brianna McDonald: Your early-stage companies, what does that look like for you? For people who are brand new to investing, I think that would be something that might give me pause. I might want to learn a little bit more about them before. The first thing we do is talk to founders about some of their great investors and who they have, right? Especially in your area and things that they’ve come across in the market.

You’re going to immediately know if someone’s not a fit. You’ve got to trust your gut. You’ve got to trust your gut. Man or woman, it doesn’t matter. There are things that happen when you meet people that will say, Hey, you know what? I actually would really like this person. I think the more an investor can be there to support, the better. I love my favorite thing to do especially with my earlier companies is to join an advisory board. I invest in the company, get some options and join the advisory board. I help support the company grow, and it’s one of my favorite ways to be involved in the business.

I also get to know other investors that are alongside the deal and really just build up great rapport as a whole with the CEOs we’re working with, the companies we’re investing in as well as the executive team and the other investors supporting the business from the earlier stages. Companies need to diligence the investors as much as they’re diligencing them. How many companies have you invested in the past? What does your capital deployment look like? How do you work with companies you invest in?

I took a check from them—are they going to be calling me six months from now and asking me for their money back every six months because they didn’t realize it was illiquid and what went into it, right? You can’t assume anything about people. So it’s just as important for early-stage founders to get to know who their investors are before accepting cash as it is for investors to look at the business and see if it’s something they want as part of their portfolio. It’s really a people business.

Shubha K. Chakravarthy: That much is becoming pretty clear to me. Two other big topics I want to cover today. One of which is cap table management and fundraising vehicles, both of which you alluded to earlier, very critical.

How does the cap table play at a high level, can you just talk to how a founder should be thinking about the cap table from day one, like before they raise their first outside dollar, what’s the role and how should they be thinking about the cap table strategically, like what are the mistakes you see founders making? What are the things that they should be considering as they’re looking to manage their cap table?

Brianna McDonald: The first thing is to understand the purpose of the cap table. The cap table is to be able to determine ownership of the company. So ownership of the company is critical. What kind of an owner do you want to be? If you end up selling your business off, is it going to put you in a minority piece where you might not actually have control of the company anymore?

It’s understanding the implications in the ownership structure. We see, if I was going to use one word to describe a cap table, it is foundation. It is the absolute foundation of the business. It helps to incentivize other executive team members with the work that they’re doing with your option pool and being able to give them percentages of the company to keep them moving forward and keep them interested and incentivized to continue to grow the business. It also helps with hiring.

There’s a lot of great ways to be able to bring on new hires by providing options. Looking at that option pool and how you reset the option pool at each capital raise matters. It’s really important, understanding what a waterfall analysis is. I think working through an exercise a standard waterfall analysis, but it’s just equity. It’s so easy. When it’s like equity, convertible note, equity, convertible note, equity, math gets a little bit more complicated. Now imagine adding in the example I mentioned before of 11 different convertible notes and SAFE vehicles and no equity. They all have a different target, different interest rate, different event of when it converts.

It all implicates the founder and how much ownership they have in the business, so everything can be done with math, even the valuation looking at the cap table and running the numbers. So much of what I deal with in valuation sometimes as well. I believe my company is X. I am worth 10,000,000 pre-seed. No revenue on this. Pre money, SAFE note or post money, whatever. It’s like, yeah, well, if you just looked at the cap table. You adjusted it by one point, that’s it.

One percentage point of ownership. You could get that down to four million and make it a much more attractive deal for investors to get in early on. That wouldn’t just have this number that is supposed to appear for you. The cap table is incredibly valuable to know inside and out and where your ownership lies in the business and how it’s going to be implicated down the road. I think most founders don’t understand their cap table at all and they don’t understand what a waterfall analysis is and how it’s implicated. They just know they need money right now, they’re going to go take whatever cheap vehicle they can get and bring it in.

Shubha K. Chakravarthy: I know that many of our founders probably are not familiar with the cap table. Obviously where it’s equity or even with terms and equity, it’s easier. You mentioned this example where moving one point can really make a difference.

