How to raise capital, according to Harry’s and Warby Parker co-founder

The world of fundraising
can feel opaque, but it shouldn’t have to. Jeff Raider is
pictured.
Courtesy of Jeff
Raider

• Founders often need to know how to raise
  capital
  to grow and achieve their company goals. 
• Jeff
  Raider, who co-founded Harry’s
  and Warby
  Parker, has learned a number of things during the fundraising
  processes for these two companies, which combined have raised
  more than $700 million.
• His advice is to first ask yourself, “Should I raise
  capital?”
• From there, he outlines the entire process for raising
  money for a startup,
  from determining how much you need and finding investors, to
  what kind of capital you should raise.

I have the privilege of meeting with amazing founders who inspire
me with their vision to build companies that truly transform
their markets and make people’s lives better. Many of these
founders require capital to grow and achieve their potential.
Thus, I’m often asked about how to raise capital, and how to get
the best outcome when raising money.

The world of fundraising can feel opaque, but it shouldn’t have
to.

In the spirit of transparency, I want to share some of
the things that I’ve learned over the course of past fundraising
processes.

Before wading into this topic, I want to acknowledge that I’ve
been really lucky. I’ve co-founded two companies: Harry’s and
Warby Parker. Together, these companies have raised more than
$700 million from major institutional investors.

Before I founded these companies, I worked in private equity
investing, so I started out with a solid understanding of the
investment process, and I had relationships with people in the
investment world. My co-founders and I also had great guidance —
from amazing co-founders, teammates, board members, and lawyers —
and lots of luck along the way, so I try not to take any of that
for granted.

With that said, and with the caveats that this reflects my own
experience — and others may have different, but equally valid
perspectives — I hope some of this advice can be helpful to
anyone looking to raise capital.

So let’s dive in.

There’s a question I don’t think entrepreneurs ask
themselves enough: ‘
Should I raise
money?’

People have often congratulated me and my co-founders after a big
round of funding. But raising money isn’t a badge of honor. While
it’s validating to have someone in our vision enough to invest in
the company, outside capital is just fuel for a business to grow
until it can exist in a self-sustaining way.

It’s a means to an end, not an end unto itself.

My co-founders and I have taken big swings at Harry’s and Warby
Parker. We’ve opened more than 75 Warby Parker retail stores and
have grown to over 1,000 people in only a few years. At Harry’s,
we bought a 90+ year old, 420-person German razor blade factory,
even though we’re just a 30-person startup in New York. And we’ve
done all of this in highly competitive markets. As a result,
we’ve felt it prudent to raise outside capital to enable us to
grow quickly.

But raising lots of money isn’t necessarily right for every
company. You may not feel pressure to grow as quickly or compete
in the same ways we did (and that could be a good thing), and you
may not need to raise outside capital.

Additionally, raising money doesn’t come without
cost.

The math speaks for itself: If you own 10% of a $100 million
company, it’s the same as owning 100% of a $10 million company,
and sometimes the latter can be much easier to achieve.

Raising money also comes with high expectations from your
investors about your business performance.

At Harry’s, we
raised money at a $750 million valuation as a three-year-old
company. That valuation was predicated on our ability to continue
to grow quickly; it came with substantial expectations from
investors that we would hit aggressive growth targets. Such
expectations can be good — they drive our team to achieve at the
highest levels — but they also add pressure to the already
pressure-packed situation of building a company.

Investors also expect that we’ll pay them back — meaning that at
some point, we need to sell our companies, take them public, or
find another large investor to get our initial investors’
liquidity.

So for all of those reasons, the first question I encourage
founders to ask when thinking about raising capital is a basic
one: “Should I raise outside capital?”

Strelka Institute / Flickr

How do you get money?

How you approach the process can have a meaningful impact on the
future of your business, and your role in it. The choices you
make will dictate who surrounds you, your control as a founder,
and financial outcomes in both positive and negative scenarios.

Take the time to prepare

Before even thinking about valuation, terms, or reaching out to
potential investors, I suggest spending time refining an airtight
narrative and business plan.

A good business plan answers four key questions:

1. What is your fundamental reason for being? What is the unmet
   need your business addresses?
2. What’s the market environment today? How big is the
   opportunity to solve this problem, and why haven’t others done it
   yet?
3. How is your business going to deliver against the consumer
   need in a differential way? What’s your operating plan to get
   there?
4. And what does all of the above imply financially? How do the
   economics of your business work? How much capital do you need for
   the next stage of the business?

For me, the most important part of a business plan is the first
section that defines your reason for being. Everything flows from
there. At Warby Parker we expressed our reason for being in one
line: “Glasses shouldn’t cost as much as an iPhone.”

As you’re laying out your plan, be pithy! Our business plans have
been 25 to 30 slides at most. There’s always time to
share more after.

