Lighting the Fundraising Fire | Code Brain Episode 9

Code Brain

Issue 09

Code Brain is a key component of Source Code Capital's systematic, productized post-investment service system. It is a flagship post-investment service product that Source Code Capital has built to help Ma Hui entrepreneurs upgrade their thinking. At every stage, we deeply understand and continuously explore entrepreneurs' needs, iterating on Code Brain in real time so that entrepreneurs at different stages receive sustained intellectual nourishment. Our important goal for post-investment services is to be genuinely "helpful," creating unique value for entrepreneurs.

Raising funding is hard; sustaining fundraising over time is even harder. This winter, we don't want to amplify anxiety. We simply want to throw another log on the fire for entrepreneurs who still have a flame burning inside. To that end, Code Brain Issue 9 invited three CEOs from portfolio companies to share their fundraising experiences from angel to Series C, and to talk through the joys and sorrows, gains and losses around fundraising rhythm, valuation, profit models, and mental adjustment. We hope these six selected Q&As will be helpful.

Content Overview

1. The most common mistakes and pitfalls in fundraising

2. Timing and pacing your fundraise

3. How to value your company? How to negotiate valuation?

4. For companies between angel and Series A,

how to convince investors when you don't have enough data to validate?

How to persuade them to believe in your profit model and growth potential?

5. You typically make projections and models when fundraising.

If the business direction changes later, how do you explain this to investors?

6. When fundraising isn't going well, how do you adjust your mental state?

Guest Speakers

Yiran Huang

Founder & CEO, YiCan

Equity management platform

Lei Li

Founder & CEO, Hui Fenqi / Huizhaofang

Rental installment platform / Rental SaaS platform

Zhenhong Zhao

Founder & CEO, Baibu

Textile B2B platform

I. The Most Common Mistakes and Pitfalls in Fundraising

Yiran Huang, Founder & CEO, YiCan

My background is pretty diverse — five years as a lawyer, over a year as an FA, and now an entrepreneur. I'll share one point from each perspective, hoping to give entrepreneurial friends some useful perspective.

• From a lawyer's perspective, my top recommendation is "don't get hung up on financing terms, especially defensive provisions." During fundraising negotiations, lawyers on both sides often go back and forth on liquidation preferences, redemption rights, and similar clauses. But if the company actually fails, these terms mean nothing. If you really want to negotiate something, focus on offensive terms instead — like drag-along rights, super pro-rata rights, and priority investment rights in new projects. Worrying less about downside scenarios will speed up the entire fundraising process.
• From an FA's perspective, my advice is that before Series A, an FA isn't strictly necessary. Unless your business model is particularly complex and you need help translating it into language investors understand, or your project has grown to a certain scale where there are things you can't say directly to investors and need an intermediary. An FA's value increases the later the stage; early on, if they're just relaying messages, they'll actually slow things down.
• From the perspective of a first-time entrepreneur, my takeaway is to prepare extremely thoroughly for fundraising conversations. I may sound smooth up here today, but behind the scenes I wrote very long scripts. What I want to say to each person, the goal I want to achieve, the signals I want to send, the opening lines — all of this should be carefully prepared. Because, analogous to sales, equity is your most important product, and investors are your biggest customers. I wrote tens of thousands of words before fundraising, longer than my graduation thesis. So I performed very well when meeting Source Code too. Those are my three suggestions.

Lei Li, Founder & CEO, Hui Fenqi / Huizhaofang

Yiran just mentioned communication issues, and from my own experience, it's about extensive practice — proficiency comes from repetition. When raising my angel and Series A rounds, I met extensively with investors and used FAs. I now have roughly four to five hundred investors in my WeChat contacts, covering over 300 institutions — no fewer than an FA would have. After each meeting, I would go back and review what worked better in how I talked to investors.

Before meeting investors, I also do homework to understand what this firm has invested in and what this particular investor's style is. Sometimes founders make a mistake: say I met with Sequoia today and this person passed on me — does that mean Sequoia passed on me? Actually no, because Sequoia is indeed large, and different investors have different styles, preferences, and sectors they cover. One investor may pass on you while another can push you through to get funded.

When I first started out, I felt investors always asked about strategy, long-term goals, future development — these very abstract questions. But later I realized these questions really do matter. Even at angel and Series A, you must think clearly about where the company is headed. Even if your long-term vision isn't that grand, you need to articulate a near-term goal. The process of meeting investors is a process of constantly thinking for yourself.

Once you've thought things through, you can start meeting investors in batches. The first batch might be non-mainstream, emerging firms that have been investing frequently in the last three months — they're easier to schedule and they're hungry for deals. If you go straight to the top firms, you'll find their time is hard to get. Test things out with them first, then go back and review and improve. Once you know your pitch cold, after two sentences with an investor you'll know their angle and how you should frame things — at that point you can make anything work.

