It has only been a few years since I left the entrepreneurial rebel alliance and joined the dark side (venture capital.) There are still many pairs of jeans with worn out knees in my closet from all the fundraising (aka begging for money) I did not long ago. So when founders ask me for advice or connections to investors I try to be helpful and save them from learning all the mistakes firsthand.
Multiple times a week, I find myself giving the “Raising Money 101” mini lecture. It has occurred to me that most entrepreneurs have no idea how the investment business works. Or that it is an organized, thoughtful, thesis-driven business to begin with. I wrote about this extensively in Accelerated Startup.
Some Important Basics
The world of early stage venture investment is divided generally into two groups, Angels and Venture Capitalists.
Angels invest their own money into businesses they generally understand and feel like they can provide additional value to. They often have experience with the subject matter and, since many have been entrepreneurs before, can serve as great mentors and connectors. In other words, Angels want to feel like they are making a difference.
Venture Capitalists are professional investors who raise capital from high networths, corporates, and institutions on a specific vision of the future and a promise of high return on investment over a period of 10–12 years. A typical VC fund will make 5–10 investments annually for the first few years of a new fund. At some point they stop making new investments and reserve the rest of their capital to support portfolio companies in subsequent rounds of financings. If it is becoming clear that some of their investments are paying off (usually measured by rounds at increasing valuations,) they’ll then go out and raise their next fund to do it all over again. Each cycle takes several years so we like to call this the “get rich slow” model.
Angels will almost always be the first money in after your friends and family as they are investing smaller sums (which also makes them more valuation-sensitive.) VCs are in the risk-reduction game — where waiting is the best way to win. If you could invest later at the same valuation while the company makes mistakes and learns lessons on someone else’s dime, wouldn’t you? We’ll come back to this very important point in a bit.
One of the biggest time and connection-wasting mistake first-time founders make is seeking out ad-hoc meetings with investors based on loose, untargetted introductions. The chances of these conversations converting into investments are random, at best. Instead they’ll usually lead to a lot of unsolicited advice and frustration for the entrepreneur.
Worst yet, after getting the inevitable “no,” the entrepreneur (thinking they are hustling in a good way) will ask for an introduction to others investors “who may be interested.” Here in lies one of the biggest disconnects. What you have to understand is that venture capital is a relationship business. Especially in early stages, an introduction is someone vouching for you. So if the extent of our relationship is a 90 second email exchange where the answer is “sorry this is not a fit for me but good luck” I certainly won’t be willing to vouch for you with other investors. If I forwarded every “do you know someone else?” email, my network would stop taking my intros seriously very quickly. Besides, I’d have to explain why I’m not excited enough by the business to invest but it’s a perfect fit for someone else.
In venture capital, your personal network and reputation is hard-fought over many years. You could easily say the it is the most important asset in this business. Most investors will be highly defensive with their reputation if they want to stick around.
There is of course the right way to raise money. It is the same process that makes investment bankers so consistent and effective in raising rounds for companies. Unless you’ve had a big exit before (and are therefore a safer pony to bet on,) there are few shortcuts around it.
- Polish your pitch so it is easy to explain to a smart 5th grader, make sure it leads with the business opportunity and showcases your unique value proposition. Test drive it on some friendly investors and funded entrepreneurs who will give you brutally honest feedback so you can improve. Your mom or significant other will tell you everything is great and that you are genius. That is likely untrue and definitely not helpful.
- Setup a CRM such as Pipedrive or even just a spreadsheet. Mine Angel List, Crunchbase, CB Insights, and PitchBook to build a list of as many potential angel, venture, and corporate venture investors as possible. Very important: make sure they are stage-appropriate. If you’re raising a seed round, don’t go to growth equity funds who invest 10s of millions at a time, for example. Confirm that they invest in your category (IoT, healthcare, SaaS, etc,) and don’t have any portfolio companies that are even remote competitors to you. If VC funds are on your list, make sure you figure out who is the partner leading investments in your category.
- Open up trusty ‘ol LinkedIn and, next to each row in that spreadsheet, put in the name of the person or persons who can connect you to each investor (vouch for you) and give them a heads-up that you will be asking for introductions. BUT WAIT! Don’t ask for the intro just yet.
- Prepare a shareable summary document, your deck, and financial projections so you don’t have to disrupt your whole process midstream and risk let interested investors cool off. Then shorten the what, why your company, and your recent success to 3–4 sentences for those email intros.
- Only after that prep work, are your ready to ask for all of the intros at the same time. You should expect to talk to 50–100 or more potential investors in a compressed period of time.
- If all goes well, conversations will continue to subsequent meetings with genuinely well-match and interested investors for a couple of months and eventually to terms sheets.
Remember 136 seconds ago when I told you experienced investors are going to wait if you let them? In meetings, they will all be interested in “where you are in the fundraising process” and if you stick to the process, you will honestly be able to tell them that “this rocket ship is leaving with or without you, get your seat.” Your job is to create a deep sense of FOMO. Got it?
So that’s it, there is nothing more to it… oh except all those years of relationships and hundreds of hours sending emails, reminders, and having 100 first dates.
For now, heads-down, get it done! Once you’ve gotten to some solid revenues and are ready to raise a $10M Series B, that’s when you reach out to your friendliest investment banker for help.
Luck has little to do with it, so I wish you discipline and success.
