One of the worst things that can happen to a CEO of an early-stage company is to be in the state of perpetual fundraising.
Here is how you can tell that it may be happening to you:
- You have been fundraising for a while
- You are fundraising and running the business at the same time
- You don’t have strong interest from investors
- Investors aren’t engaged / don’t ask a ton of questions
- Investors keep telling you it’s early / to keep them posted
The list can go on, but you get the point.
You are wasting your time because you aren’t prepared and the timing is likely off.
Please go and read my popular post about 9 seed funding gotchas and I will be right here when you come back.
Disorganized, prolonged fundraising is exhausting and harmful for your company and your personal brand.
So what can you do?
Here are some things for you to consider to help the situation.
Do the Gut Check
Be honest—are you really READY to fundraise?
Have you prepared enough, or are you going out too early? When you go to bed at night and think about it, like really think about it, are you really ready?
The best way to fundraise is not to go out early, but to first prepare and answer a whole bunch of key questions about the business and the opportunity.
Think about questions like: why are you the right team, why are you going after this opportunity, why now, how do you know this is needed, what are the early indications of product-market fit, what is the business model, what are the unit economics, how are you going to acquire the customers, what is the pricing, what will this business be like in three years from now, who are the right investors, why would they invest, how do you get in front of them, what will be important to them—etc, etc, etc.
The nerdier you get about fundraising, and the more prepared and disciplined you are, the higher the chance you will be able to get it done faster.
Build Investor Pipeline
Assuming you passed the gut check, and you really feel like you are ready, next assess whether you are able to get in front of enough qualified investors.
Like sales, fundraising is a numbers game. If you don’t have a strong enough pipeline, you can’t get to the finish line.
Every single NO should cause you to add 3-5 more prospects to the top of the funnel.
If you are early on in the process, particularly a first-time founder without a strong network, you will find that fundraising is taking a long time because you aren’t even getting that many meetings.
Your fundraising process is stretched over weeks and months, but you aren’t seeing a lot of investors. As a result, you obsess over every single opportunity, like a few conversations you are having instead of focusing on having a lot more conversations.
What you need to do is to pause and focus on filling up your pipeline with 20-30 new investors. Just keep filling the pipeline, but do not take the meetings. After you have the pipeline filled up, THEN go and pitch everyone. This strategy will help you get a real signal and have a chance at creating momentum in your round.
Understand Investor Feedback
Assuming you have enough in your pipeline and you are meeting a bunch of investors in a short period of time, you really need to understand their feedback. What is the reason that people are saying NO? Do you not have enough traction? Is the space not interesting? Is the opportunity too small? Is it something else?
Whatever it is, your job as a founder is to avoid happy ears, parse the feedback you are given and really take it to heart.
If you are early and don’t have enough traction, then you need to understand the milestones people expect and go build the business until you hit them.
Investors may tell you that they don’t believe in the market size, or in unit economics or in your customer acquisition strategy—whatever feedback they give you, whatever the signal is, go back and address it. Understand the pushback, do research, get data, execute and come back with a fix.
Also, know that there are more subtle things that people won’t necessarily tell you about. For example, investors may not believe in the founding team and don’t see strong founder-market fit. Investors may not like the space. They may have issues with well-funded competition. If the issue is more subtle, try to really figure out what it is.
The bottom line is whatever the feedback is, no matter how tough it is, go back and address it.
Pre-seed Fundraising Strategy
Now let’s look at specific strategies for types of financing.
Your pre-seed round is truly an idea stage. You don’t have a product and you may not have your team fully assembled. You are super, super, super early. Read this other post I wrote first.
If you are a first-time founder, focus first on your friends and family, people who really know you and already think you are great. Get at least a little bit of their capital, and maybe even your personal capital so that you aren’t at zero. Being at zero is the worst state.
Don’t spend any time with VCs at this stage; you are WAY TOO EARLY.
You can raise capital from angels, but the key things are to a) get a little first from friends and family, b) target the investors correctly, and c) figure out milestones.
To build a correct list of potential investors, talk to other founders and ask them who the pre-seed stage firms and individuals were that funded them. Research, research and research some more to build the right list, otherwise you will be massively wasting your time.
Only specific funds and individual angels invest so early, so your job is to find investors whose strategy it is to fund the companies at your stage.
Next, think through all the tough questions you will be asked. Do the gut check—do you know the market, the customers, competitors, etc.? The more fluent you are in the problem and the business, the higher the chance you will get the check.
Lastly, clearly define milestones you are going to hit with the pre-seed round.