Sebastian
ter Burg/Flickr

Determine how much money you need, and how you want to
raise it

Your financial model should help you determine how much outside
capital you need. From there, imagine scenarios where things
don’t go exactly as planned (because they never do) and what
those scenarios mean for how much money you’ll actually
need.

For example, ask yourself questions like: What happens if
Gillette threatens to sue Harry’s? (Which they did) Or, what if
our business grows twice as quickly as we had forecasted? (Which
also happened). Given the unpredictability at Harry’s (and at
many early stage companies), we needed to be prepared for any
scenario related to cash burn.

This estimation is both an art and a science. I’ve personally
never been able to determine, with surgical precision, the exact
amount of money it takes to run a business in a variety of
different upside and downside scenarios. And as a result, I’ve
always thought it prudent to raise a little extra capital (and
take a little more dilution) in order to ensure we have some
cushion against our projections.

Once you’ve determined how much capital you need, there
are three common approaches I’ve seen entrepreneurs take in the
seed stage:

1. Friends and family:

Go to your friends and family who love you and believe in you,
and ask them to invest in your company to the extent they’re
financially able.

We started this way at Warby Parker. We were lucky to have four
founders and a broader group of people around us who were able to
invest in our idea.

This approach works nicely because it gives the people closest to
you the chance to benefit from your success in the company. The
conversations are usually easier because these people already
know you well and they believe in you. With that said, unless you
have very wealthy friends and family, this approach has limits in
terms of how much capital you can raise.

2. Professional investors:

These can be angels or venture funds — either way, they are
people who invest professionally and are likely invested in lots
of companies like yours.

The benefit to speaking with these folks is they know the
investing process well, and can commit material amounts of
capital to your business. They also work with lots of companies
and have perspectives and experiences that can be helpful.

That said, it can be harder to approach these investors cold, and
you have to really convince them of the return on investment your
business will provide.

3. A mix of the two:

Many people raise a round with both professional investors and
friends and family.

What’s best for you depends on how much capital you think you
need. If you just need a little capital to get started, friends
and family can be a good way to go. If you want more capital, or
lots of advice and engagement, then it may make sense to pursue
professional investors.

SFROLOV/Shutterstock

What form of capital should you raise? Note vs. priced
round

Convertible note:

A convertible note is an instrument that typically converts to
equity in the next funding round. These notes usually pay
interest during the time that they are outstanding, and some have
a “cap,” which means that there is a max valuation at which they
convert to equity.

For example, a company may issue a convertible note at 15%
discount to their next round of funding with a $10 million cap.
In this case, if the company raises money at a $10 million
valuation in the next round, the note would convert to equity at
an $8.5 million valuation (15% discount). Yet, if the company
raised money at a $15 million valuation, the “cap” would kick in
and the note would convert to equity at a $10 million valuation.

Convertible notes are commonly used in the early stages of
companies when people aren’t ready to put a hard valuation on the
company, and they tend to be more popular with smaller friends
and family raises. They can often be quicker and easier to
complete because valuation is off the table.

They provide companies the limited capital they need to hit early
milestones, at which point they then can go out and raise money
at a valuation that’s exciting to them.

Priced round:

The other option companies commonly choose is to raise a “priced
round.” That means raising money in equity at a specific
valuation.

In this instance, the founders believe their vision and track
record can command an attractive valuation. They also are more
likely to want to raise substantial amounts of capital at a
valuation they are comfortable with and have the capital last for
a while.

There’s no right or wrong answer as to type of funding you should
choose. We initially bootstrapped Warby Parker, and at first only
invested our own capital (meaning our life savings). Then, after
we launched the business and sold out of glasses, we realized we
needed more (but had no more life savings), so we turned to our
friends and family and raised money from them through a
convertible note.

At Harry’s, we had to buy a million razor blades to lock a
contract with our German factory. We signed the contract, but
didn’t have the money to buy the blades — this part is not
recommended — so we came back to New York and raised a priced
round in order to have capital to get started.

Thus, the type of capital you raise depends on the state of the
company, what milestones you want to hit before raising more
capital, how much money you need, and what valuation you think
you can command.

Flickr/Strelka
Institute/Attribution License

How do you navigate the investment process?

Find a lead investor

The fundraising process can quickly spin out of control and
become complicated to manage.

In order to streamline, and make the job as simple as possible,
we’ve always found it helpful to find a single investor to lead
each of the rounds — although this is still not easy. A lead
investor is a person or firm who will commit a substantial amount
of the capital in a round, and with whom you can negotiate a core
set of terms.

The benefit to this approach is that you only have to negotiate
once. After you have a lead investor and a core set of terms
negotiated, you and the investor sign a “term sheet” codifying
those terms. Chris Dixon, general partner at Andreessen Horowitz,
wrote a post that thoughtfully lays out the
common terms included in a term sheet.

