Fundraising Advice for First-time Founders
One of my favorite parts of investing is meeting entrepreneurs who are new to navigating the fundraising circus, who aren’t looking to “game” the system but instead just want to get money from some nice people so they can get back to work building something awesome. This is what I normally suggest to those people.
(1) Do everything in your power to stretch out the period before you need external institutional capital. This means being insanely thrifty, revenue-funding, learning to build things yourself, prototyping with no-code solutions, selling before you build anything, keeping your day job, sleeping on friend’s couches during business trips, finding rich people in your city to write you small checks, replicating the Airbnb cereal hustle, whatever.
At your company’s very earliest stages — before you have proof points, cashflows, or financing alternatives — the chances of professional investors wasting your time are extremely high, and any funding that you do secure will likely be massively dilutive. If you ever manage to raise a Seed round at (let’s say) a $7M valuation, you might really regret the convertible notes you sold the year prior at a $1M cap.
Furthermore, once your company changes from being fully founder-owned to one where ownership is shared with external institutions, important things will inevitably change — and there’s no undo button for that. Going forward your priorities will be influenced by your investor partners whether you want them to or not. This can be wonderful, but it can also be nightmarish. Generally the longer you can delay this and the more optionality and self-sufficiency you can assemble prior to making this switch, the better.
To summarize: Every method you plan for de-risking your startup with investor capital is worth pursuing prior to raising money.
(2) Always have a plan for what to do if your fundraising fails. Write it down before you do anything else. Always have an escape route. Read Default Alive or Default Dead? and then The Fatal Pinch.
(3) Don't compare yourself to any other entrepreneur who has a prior venture-backed exit under their belt. Yes, some of them can raise at a $10M valuation before even building a prototype. No, this won’t seem fair. It’s not worth dwelling on or getting upset over.
(4) Determine a plan of attack. If you ask different people you will get different takes on whether it’s better to only approach VCs when you’re ready to fundraise versus building relationships with them over time. I contend that most of the people who pulled off the direct approach had one or more of the following attributes: 1) They were repeat entrepreneurs; 2) Their companies had 95th+ percentile traction metrics in markets that VCs identified as interesting; 3) They already had strong connections & reputation in the VC community (ex-Stanford, ex-Uber, etc). As Churchill once said, “history is written by the winners."
https://twitter.com/jasonlk/status/1163467401205207043
My business philosophy is, try to only get involved in competitive situations when your chances of winning are high. Find games that are rigged to your benefit.
The “run a fast process, only approach VCs when you’re ready to raise, and raise off the strength of your team & traction” game is very competitive — you’re competing against every other startup that is attempting the same thing. If you’re the best startup around: Yatzee! But most startups are not the best startup; they are better off avoiding these comparison-based games (remember: You don’t have to be 51st percentile to get funded this way, you have to be 98th percentile). They’re better off playing a different game, a less competitive but longer-term game.
(5) How to Nurture VCs. What are different ways that companies can advertise their investability? Say you’re pre-revenue, this is your first time starting a company, and your network is pretty small — what can you show off that reflects your strengths? Answer: Trustworthiness, follow-through, momentum, work ethic, resourcefulness, thoughtfulness, and emotional connection. These are traits that you can’t advertise in a 30-minute pitch. But over 3-6 months… different story.
Here’s how you run the playbook:
Identify 50 investors who are good fits to invest in your business 3-6 months from now (this means they do “seed” or “pre-seed” deals in your sector & geography).
Reach out to all of them — get intros if you can, but e-mail is fine if not.
Send these folks a very short note explaining what your business is, that you’re not raising now but you’re considering it in 3-6 months, and that you think you might be a fit for them in the future. Ask them if they’re interested in meeting for a half hour for a no-pressure chat about your company. If they say you’re “too early”, remind them you already know that.
Your goal should be to get between 4-6 out of the 50 intrigued enough to agree to a coffee meeting or Zoom call. If you only get 0-1, look into whether you’re not communicating about the business very well, or whether your business is just inherently unattractive to investors — in either case, this is valuable feedback.