What are the things I should be looking at as a founder?And what advice would you give a founder to start the journey of understanding what the implications of a cap table are. Where should I go? How do I learn this? How do I get better?

Brianna McDonald: As a solo founder starting your business, you’re going to own 100 percent of your company. As the founder of my business today, I own a hundred percent of my company. Actually, I own 50 percent because I share it with my husband, right? So it’s a 50-50 deal. I lived in a community property state. That’s the way it would sit on the cap table is, of the shares. That is existence which usually is a 10 million is typically what they go off of.

I would add 5 million and my husband would have 5 million and that would be what we own. Now, if we wanted to go out and raise capital, we would sell a portion of that business. If we’re going to sell 10 percent of the business. Now 10%. Then I would now own 45 and he would own 45 and 10% would be owned by somebody else. That’s just with pure equity. The challenge when you get notes involved is that you have interest rates that also can eat up the valuation, and the discounts that affect it with SAFEs, with pre-money SAFEs. I just, I hate that word so much. Nothing at all is safe about a SAFE note.

Nothing is safe. It was created by Y Combinator to work through their program and it got pushed out because there was no interest. Well, guess what? Interest rates went up, things went up and investors like convertible notes because it was. At least if they’re going to just take nothing and get nothing, they’re going to at least be in the first position as a debtor over the equity holders to be able to get something if something were to happen, right? It’s a place of comfort of investing and feeling like there’s a given return.

But a pre-money SAFE, you have no idea how much equity you’re selling.

The investor has no idea how much equity they’re getting. There’s no protections. So that’s why it’s so problematic. Because you could raise on that SAFE and you could raise, just below that event and you could keep doing it, right?

I’m just going to extend this SAFE because it’s a pre-money SAFE. And then you don’t know how much you’ve given up. When you actually go to convert it, you have a lot of problems because you might end up with a lot less than what you initially thought. And this is why VCs like them so much right now because. They get to take a whole bunch of the company. They love pre money SAFE zones.

They’re like, please go raise on those. That’s great. The post money SAFE’s on the other side, if you raise above that post money amount, you just dilute yourself further. And if you look at the cap table, it affects your ownership. It’s understanding how each of those vehicles play and interact with one another as you’re doing the math and there’s no way I can explain the math because it’s complicated math. It’s hard math to do. You should look up doing it. There’s definitely classes that are hosted through the ACA on cap table management and others that people can utilize to understand how they properly manage a cap table. The foundation of the company. It’s your ownership stake. It’s why you’re working so hard.

Shubha K. Chakravarthy: I understand and I completely agree with you. I took the Angel University classes and I can totally agree that they’re really excellent classes on the cap table. Just one last question on pre money versus post money SAFE. I understand the piece around math. Just high level, what’s the difference between a pre money and a post money SAFE, just for the founders who haven’t heard those terms?

Brianna McDonald: A pre-money SAFE is basically when you have a valuation that is your pre-money. Typically, if you do an equity round of financing and you’re like, My pre-money valuation is 10 million on this equity round of fundraising, and I am going to raise 4,000,000. What’s actually more important for you to talk about is not what your pre-money valuation is—it’s what your post-money valuation is.

Once you bring in that 4,000,000 in cash, your post-money valuation on the company will be 14,000,000. You add it together—that’s how it works. So, if you want to be really sophisticated in talking with investors, you talk about what the post-money is going to be at the end of the round versus just the pre-money. People tend to get hung up on that, but once you conclude what you’re doing, that’s what it’s going to end up being.

A pre-money SAFE is investing on that pre-money—so that 10 million. But if the event is like, I’m going to go raise 2 million, but you just keep raising and extending, you’ll run into issues. I’ve seen founders do that. You don’t actually have to convert it. They’ll say, I’m going to raise a 750,000 round here and I’ll raise a 500,000 round there, and they keep raising. They over-raise on the SAFE note; they oversubscribe. They think, I’m going to keep going to 4 million. It sounds great on my pre-money SAFE note.

But no one knows how much they bought or sold until the math is actually done. If they raise on another note after that, it gets even more complex. If they do another note after that, it becomes even more complicated. The thing to understand is, there’s a discount typically into the next round. We’ve seen SAFEs written like convertible notes (minus the interest rates) in the last year or so. But with the convertible note, it’s just important to understand that interest does add up.