A typical milestone at this stage would be shipping the product. A better one would be shipping the product and getting a few early customers. No investor wants to give you a check to support your burn.
Investors want to fund you to the NEXT MILESTONE.
In the case of pre-seed, the key question an investor needs to answer is what milestones will enable you to raise a seed round. That’s really the meat of getting the pre-seed check—articulating milestones and metrics that will get you to the next round.
Seed Fundraising Strategy
Everything that we said for the pre-seed applies to the seed round as well.
Keep in mind that the bar is now higher in the seed round. You can’t be pre-product; you need to know your customers and you will likely be expected to have early traction. The game overall is upped significantly compared to pre-seed.
In addition, since the amount of capital you are raising is larger, you need to spend more time on identifying more relevant investors and getting introductions to them.
In terms of targeting investors, start with angels and micro VCs and try to get a few hundred thousand committed. Don’t spend a ton of time early on talking to venture firms, as they take longer and most of them would still think you are early.
By getting several hundred thousand committed on the round, you will be able to create momentum and will have better chance of getting larger checks.
Start with small checks—get to 1/4 or 1/3 of the round then shift focus to larger checks.
Also, how much capital are you asking for? 1.5MM – 2MM may be too high. Review your financial model. Can you make things happen with 1MM? If so, revise your model to be more capital efficient.
It is always better to start lower and then, based on the demand, over-subscribe vs. starting high and never getting there.
Series A Fundraising Strategy
It’s really tough to raise Series A if you don’t have strong metrics. Some founders raise on a story, but they are either repeat founders or working in the hyped-up spaces. Most founders will need really strong metrics.
There are exceptions, but if you are already generating revenue, you will be judged by your a) MRR/ARR and b) MoM Growth. However, strong metrics alone won’t get you a check. Not in this market, anyway.
The dance to raise Series A involves identifying the right firms and identifying the right partners, then getting to know them and letting them get to know you. It will also involve a lot of guts and luck.
Clearly assess how much appetite there is in the market. You should have a gut feel.
If the demand is not there, cut the burn (you should do it anyway), and go back to building the business.
Focus on getting to profitability.
Get feedback from the investors on what your metrics need to look like and keep them posted every eight weeks or so. Assuming you are growing well and hitting profitability, the investors will likely be open to another conversation.
In conclusion, fundraising is stressful, complex and needs to be done thoughtfully or else it is extra painful and takes way too long.
A lot of founders get fundraising wrong.
Do not fundraise randomly and perpetually. By doing so, you are literally harming your company and your personal brand.
As the CEO/founder, have the strength to listen to feedback, understand that you are not ready, pause, regroup, improve and go back to the market.
And lastly, get help! Read up, connect with other founders and get 2-3 key advisors on board. You don’t have to do this by yourself.
Originally posted on Alex’s blog.
We’ve written about the slowdown back in August of 2015. Lack of IPOs and liquidity in the later stage has a reverse domino effect on the whole investment ecosystem. The bitter election and uncertainty around the US and world economics and the future aren’t helping either.
As a result, we are seeing a significant slowdown and reluctance in seed investing. There are fewer angel investors, and those who do invest take much longer and invest much less. Similarly, Micro VCs are more cautious and take a lot longer to make decisions. What used to be two or three meetings to a check, now is five or six meetings to a MAYBE.
This market is not likely to improve quickly. Early 2017, and likely all of 2017 may continue to be slow and difficult for seed fundraising.
Here are some practical things founders can do to be successful in this new environment.
1. Raise Less Capital
Start by thinking about how you can do more with less.
If you previously planned to raise $1MM, can you revise your plan to accomplish the same with $700K? Most of the time, founders ask for arbitrary round numbers like $1MM or $2MM instead of the actual amount of capital needed to achieve specific milestones.
Think about what can you cut. Work to re-budget. Hire less people. Spend a little bit less on marketing. Get rid of your office space. Try to get hosting credits from Amazon or Digital Ocean.
Be creative and stingy. Spend time really polishing your financial model, and forecast, so that you can confidently tell investors why you are only raising $700K and why you know you can achieve the necessary milestones with less capital.
2. Lower Your Valuation
Very few things upset founders more than a low cap or pre-money valuation. Whenever most founders look at a term sheet, the only important term they see is valuation.
In reality, many other terms matter, and post-money valuation actually matters a lot more than pre-money valuation, because thats the true indicator of how much dilution the founders are going to have.
It is important for founders to realize that in a slow market, investors want a deal.
When there is plenty of capital to go around, founders ask for high valuations. When there is little capital to go around, investors push for low valuations. Investors want a deal.
