Fundraising lessons from David Rogier of MasterClass

Conventional wisdom says your company should be up and running and have some traction before you raise. But MasterClass co-founder David Rogier says entrepreneurs should try to raise funds before launching.

Before going live, David raised $6.4 million — $1.9 million in a seed round and $4.5 million in a Series A — for what would become MasterClass. To date, the company has raised six funding rounds and secured almost $240 million.

MasterClass’s first investment actually came from Michael Dearing, the founder of VC firm Harrison Metal and one of David’s business school professors. After graduating from Stanford University Graduate School of Business, David started working for Michael at the firm. About a year in, he quit to start his own company.

When David gave his notice, Michael told him he would invest just under $500,000, even though David didn’t have an idea yet.

“I was honored, I was thrilled and I was terrified, all within the span of 10 seconds,” David says. “It was an amazing gift, but I also felt an immense amount of pressure. I knew this was a once-in-a-lifetime chance, and I didn’t want to mess it up.”

He drew a blank for a year, but finally got inspiration from a story his grandmother told him when he was in second grade. In it, she stressed the importance of education, the one thing no one can ever take away from you. Upon remembering that lesson, David knew he wanted to give as many people as possible the opportunity to learn from the best, and MasterClass was born.

In an episode of How I Raised It, David shares some of his secrets to raising capital.

First money, then metrics

Securing funding before you even launch your company definitely isn’t a common practice. But David is adamant that you should attempt it.

“Your metrics out of the gate are never going to be great,” David says. “You need enough funds to have the time to actually improve them.” At the beginning, instead of relying on data, you should sell investors on your vision.

Of course, this is easier said than done. Many investors don’t want to give you a dime until you’ve proven your concept works. To overcome this barrier, David figured out what he could do to help minimize risk for investors.

For example, some of the potential risks for MasterClass were:

• Will celebrities and other big names agree to teach?
• Will the classes be good?
• Is there a demand for this type of offering?

To answer these questions, David conducted a series of tests and experiments.

He hustled to get at least a few instructors to sign on. To measure demand, he sent out multiple polls and surveys. He ran a test class to prove they could produce high-quality content. Fun fact: The students in that class were his parents — and no, he didn’t pay them.

“When I went in to actually pitch for the seed [round], I could paint a picture of where I was going,” David says. “I could show these test results.” These efforts not only reduced risk for the investor, but they also proved that David is scrappy, understands the risks and is trying to solve them — all good signs to investors.

The first few rounds of funding are all about your vision. Be very clear about your mission and the research you’ve done to prove that your company is needed.

Don’t just take anyone’s money

“One of the worst things you can do as a company is have a bad board,” David says. “Having bad investors or a dysfunctional board is going to kill you.” It’ll be stressful, painful and waste a ton of time you really don’t have.

If an investor isn’t a good fit for your company and team, partnering with them will do more harm than good, no matter how great their financial offer is.

So, heads up: Be strategic and choose your investors wisely. Especially because, as David adds, it’s very hard to part ways with an investor once you’ve taken their money. Each investor should be a collaborative partner, someone easy to work with who’ll give you help, advice and respect.

This means you have to do your homework. Talk to other entrepreneurs who have had the investor on their board. Better yet, talk to those whose company has failed or isn’t doing well. (To find them, you could leverage Crunchbase or the investor’s portfolio page, or consult your current investors.)

“It’s easy when a company is doing well to be nice and great,” David says. “But the real test is when things aren’t going well — how [did the investor] act?” To get these details out of a founder they worked with, David suggests asking the following:

• How would the investor behave during times you didn’t agree with them?
• What frustrated you the most about them?

You can also do some research when you meet with the investor — ask situational questions such as, “What would you do if our sales drop next quarter?” You’re doing this to try get a feel for how the investor thinks — are they rational, or do they fly off the handle easily?

“In a lot of rounds, we actually didn’t choose the best terms,” David says. “We chose the best investors. Because that extra 10% or whatever it is, to me, is not worth it. Any day of the week, I’ll take a great investor over optimizing the best price.”

Find people who can show you the ropes

You shouldn’t write a strict script for your pitch, but you should do dry runs. It’s not about nailing the pomp and circumstance of it all, though. It’s about getting an honest critique on the deck and how well you’re communicating each point.

As you move on into later and later funding rounds, you can practice in front of your board members and investors. But, some of the most important people to solicit feedback from are other entrepreneurs.

For every stage your company is at, try to find one or two founders who are currently in the stage ahead of you, “someone who was in your shoes about a year ago,” David says. Show them your pitch deck and seek their advice on your presentation and potential investors. They’ll have unique insights that other people likely don’t have.

For your first few pitches in a round, start off with investors who aren’t your top choice, David suggests. By doing that, you’ll be able to identify the few points that every investor will ask you about, such as your LTV ratio and your market cap. If there’s anything that isn’t clear in those meetings, you’ll be able to fix it for future pitches.

The practice will serve you well, so you’ll be well-positioned by the time you do meet with your top-choice investors.