It’s meant to be there with a maturation date for you to convert it. Investors want equity; people want to be tied to the investment. I don’t like investing in air. If you really want to use a great vehicle that can help you do this in a much better way than a SAFE, look at the ACA Convertible Note that they just developed. I can’t say enough about the Angel Capital Association and the work they do to help founders understand the implications and how they need to care about their investors as well as themselves with the capital they’re bringing in.

That new convertible note which was launched in June, helps provide investor protections and other things. It’s a little bit of a longer document, and that’s okay. It’s okay that it’s a longer document. You need to read it and understand it. This is important stuff—this is relationship-building stuff.

The other thing to understand about the notes is that if they don’t convert before you hit that 50 million in your equity then you cancel out your Qualified Small Business Stock which is not taxable. The sooner they’re able to convert at lower valuations, the better. You benefit yourself and you benefit your investors by supporting the growth of innovation and getting that tax-free money when the return happens.

Shubha K. Chakravarthy: This is not something I can gloss over as a founder, just because I’m uncomfortable with the math regardless of how tough it is. I have to sit down and make it work and make sure I understand it because there’s a lot of money to be lost here.

If I am not, it’s like a big message, right? The other big takeaway for me was that the instrument matters a great deal. Even though it’s easy, it’s easy now and tough later in terms of the SAFEs. My question to you then is, understanding that these things are so important, how much leeway do I have as a founder in determining on what instrument I raise?

And what counsel would you give to founders as they go out and ask, Do I just say no? I won’t raise it on a SAFE?

Brianna McDonald: Well, I only give suggestions, and I never give advice. It’s nuanced. I have. I really like to be clear on that. People can choose to do whatever they want and I want people doing what works for them. It’s their business. At the end of the day, they can do what they want with their company and their business and how they want to grow it.

Your deal terms are your greatest marketing tool. Just keep in mind. The longer it takes you to raise capital, the harder it’s going to be to continue to raise capital and what you’re best at doing is growing your business. It is a full-time job when you are raising capital. How quickly do you actually want to get that done? And what kind of marketing tool do you want to have to be able to do that?

Really good deals just like houses in a really terrible market, still get bought. If you ever sat and looked at a house that was in a great neighborhood and it was at this ridiculously low price, and you’re like, “What is wrong with this house?” It has been on the market for eight months in this neighborhood where everything sells in three days for multiple offers. “Oh, the foundation must be bad. Oh, the sewer must be bad. The neighbors must be terrible. There is something wrong with this house.”

It’s the same lesson in real estate that applies here to investing. It’s the high cost of overpricing your home—you end up selling it at a lesser amount. Really think about the deal terms and the valuation. If you raise at too high valuations, you could talk to and look at the data of many founders today that are doing down rounds or flat rounds. Flat rounds are the new up rounds because they raised at too high valuations in 2021, they didn’t hit their milestones. They don’t have enough to be able to actually go and raise their valuation to raise more capital.

They’re recapping their cap table and now they’re taking hits. There are huge implications to not thinking about this properly—from both a capitalization plan, a deal structure plan and understanding the full ownership of the business and the cap table as a whole and how much you own. They all are intertwined together.

All I ask is that you do your homework. You find out what’s best for you and your attorney doesn’t tell you what to do. You hire your attorney and they work for you. You go in and you tell your attorney what you want.

Shubha K. Chakravarthy: That’s excellent advice. You mentioned this repeatedly throughout the conversation which is this concept of you need to be marketing your company to investors, just like you market your product to customers.

That’s not something that we hear about much in terms of how you intelligently market to your investors. How would you advise that or how would you suggest that a founder go about marketing her company to investors? What does that involve and what should she be thinking about?

Brianna McDonald: It’s the deal terms one and it’s really the relationship building. It all goes back to the fundamentals of what we talked about—having a proper plan in place and understanding who you want to target. I firmly believe and I’ve seen it happen over and over again that thoughts become things.