Instead of being stuck on the numbers, lower the valuation and get your round done.
You thought you were going to raise capital on $5MM cap but investors want $3MM cap? Fine, agree to the deal. Yes, this is a lot more dilution, but you’d rather raise quickly on a lower valuation that not raise at all.
More importantly, if you crush it, there will be an opportunity for you to make up the dilution in the future financings. A year from now, when you may need to raise capital again, your numbers will be stronger and there is a chance that the market will be better as well. At that time you will be in a position to ask for better terms and you can compensate for the dilution you have to agree to now.
Simply put, you can get diluted 25 percent now and 15 percent later, or 15 percent now and 25 percent later and it is the same amount of dilution.
Sure, ideally, founders want less dilution now and later, but this is not real world, that’s not how markets work, and that’s not what investors want. Recognize the reality, give the investors a deal, and close your round faster. Also, raise less capital and your dilution will be smaller.
3. Meet More QUALIFIED Investors
We tell Techstars founders all the time – when in doubt, add more to the top of the funnel. This is true for both sales and for raising capital.
In the slow market, the shape of your fundraising funnel changes in two ways.
First, it gets taller. It will take you more meetings and more time with every single investor. What used to take two to three meetings to a check, may now take five to six. Be prepared and ask what are the steps, how long the process will take and what to expect.
Secondly, a lot more people will say NO in every stage, so it is important to triple the top of your investor funnel.
Fundraising, like sales, is a numbers game. You need to meet a lot of investors to get funding. Most say NO, because seed stage companies are super risky. Just be ready to get a lot of NOs, and keep finding new investors to talk to.
While it is important to talk to a lot of investors, this doesn’t mean you need to talk to every investor out there. Quite the opposite. You can only get funding from a qualified investor – someone who is interested in your space, someone who has capital to invest, someone who hasn’t backed your competitor. Research the investors to make sure they are qualified. Do not waste your time by trying to talk to every single investor out there.
4. Become Profitable
In the world enamored with venture capital, we rarely talk about profitability.
Yet, profitability for a startup is the most liberating thing that can happen. When you become profitable, you no longer depend on raising external capital.
Can you become profitable by closing a few more contracts, cutting expenses, and slowing down your growth? If you can, then this is the time to seriously consider doing it. If you become profitable you will be able to control your destiny.
A company that’s profitable is also more attractive to investors. It is less risky and it’s clear that the management team will spend the money responsibly.
Even if you aren’t profitable now, make profitability your next milestone. Instead of telling investors you will need to raise more money in 12 months, build a plan that gets you to profitability.
5. Get MORE Customers
In general, early stage investors are reluctant to invest because the companies don’t have enough traction. Real traction is revenue and paying customers. Get obsessed with sales and getting customers, not just fundraising.
Every single paying customer gets you closer to profitability, and to ultimate independence.
The more customers you get, the more convinced you are about the business and the faster investor dollars will come. Become your own toughest critic, leave no stone unturned and ask all the questions investors will ask.
Nothing excites investors more than actual paying customers and a hockey stick growth in customers and revenue. Get to revenue, grow the revenue and your chances of fundraising will go up.
6. Be MORE Inspirational
In a slower environment the bar for everything is higher. Not only do investors expect a better deal and more customers, they will also expect an inspirational vision and a bigger story.
Investors are naturally attracted to founders who have strong founder-market fit, see the future and have the ability to make it happen.
There reason that investors are attracted to artful story telling is because they know that great CEOs and founders have to inspire customers, employees, new investors and the whole world.
Founders who have a clear vision are also very resilient – they know where they are going, why they are doing it and what they are doing, and that gives them strength.
Inspirational founders with massive vision are the founders who won’t give up.
Take your vision and weave it into an inspirational story and investors will be more likely to invest.
7. Be Ready to Bootstrap
Lastly, be ready to not raise capital.
Strong founders need to be ready for every situation, and there is a real possibility that you won’t be able to raise any capital or will raise a lot less than you set out to do.
Do you feel like investors aren’t biting, and you’ve been fundraising for months? When your fundraising is not going well, it is time to pause and re-think your strategy. It is probably time to switch to plan B and to bootstrap.
The important thing is to have clear plan.
What can you do with no or little capital? How long can your team go without being paid? Can you tap your friends and family to help a little bit? Can you make progress on the product? Can you sell more customers? Can you execute on the business without the capital?