If an investor rejects you, never hold it against them. You'll want to go back to them for your next round. I've fundraised five times, and there was one investor I met four times who still didn't invest by the fourth meeting. But by the third time, he started reflecting. He said, "When you came to me this time, I looked at your project very carefully, at why you haven't died — was I actually wrong?" Because the company not dying is the best explanation.

Zhenhong Zhao, Founder & CEO, Baibu

I agree with what both said — before communicating with investors, you must think through the entire framework. What questions might come up, how to answer them. If you haven't thought it through, an investor might knock you down with one or two superficial questions, and then there's no second chance. But if you can answer in one second, they'll feel you've prepared thoroughly.

On financing terms, my suggestion is to put yourself in their shoes. Early on, many investors will ask for veto rights because they're taking risk and need something to protect their interests. So there's no need to fight them too hard on this. As your company performs better and better, many terms become easier to flip.

Finally, cash in hand. In the current market environment, getting a term sheet or signing an SPA doesn't mean the fundraise is done. Money in the bank is what counts. There's usually one to two months between term sheet and funding closing, and a new competitor might emerge in the market, giving investors plenty to worry about. You need to keep engaging with them through this process, keeping their thinking aligned with yours.

II. Timing and Pacing Your Fundraise

Zhenhong Zhao, Founder & CEO, Baibu

Fundraise when you're in the strongest position possible — this is when you have leverage, and investors will overlook many of your flaws. You should also find a good FA for the process; they'll catch various details and help you improve.

Yiran Huang, Founder & CEO, YiCan

Another suggestion is to maintain long-term friendly relationships with appropriate funds and investors outside of fundraising windows. Every time the company makes a small step forward, I message my investors — it doesn't matter if they don't reply; the key is letting them see we're doing well. The benefit is that when you do need to fundraise later, investors have already had sufficient groundwork laid, and getting money flows more naturally. Even if you really hit difficulties, asking these people for money has a higher success rate than finding new investors.

Lei Li, Founder & CEO, Hui Fenqi / Huizhaofang

My approach is to always be fundraising. If valuation is good, I'll dilute more; if valuation is low, I'll dilute less. There's no such thing as too much money — just give me the cash. This may relate to my entrepreneurial experience: I started in 2014, and by October 2015 I had already hit a winter where several term sheets were torn up. Capital markets have been fluctuating ever since, so I keep fundraising to ensure money keeps coming in. More shareholders means more people who can help you. Investors and entrepreneurs aren't adversaries.

Second, after closing a round, get investors to wire the money as quickly as possible. All my shareholders' impression of me is: once we sign a term sheet, I'll call you every day pushing for the money. During the honeymoon period, they think you're great everywhere — get the money while it's hot. Otherwise if the market shifts significantly, they can easily change their minds.

Finally, to add to what Yiran said: when you first meet an investor, it's hard to build trust. But on the second or third meeting, they'll have formed an impression of you, especially if what you told them before is now playing out the way you said it would — whether market changes or business data — they'll feel more comfortable investing. Investors today are very冷静 and very smart; just telling stories doesn't work anymore. You can only use the most straightforward approach: deliver on what you said, then tell them what you're doing next.

III. How to Value Your Company? How to Negotiate Valuation?

Lei Li, Founder & CEO, Hui Fenqi / Huizhaofang

New businesses often have no profit and carry high risk, making valuation very difficult. My approach is to first throw out a number, then calibrate against peer data. For example, what's a comparable company in my space valued at, how does my data compare to theirs? If the numbers are similar, I'll price at 80% of their valuation — this makes me easier to fund while they're not. If my data is actually better, I might price at 90% or match them.

Zhenhong Zhao, Founder & CEO, Baibu

On negotiating valuation, my experience is to start low and move higher. Quote slightly below market expectations for each round, so investors feel like they're getting a bargain. If the valuation is cheap, even if you have flaws, investors will be forgiving. Once you have more interested parties, you'll have leverage, and your FA can help bid the price up. When no one is giving you an offer, you can't raise the price.

Live roundtable discussion

IV. For Companies Between Angel and Series A, How to Convince Investors Without Sufficient Data Validation? How to Persuade Them to Believe in Your Profit Model and Growth Potential?

Zhenhong Zhao, Founder & CEO, Baibu

Take Baibu as an example. When B2B first started, the entire industry was learning from Zhaogang Group's matchmaking model. But we discovered matchmaking didn't work for textiles, so we switched to self-operated inventory. Most investors didn't believe us when we pitched this, but one investor thought it was right. He observed me for half a year, and only when my performance started coming through and gross profit turned positive by RMB 30,000 did he believe me and invest.