There is nothing free about raising capital. It costs money to raise. If you think raising capital is free, I’ve got news for you—it’s not. It is just plain, flat-out not. You can go pitch to an angel group for free where they have a 50-50 funding rate. Then, how much time are you going to spend meeting with people who are tire-kicking and not actually doing anything? How much coffee? How much driving? How many emails? How many follow-ups?

It’s really about finding the right strategy that’s going to work for you. Accelerators? Not free. There are some great accelerators out there but you’re giving away 7–9 percent of your company for $125,000–$150,000? Look back at that cap table—that’s a huge chunk of your cap table for a very small amount of capital at the end of the day. If it’s worth it for you and that’s part of your growth plan, great.

There are different funders that do different things for different types of companies. If you are a VC-tracked company and you need to raise $75 million, raising from individuals the whole time might not be your best bet. You might need to go the VC route but how do you then build those relationships to get in those doors with the VCs? They are very ivory towers.

There are some really good smaller funds out there on the early side that you can get in with but who do you want next? Who do you want that to be? Or is it a family office? What is your exit plan out of this? How do you make money out of this? Are you going to divest your investors once you hit a certain point? You’ve got to really think about it.

It all comes back to what the founder wants. If there’s anything—going back to women, thinking about women-led companies and I don’t like to think of myself as a female leader; I just like to think of myself as a leader. I’m just a leader. But there’s something to be said for how we think about things differently. Women are really good at making great plans. So, benefit yourself. Do this for yourself. This is not for me, the investor. This is for you, the founder, to create a really awesome business that can change the world in whatever way you want to change it. Bring money back into the ecosystem to keep funding the next stage of founders. Keep innovation moving. I think there’s something to be said about that.

Shubha K. Chakravarthy: Awesome. It sounds to me like if I were to take a step back and recap everything you’ve said so far, the big message I’m getting is that you need to start out with some end in mind. Like, “I want to be this kind of company in this period of time.” Then work my way back to say, “Okay, if that is the case, then it’s putting me on this path versus this totally other path.”

All the other decisions cascade off of that end goal. You might end up saying, “Okay, I no longer want to be a $75 million company.” That’s fine but I still start with that point of view and everything I do is one step and one building block with a clear end goal that gets to that point. There’s thoughtfulness behind who you go after for funding, what kind of milestones you set, how much you get funded, on what kind of instrument, and at what point in time. It’s kind of like the big message that I’m getting from the conversation we’ve had so far. Is that a fair characterization of what you’ve been saying?

Brianna McDonald: It really is. It’s just about creating a good plan, and what we’ve seen over the last 14 years with 0 percent interest rates and a lot of money flowing everywhere is that everything was free, and it’s not. And this year has been really tough. It’s been tough for a lot of founders, and they’re finally realizing this.

And so, if there’s anything we can do to help shift the narrative and be able to learn from the mistakes of the past. We could go back to the late 90s and what was happening there, and money flowing endlessly into companies without due diligence, and then we had the dot bomb, right? And so, there’s cycles here, and they repeat themselves. And the one thing I want to say to everyone, any founder that’s starting right now in their business, is there is no greater time to start a company than in a down market because you can look at the leaders in our country and globally today, and they were all started in down markets.

It’s because we understand the value of a dollar. It’s because we understand how to make it stretch. It’s because we had the proper plans in place. It’s just been a long time since we were here. The last time we were here was 2008-2009. That was the last time we were in the position we’re in today. It’s going back to the drawing board and being really thoughtful about how we want to grow companies into the future and be able to create some amazing jobs for people. I mean, that’s essentially what we’re helping to do as we grow our vision too. It’s economic development. So, how do we impact people’s lives?

Shubha K. Chakravarthy: Awesome. For the woman or the founder who’s starting her company today, given that we are in this environment, it’s no longer zero interest rates. Are there like three pieces of thoughts, suggestions, ideas that you might want to throw to her to think about so she increases, maximizes her chance of success?

Brianna McDonald: The market today is not easy. The first thing you need to remember is it’s not you. It’s not you. And if you don’t find a connection with that right investor first, don’t internalize it and make it about yourself. Because everybody’s got their own things going on in the world and why they operate the way they do.