Come up with a very clear plan. For example – we won’t try to raise again for the next six months. During this time, we will grow revenues by X percent MoM and add A,B,C product features. We will all work from home and will have to dip into savings. We think that based on the feedback from the investors, if we achieve the above goals we are likely going to be able to raise capital in six months.
Having a very specific and concrete plan and having very specific and open conversations with your co-founders is really important. Come up with a plan, discuss it, get feedback and then go back and execute on it.
How badly do YOU want YOUR business to exist? If you have to make it happen, then no slow market and no lack of investor checks will deter you. You will find a way to make it happen.
We are all in the rush these days. As founders, we want to literally do more faster all the time. As we rush, we may get a lot done, but sometimes we don’t do things right.
We forego quality in exchange for speed and quantity.
Yet it is really important to pay attention to correctness and quality. When we rush and make mistakes, we then have to go back and fix them. When we go faster and miss things, we have to go back to fix them, and that usually takes more time.
It pays off to spend a bit more time and get things right.
Over the years, I’ve adopted a few simple principles to make sure that the work I produce is quality work. I learned these principles as a software engineer and now apply them to all things I do.
These principles are: simplicity, completeness and iteration.
Always make things as simple as possible.
Ask – what is the simplest most straightforward way to get something done. How can I describe something, or make something happen in the simplest possible way?
For example, is the email or blog post I wrote simple? Can I take away sentences or words to make it simpler?
Or when working with founders and thinking about their business, ask if the founders articulate their vision in the simple way? Can we simplify?
Or is our process for matching founders with investors simple? What can we do to simplify and be more effective?
By actively asking this question, you focus on and achieve simplicity.
Secondly, ask if what you created is complete.
Sometimes things that are too simple don’t fully solve the underlying problem.
As Einstein pointed out, things should be as simple as possible but no simpler.
Look at your document, presentation, task, piece of code and ask – does it satisfy fully what you’ve set out to do?
Is it complete?
Iteration is the third key.
Look over your work and check again for simplicity and completeness. Like a great editor, revise it and make it better. Like a great sculptor, refine and touch up.
Iterate until you can neither take anything away (simplify) or add anything (make it more complete).
When this happens you are finished, at least for now. Tomorrow or even a year from now things may change and you may need to iterate and improve again.
By applying these simple principles, by looking critically at your work, by polishing it a bit more, by asking if it makes sense, if it is simple, and complete, by looking at your work from an outside perspective you get to a much higher quality.
It takes a little bit more effort to learn and put this into practice. But once you master it, it will just become a second nature. The speed and quality will be happening automatically.
Quality doesn’t have to take more time, it just needs the right approach.
And now please share your principles and ways you achieve quality in your work.
I had a pleasure of interviewing Moisey Uretsky, co-founder of DigitalOcean (Boulder ’12), a close friend, and one of my all-time favorite founders. Moisey is incredibly smart, thoughtful, and had one of the best product guts and chops out there.
We talked about a lot of topics around engineering and startups, and one of the things that came up was the elevator pitch.
Moisey said that founders and investors often focus on the elevator pitch, and it’s fine, but it is not nearly as important as the customer’s elevator pitch.
I didn’t really know what the customer’s elevator pitch was. Moisey explained that it is the elevator pitch that a customer of a startup would give on behalf of a startup to a prospective customer.
The concept instantly made sense to me, and connected together two really important concepts – Product-Market-Fit and Virality or Word of Mouth.
The reason that Moisey’s articulation was particularly interesting to me is because it is a kind of litmus test for how well the company is doing, and it is also a kind of shortcut. That is, a concept of the customer elevator pitch embodies both – a successful product and the customers are so happy they talk about the product to prospective customers.
First, a Product-Market-Fit is achieved when most sales succeed and most customers don’t churn after a sale. We have written previously about the Magic Moment here. It is somewhat hard to understand, but an important concept.
The Magic Moment is a very special state—once a customer reaches that state, the probability of the customer churning in the future is dramatically lower. To put it differently:
An average customer that hits the Magic Moment will stay a customer for a long time, will have high LTV, and will be profitable for the business.
That is, the Magic Moment leads to a viable long-term business. When enough customers hit the Magic Moment, you get to Product-Market-Fit – customers buy and stay happy.
But Product-Market-Fit by itself isn’t always an indicator of a great business. If people keep buying the product or service, but don’t tell other potential customers, the cost of acquiring customers would still be high and margins of the business maybe hurting.
When the product is so great that customers tell other customers, then the cost of acquiring customers drops dramatically, and that typically leads to a great business. For the exact dynamic of how this growth happens, read this post, this post, and read up on K-factor.