These initial 4-6 people are your candidate investors that you should be nurturing over time into your informal advisors and eventually allies. Update these folks every month or two (whenever you have good news). Give them an idea of how you plan on spending your next 4-8 weeks & why you’re so excited about the company’s next steps, and then overdeliver against those predictions (or, if your plans change, explain your decision-making when you decide not to follow through… this will make you seem dynamic and thoughtful rather than spastic and unreliable). If it seems appropriate, ask them for small favors (advice or intros).
The ideal situation is that after repeating the above process 1-3 times, you eventually have a small handful of engaged investors (who you like) advising you and staying responsive to your updates, who get steadily and incrementally more excited about your business until eventually one (or hopefully more) of them say “hey, maybe we should talk about putting some money into your company”. Or alternatively, when you finally do ask them for money, they say “yeah, I’ve actually been thinking about that for a while now” or “I’ve been waiting for you to ask!”
The idea is not just to demonstrate your positive attributes over time but also to recruit your candidate investors into being your co-conspirators. Someone who is actively rooting for you — someone who perhaps has helped you out repeatedly, maybe given you some advice or made a few intros, even before investing — is a person who is on their way to being your ally for the long run.
This doesn’t mean that they will invest — but it gives you a better chance, and plays to your strengths. Getting investors out of comparison mindset (“I’m not sure if this is the best deal we’ve seen lately” / “this is too early, we have a $50k MRR minimum”) and into true believer mindset (“I just know that this team will be successful and I think we should get a piece of this”) is hugely advantageous to your fundraising efforts.
(6) Whether you pull off the nurture strategy or not, eventually you’ll need to create a presentation and pitch your business. Some tips about that process:
You'll need 2 pitch decks — a short teaser (10-12 slides: problem, solution, product, market, competition, team) and a longer one (which includes everything that makes you proud & pumped up about the company and business opportunity). Always share the short one first. Give the long one to anyone who asks for “more to chew on”. Feel free to make it crazy-long — if you’re excited when build it, your slides will communicate your enthusiasm. (The right order of operations is probably to build the long deck first — Go wild! Tell the story you want to tell! — and then whittle it down to the short version).
Always lead with whichever aspects of your company are (potentially) world-class. If your market is huge, start with that; if your team is elite, start with that, etc. If your traction metrics are so-so then don’t put them front-and-center in your pitch, instead put them later after you’ve hooked your audience with your strongest points. And make sure there’s something in there that either is world-class or should be world-class shortly after you launch (amazing market, perfect timing for that market, incredible technology, amazing unit economics, best team ever for a company of this type, etc). The #1 mistake I see in fundraising pitches is a bunch of information that describes a “solid” company that doesn’t really have any faults or weaknesses, but doesn’t offer anything tantalizing, anything that could potentially make a company “break out”. VCs don’t care about businesses that can merely grow, they care about businesses that can defy gravity and make them rich, and those business have something about them that is eye-poppingly out of the ordinary. You’re better off pitching a company that has a mix of A+ and C+ attributes than one that is B+ across the board with no A’s.
I strongly encourage you to commit to only revising your pitch presentation one time after you expose it to feedback from investors (updating numbers as they change doesn’t count as revising). After going to market and getting a bunch of rejections from VCs, there can be a strong urge to keep revising your deck over and over again, hoping to strike just the right chord that gets investors to open up their wallets. Yes, persistence pays off, and yes, you should take feedback into account to structure the best presentation you possibly can (that’s why I said revise once), but 9 times out of 10 if you’re getting only “fast no’s" after pitching it 10-15 times, you’re better off executing your “what if we can’t raise” backup plan. Otherwise you can get stuck in “Pitch Deck Polka” where you go round and round alternatingly pitching and revising, pitching and revising, over and over as your runway disappears and your optionality dwindles. If you want a humbling reminder that fundraising isn’t really about the perfect pitch deck, bookmark the bare-bones MixPanel deck that helped them raise $65M.
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