Then, you can take that term sheet to other investors and get
them to join the round on the same terms as the lead investor.
Your lead investor can help you there, too, by introducing you to
their own network and serving as a partner throughout the
fundraising process.

For example, at Harry’s, Thrive Capital led our seed round. After
the Thrive team committed to investing, we sat down, talked about
the early needs of the company, and put together a list of
potential investors who could be helpful, instead of spending a
lot of time and effort fostering our own independent
relationships with potential new investors. Thrive then helped to
introduce us to those investors and supported us by explaining to
them why Thrive was excited about Harry’s.

Find the right investors

It’s important try to figure out who the “right” investors are
for you.

Investors can add a tremendous amount of strategic value beyond
just the capital they provide — and different investors add value
in different ways. Some have material domain expertise, some are
exceptionally well-connected and can make helpful introductions
to partners and prospective employees, and others have relevant
experience in building businesses at your stage.

When thinking about who might be a good investor, I often try to
identify who has invested in analogous companies. Then, if
possible, I ask other founders about their experiences with those
investors.

Once you’ve figured out who you want to invest, you have
to actually get to those people

This step can be hard. Most people with great business ideas
don’t have a Rolodex of potential investors at their fingertips
(and we certainly didn’t either at Warby Parker).

This is where entrepreneurial hustle comes in.

I’ve found the people who make the best introductions for me are
people who know me well. It’s always easier to make connections
through someone who already knows you. For example, when I was
preparing to raise money for Harry’s, I first went to my Warby
Parker co-founders. They knew great investors — and more
importantly they knew me well. Because of this, the investors
they introduced me to were receptive and took their
recommendation seriously.

Think broadly about who you know personally — professors,
colleagues, bosses, friends — they could have a connection to
investors or firms that might be useful. But if you’re drawing a
blank, think about who you can get to know — other
founders, VCs, people in the tech community, corporate venture
funds — who might be able to help connect you. In some cases,
pitch competitions, incubators, or grant programs that can open
doors and give you initial exposure.

Strelka
Institute/Flickr

If you’re having an introductory conversation with a person you
don’t yet know, I would approach it with a lot of curiosity and
self-awareness. In my experience, the first discussion is
probably not the right moment to go in guns blazing with a hard
pitch.

Investors are also out there looking for you, too. So, expand
your network, get people to know and like you, meet with and
learn from interesting folks, do people favors, and try to
network yourself into the right investors in an organic and
authentic way.

No one said this part was easy — it’s really hard.

How do you best negotiate?

Once you have identified a potential lead investor who is excited
about your business (congrats, in a lot of ways that was the hard
part) — you can think about the terms of a deal.

There are three things you should keep in mind:

1. Valuation and dilution: How much the company is worth?
2. How much control of the company founders retain: Control over
   the board, voting rights and governance of the company.
3. Structure, and what happens in a downside scenario: Investors
   can invest in different securities that enable them to get their
   money or earn a return, before founders and employees are
   eligible to get proceeds themselves.

Although it’s counter to the way people often talk about
fundraising in the news, I’ve always been focused more on
optimizing structure and control than on valuation.

You might know the valuation of a company, or how much it’s
“worth.” But do you know whether it’s capitalized through common
or preferred stock, and what special terms preferred investors
have? Do you know the composition of the Board and the voting
rights of the founders? These things also matter.

I believe that you don’t always want to take the highest price
valuation. Sure, big sticker prices are good for the ego, they
can attract top talent, and they are often good for company
morale. But if you’re optimizing solely for valuation and trying
to push for the highest possible number, you may sacrifice other
terms, or you may not get the right investor, or you could
increase pressure on future rounds to raise capital at even
higher valuations.

Clearly this is all conceptual, and when it comes to specifics
I’d suggest hiring a great lawyer who’s been through lots and
lots of transactions like this and can give you good advice.

In summary…

Raising money is always hard, emotionally draining, and time
consuming, but it doesn’t have to be a mystery. I hope this helps
other entrepreneurs to have a more informed perspective on the
fundraising process, to make good decisions for themselves and
their companies, and to get the capital they need and grow their
businesses and achieve their entrepreneurial vision.

Good luck.

As co-founder of both Harry’s and Warby Parker, Jeff Raider
aims to build companies and brands that positively impact
people’s everyday lives, and the world more broadly. Harry’s
ambition is to create exceptional shaving and personal care
products that better meet the needs of modern men. Prior to
Harry’s, Jeff co-founded Warby Parker, the transformative
lifestyle brand that offers designer eyewear at a revolutionary
price while leading the way for socially-conscious businesses.
Today, Jeff serves as the CEO of Harry’s Labs. He is also on the
Board of Directors at Warby Parker.