Q: What are the top things founders should know about fundraising from VCs?
Fundraising … It is sales.
It is selling stock.
And sometimes, it’s easier than other times. For many, 2H’20-’21 was the easiest time. At least, for those with a hot hand. Right now, things are harder for just about everyone. So it’s time to up your game. And be even more careful about who you take advice from. Those who had it easy will give you some wrong advice. And those that think the sky is falling, will too. As will those with positive and negative VC experiences.
With that, let’s simplify some basic tips that always help increase the odds fundraising goes well:
When you have more demand than shares to sell, yes you can sort of run an auction. You can do it all on your terms even, sometimes.
At all other times, it’s the opposite. You need to be selling. And as part of that, one key to sales is taking friction out of the buying process. So:
- Be honest about the process. During the crazy days of late 2020 and 2021, so many founders, even at the seed stage, ran very accelerated “processes”. Giving VCs just a week, or even a day or two, to make a decision. This works when you have a super hot hand in the best of times, but be careful today. Give investors both more time — and be honest about the process. About timing, about the size of the round, about expectations. Make it easier on them.
- Don’t hide numbers. Even in the early days, the numbers do matter. They are what they are. Hide mediocre growth, or high churn, and it may seem like you get more meetings. But they’ll just fade away once they see the real numbers.
- Don’t hide the weak team members. Sometimes, this can sort of work, since many investors will only want to talk to the CEO. But it can blow up on you if the CTO has issues, or your co-founder is leaving, etc. The best CEOs are upfront about who on the team is strong, and who isn’t, and where they plan to upgrade.
- Don’t hide the bad stuff. Share it upfront. Related to the prior point. No one expects perfection in a start-up. But hide the problem areas, and that can turn a small or non-issue into a big issue.
- Share the deck!! This saves everyone time. If a sales rep asked you to “get coffee” about a product you’d never heard of, would you? Probably not …
- Know your product cold. You have to at least know the competition and the market dynamics better than your buyer.
- Put together a customer case study pack — with actual email testimonials. The idea here is to do half the VCs’ customer diligence for them ahead of time. They’ll still want to talk to a few customers. But if you literally can do this for them, and share it early in the process, it can make the process go faster and easier.
- Build trust. This is critical to all non-transactional sales. Each interaction should build more trust. 50% or more of each investment is in the team. Your buyer has just gotten to know you. Why should they trust you? Nothing works better than transparency combined with prompt follow-up.
- Be on time and professional. Just like Mom and Dad taught you. In fact, be 2 minutes early to the Zoom. That shows professionalism and respect without being too early. I just love it when folks are 2 minutes early to the Zoom. It shows they think the meeting is important. 2 minutes late by contrast — it really starts the meeting off poorly. Even if no one says anything about it.
- Do your research. Only a subset of VCs and even angels will be interested in the type of start-up you are running. Sometimes it’s still worth a meeting, but don’t waste too much time on folks that won’t fund you. And after you make sure the VC is a good fit, at least get to know their portfolio a little bit.
- Write your own investment memo. Forget the business plan, but instead, write a memo on why if you were a VC, you’d invest in your own company. Flip it around, and put yourself in your buyer’s shoes. And force yourself to write a memo you’d have to write as a VC, to get your partners’ buy-in. If you are struggling to write a compelling investment memo on your own start-up … you aren’t ready for your first real pitch.
- Practice. Everyone gets better at pitching. Practice on your friends first. Then, practice on a CEO or two that has raised VC money before. And finally, maybe for your first real VC pitch, maybe don’t have that be your #1 first live pitch. So you have a chance to make a few mistakes there too, and learn.
- Sometimes, they really will just invest Later. A lot of investors will pass and use “you are too early” or something similar as a simple catch-all. Usually, “you are too early” just means Not For Us. But sometimes, it really actually means we like the opportunity a lot, and it’s close — but it really is just a bit too early. Any VC that “passes” but has high interest in you and the company, keep them in the loop with your progress. They may invest 3–6–9–24 months later. A bit more on that here.
- Trust > brand or anything else in the investors you pick. If you have options, i.e. more investors than you can take in, there will be many criteria you use. But start with Trust. You’ll be stuck with your investors for years, maybe even decades. Start with the VCs and other investors you’d trust the most to be on the journey together. Even if another fund might have a better brand, or a bigger fund, etc.
Fundraising is just a highly, highly specialized type of sales. You probably will eventually get good at it. Until you are, err on the side of promptness, honesty, and full disclosure. It will build trust faster.
(note: a SaaStr Classic answer)