Lessons for raising $10M without giving up a board seat

As a startup founder, you have no shortage of voices to listen to. Most of those voices — especially those from venture capital or other startups — tend to give you a singular piece of advice when it comes to fundraising: Basically, raise as much as you can as fast as you can. This isn’t “bad” advice, per se, but given the funding environment we find ourselves in, it may not be the most realistic.

My co-founder and I started Reclaim.ai nearly four years ago, and our path to raising capital has been far from conventional. We realized early on that we tended to build best (and pitch best) using a more incremental approach — raising modest sums of capital as we grew rather than using a pitch deck and raising multiple rounds. Doing this not only gave us a more sustainable business that had less risk of entering zombie unicorn territory, it also let us build faster, and we had fewer distractions and more control.

I’ve written about this before, and we’ve since continued to follow that mantra as Reclaim has evolved. We recently raised another $3.2 million to power our next phase of growth, bringing our total funding to nearly $10 million over the past two years. We’ve done all this without giving up a single board seat, and Reclaim employees continue to own over two-thirds of the company’s equity.

Here are three lessons we’ve learned from this journey:

Belief goes farther than a pitch deck

Our most recent round of funding came from a mix of new and existing investors. In fact, the round was fueled by a couple of key insiders who believed in what we were doing so much that they went to bat for us and brought in other angels and firms to the table. We didn’t have to do much pitching and outreach in the end.

To do this, we first identified the people in our cap table who seemed most likely to be interested in expanding ownership based on their profile and relationship. Second, we used an instrument called a SAFE to help expedite the process and reduce due diligence pain. Lastly, we emphasized lightweight growth metrics instead of a full deck to keep the focus on a few key points.

To start off, we looked at our existing insider list and asked ourselves a few key questions:

1. Is this investor someone who believes in us and our mission deeply?
2. Is this investor from an early-stage fund that would be highly motivated to expand ownership at a pre-Series A price (i.e., they will likely be squeezed out in the next major round)?
3. Is this investor someone who we think should have a bigger presence in our cap table?

This allowed us to narrow our choices down to a few partners at seed-stage firms who had invested in previous rounds, and we sent them short emails pitching the SAFE and some key metrics.

The template went something like this:

These investors were already familiar with our business and got updates from us monthly, if not more frequently, so we didn’t need to belabor our vision or drown them in data. We just needed to remind them that the business was growing, that we saw an opportunity to bring in just enough capital to fuel the next phase of growth and that they had a window to increase their ownership ahead of a larger round that might be at a valuation prohibitive to their investing stage.

This initial outreach got us our first three major commits, and those investors then brought in another chunk of capital to fill out the round. Their endorsement was enough; we didn’t need to pitch those other investors or spend time running a process. The whole process was done and dusted in a week.

Don’t get sucked into over-raising

In the past couple of years, early-stage startups have been increasingly raising bigger rounds at massive valuations — sometimes before they even had a generally available product. There are scenarios where this makes sense or has worked out well, but there are also a variety of situations where it has more negative implications.

For one, it nearly guarantees that you give up control of your company’s board extremely early. While you’re still making foundational decisions that will shape the culture and approach of your company and product, you’ve now got a bunch of investors who get to make invasive decisions about who you hire, what you focus on and how the company evolves.

It also means that you’re under pressure to deploy lots of capital (regardless of whether it makes sense for the business) and clear a massive valuation hurdle. I don’t envy companies that were pre-product and raised all the way through Series B in this market — they now have to navigate a very hard path to their next round, at least until the market recovers.

Like any entrepreneur, we have also felt the pressure to raise more and be more aggressive to bring in money. There were certainly times where we felt we were “wrong” for not doing so. But as our business has evolved, and as we’ve gone through those moments when we wanted to make a fast pivot or change to accommodate new information and surprises, we’ve felt extremely vindicated in our approach. We’ve also been grateful for the lack of board meetings, which have been replaced by a much more lightweight quarterly investor update.

So by all means, raise capital, but be conscious of the fact that raising too much means you may be relinquishing control at a very early and sensitive stage.

A larger cap table means more founder control

Another key benefit to raising incrementally and taking on a larger group of investors in your cap table is that you avoid “whales” — investors that have such a large investment that they merit a board seat and have outsized influence over your decisions. Not only does this dilute your equity, it also enables a single investor to sway the future of the company as well as your control over it.

We deliberately enlarged our cap table to bring in an array of valuable voices and advisers and to avoid the scenario I outlined above. We’ve ended up with a ton of amazing people who are invested and interested in a great outcome for Reclaim — all without sacrificing board control or employee ownership.

A big reason why founders leave jobs at big companies is because they want to build something that is truly theirs. Why muck it all up before you’ve even had time to enjoy it? By raising incrementally, diversifying your cap table and relying on the strength of your product, team and vision to drive the next phase of growth, you end up with way more options in the long run.