The lesson is, no matter how hard it is, you must first show some signs of traction to give investors confidence. Only if you can execute does this business have a chance. And when things are really tough, don't expect too high a valuation or too much money — sometimes your last round's post-money valuation becomes this round's pre-money valuation. There's no choice, because you need to survive. If all else fails, convince your existing investors to give you some convertible notes so you have capital to keep going.

Baibu has been running for four years with many difficulties along the way. Once when a funding round hadn't closed, we had no money for salaries the next month. I'm very grateful to Source Code, who wired me money every month for two months to make payroll until I finally closed that round.

The profit model isn't necessarily your most important point at the outset — what matters is what value you create for users, and whether there's opportunity to build significant scale through this business. When Baibu fundraised, we didn't promise investors how much money we'd make in the future. Instead, we told them in the deck which links in the scaling process had profit opportunities, and investors would do their own math.

Lei Li, Founder & CEO, Hui Fenqi / Huizhaofang

Different investors have different preferences. VCs chase return multiples. A-share listed corporate strategics like profits. Tencent and Alibaba will consider what contribution you can make to their entire chain. Ultimately you need to read the room and tailor your pitch — focus on whatever they're missing.

On profit models, my thinking is: as long as what you're doing has value, you'll have user volume. The greater the value, the larger the user volume. The deeper the value, the bigger your market size. When you scale the market, making money becomes quite easy.

For example, the rental housing market is over RMB 1 trillion, and could grow to RMB 3 trillion or 5 trillion in the future. If rent is RMB 1, then ancillary spending is RMB 4 — that's a RMB 20 trillion market. Making 1% of that RMB 20 trillion is serious money. The question I think about is: what's my company's positioning? What value do I create for users? What value for landlords, what value for institutions? When none of them can do without me, my value becomes very high, and when value is high, you can always find ways to make money.

V. You Typically Make Projections and Models When Fundraising. If the Business Direction Changes Later, How Do You Explain This to Investors?

Lei Li, Founder & CEO, Hui Fenqi / Huizhaofang

The most important thing is: don't fabricate reasons just to have reasons. Making mistakes or adjusting direction happens all the time. We can do post-mortems, but not every error needs a plausible explanation. What matters more is the post-mortem process itself — understanding clearly why you took that step.

Entrepreneurs don't operate by pure logical deduction for everything. Often it's intuition, which comes from constantly thinking about and committing to something. It may not be explainable through logic, but it genuinely works.

If the company's development doesn't match previous expectations, I just tell it straight. Never make up reasons. Because the more you tell them, the more you'll believe them yourself. If you get into the habit of always finding reasons for investors, your thinking becomes that every mistake needs a reason — that's a terrifying thing.

Zhenhong Zhao, Founder & CEO, Baibu

It's rare for a company's growth data to match its forecast model exactly. When we started the business, there was lots of uncertainty. One suggestion is to frequently think through this with investors as the company develops — don't wait six months to say "sorry, I'm this far off," which would drive them crazy. Keep them updated in real time, and things will go much better.

VI. When Fundraising Isn't Going Well, How Do You Adjust Your Mental State?

Lei Li, Founder & CEO, Hui Fenqi / Huizhaofang

In 2016, I spent half my time worrying about making payroll. Mental fortitude is crucial at these moments, because your state affects the team's state, and the team's state affects how things ultimately play out.

I often tell myself and my core team three things: First, no matter how hard today is, tomorrow will definitely be harder than today, because that's how history has always unfolded. Second, no matter how hard today is, you'll find the sun still rises from the east tomorrow, not the west. Third, fortune favors those who survive great adversity. After saying these things, everyone sees you're in good spirits, and when you're in good spirits, people gain confidence.

If you're gloomy, it's better to stay away from the office, because if the CEO has no confidence, the team has no confidence. If you can survive when you're on the verge of death, confidence gradually builds. The more times you nearly die, the more impressive a company you become. Though those three lines sound like chicken soup, they genuinely help.

Yiran Huang, Founder & CEO, YiCan

Mental state really does matter — it determines whether you can tell your story well, whether your team can trust you, whether investors can trust you.

When I encounter problems, the first thing I do is look inward. You can't count on changing the environment or having others cheer you up. You need to see what you can do, using your own strength to move those around you.

When I'm particularly troubled by something I can't solve, I do depleting exercise like boxing and skiing. Because during the process your physical energy gets exhausted, or you must maintain complete focus, so you simply have no time to think about those worries. And when you come back, you usually have a fresh perspective.

Another method is to find an undisturbed place and write out your goals, breaking them down step by step to what you need to do today. You'll realize there are so many things to do — who has time for sentimentality — and everything passes.

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