It’s really building a great support group. In founders, there’s great founder communities that you can find in your local city or wherever you’re at. To them, understand what they’re seeing in the market, and support one another. You’re all on the same road together even though you’re all competing for capital, right? Leverage that. There’s value in those communities, and really seek them out. Keep learning.

Second is, do your market research. Make sure you’re ending up in the right room. When you’re going to the right room for you or your business, the first thing you do wherever you’re pitching is you first ask them, “What do you like to see in a pitch? What are you looking for? What is your investment thesis?” Before you even get in there don’t make assumptions about what they’re looking for.

Ask them what they’re looking for. Because, especially if you go around to different groups, everybody’s going to have something different they focus on. I mean, that’s the one thing even about teaching presentation training or anything else with these companies. Everybody has something different to say, and especially when it comes to early-stage investors, everyone has an opinion.

Just give them what they’re looking for. You might have to alter your pitch, so keep lots of backup slides to be able to pull in different places. And you’re going to have to modify it. Have a couple of different decks. Have a deck that’s meant for presentations, have a deck that’s meant for reading. A deck you can send, you can pitch, but they’re not the same deck. So they’re not the same deck.

And then, finally, it’s really about building those relationships with people. I can’t stress it enough. I want to get to know you, you know, have it not be about the money. Yes, I’d love for you at the end, if it’s a great fit for you to invest in my company. Can we go sit down and have coffee and I can actually get to know you and understand what you care about and understand how you work to be able to go forward?

Because an investor is seen as more than just a money bag. The chances of them investing probably go up dramatically because they’re understood for the value that they can provide, and you’ve done the research there. It’s really a relationship-building process, and it’s hard. You’ve got to be able to have those level-setting things to keep you running the marathon.

There will be a lot of hard days. There’ll be a lot of days where people don’t call you back, you don’t hear from anybody, where you think you’re going to have to turn the lights off. There are things that are challenging and hard, right? And how can you be able to pivot to get around it? And being able to set yourself up to run that marathon, I think, is critical. So, having a proper plan in place can assure at least you have a guidepost that you’re moving off.

Shubha K. Chakravarthy: Got it. And the point of making sure that Brianna answers my request for a coffee is to ensure that I understand what you invest in and I’m making a reasonable ask to say, “Hey, I want to get to know you because you’re investing in my sector. I’m kind of close to ready, but maybe not ready to pitch to you yet.”

You might have something interesting to learn from me, and I might have something interesting to learn from you. Is that right? Because, as you mentioned, time is limited, and I’m sure there are a billion founders that would all want to pick your brain or have coffee with you. How do I get through the clutter and make you have coffee with me?

Brianna McDonald: The best time to be raising capital is when you don’t need capital. I mean, it’s true. I’m thinking about going out and doing a round. This is where I’m at. What concerns you about this? Don’t be afraid to ask what concerns them. Hey, what concerns you about what I’m doing? Do you have concerns? I would start with that before you get to what you like. I mean, cause that’s going to show coachability. That’s going to show other things to be able to help grow the business.

My first question I have with any of my portfolio companies is, what do you need help with this month? Let’s get the bad stuff out of the way first. Right? Because it usually is like there’s stuff, right? It’s really about building relationships, having a great plan, and caring about your investors. And if you do that, you will be successful.

Shubha K. Chakravarthy: Got it. Thank you. Is there anything that I didn’t ask that you wish I’d asked on this topic?

Brianna McDonald: Now I thought you asked a lot of great questions. Hopefully I did a good job answering them.

Shubha K. Chakravarthy: You did great. Thank you very much. I really appreciate the time you spent with us, Brianna. I think there’s a lot of material here that a lot of founders are probably hearing for the first time but you’ve certainly given a plan of action that they can now go do research on and get smart on. We really appreciate the time that you took to be on here and have this great conversation. Thank you so much. It’s been a pleasure.

Brianna McDonald: Thank you for letting me share a little bit of what I’ve learned over 20 years of early stage investing.

Shubha K. Chakravarthy: Thank you.