Let’s now look at an example, and use DigitalOcean.
The company found Product-Market-Fit after they launched a simple, affordable hosting service using SSD drives and poured a ton of love and exceptional support on top. This offering strongly resonated with developers, and they flocked from other providers like Amazon and Rackspace to DigitalOcean.
The product was so great that developers started telling other developers – their elevator pitch was exactly this – simple, affordable and super cool hosting service. In turn, this elevator pitch resonated with new customers and more and more referrals started to roll in.
DigitalOcean took advantaged of this dynamic and put more gasoline on the fire by introducing a double referral program that gave credit to both existing and new customers. That strategy drastically lowered the cost of customer acquisition and lead to a great business and great margins.
DigitalOcean helped create a perfect customer elevator pitch.
The customer’s elevator pitch is a seemingly simple but really powerful way to look at your business. Don’t have a lot of customers? Business doesn’t work. Don’t have a lot of happy customers – business doesn’t work. Have a ton of customers but they aren’t talking about you – you are doing well, but it is expensive to acquire customers and margins suffer. But if you have a ton of customers that are talking about you, and that leads to other customers signing up, then you are doing great.
So what is your customer’s elevator pitch?
Competition is a strange topic. It is both underrated and overrated. This may seem like a contradiction, but it really isn’t.
Startups often don’t spend enough time understanding the market and spend too much time worrying about competition once they launch.
In this post, we look at different aspects of competition and how a startup can deal with its competitors.
Do the Market Research Before You Launch
Before you launch your startup, you need to study the market. Startups are about the opportunities, and to identify an opportunity, the founding team needs to do market research.
The worst way to start the company is to start without understanding the market.
Just identifying the need and talking to customers is not enough. Part of the initial research is also understanding the competition. Who else is working on this problem? Are they small startups or big companies? How long have they been at it? How are they doing? Are they succeeding? If not, why not?
Understanding the competition is critical, because the opportunity may actually not exist.
Sure, customers may want the product, but competitors may already have a good enough offering. Founders rarely spend enough time doing market research and really understanding existing competitors, yet it is a critical part of launching a successful company.
Beware of ‘No Competitors’
There are a handful of red flags that turn off investors. One of them is when the CEO of a startup says, “We have no competitors. No one else has thought about this, we are the first ones!”
No matter how you look at it, saying you have no competitors is not a good thing.
First of all, by definition, all good ideas are competitive, and all real markets have competition. Lack of competition may imply lack of opportunity. Either there is no customer need, or the opportunity is small and not compelling.
More often than not, investors know the market better than founders and can name competitors better than the founders. This is also a bad situation, because it means that the founders either didn’t do their homework or did it poorly.
Either way, when a CEO says his or her company has no competitors, this creates immediate concerns and trust issues for potential investors.
Know Your Past and Future Competitors
When investors think about opportunities, they don’t just think of them in the present moment. The founders are expected to know about competitors who failed in the past and about potential future competitors as well.
For example, people have worked on Artificial Intelligence and Virtual Reality before and those efforts didn’t quite succeed.
Many startups are working in these spaces again and say that this time things will be different. While that may very much be true, the investors want to know what exactly is different now, what conditions didn’t exist before, and why this time is going to be different.
Similarly, it is important to think about who else may enter the market. This is a much more difficult dynamic to predict because by definition, predictions are difficult.
Investors often ask the founders what would happen if Google or another large company went after their market. While not possible to predict, it is good to think about this question and be ready to answer when asked.
Figure out Your Competitive Differentiation
Market research and studying your current, past and future competitors eventually boils down to one thing—what is your differentiation?
What is your unique insight? Why and how are you different? Why does this difference matter enough for you to win?
This is why having Founder-Market Fit is particularly important. Founders who have experience in their specific market typically have unique insights and are able to come up with offerings that are differentiated.
A good differentiation is typically product, go-to-market or sales advantage. Product advantage is created when your product is substantially different in how it works from competitors’ products.
Go-to-market advantage is based on channels that you are able to secure that no competitors can lock in. Sales advantage is typically based on your experience and deep understanding of the customers.
Keep Track of Your Competition, but Ignore the Noise
Most founders spend too much time worrying about competition on a daily basis. News is extremely noisy—someone launches something every day. If you follow every single bit of news from every one of your competitors, your life is likely a major emotional roller coaster.
In the end of the day, it is not what your competitors do, but rather what you do that matters more. You don’t have control over product releases, sales and PR of your competitors—all you can control is your own business.
Focusing on creating the best possible product that your customers love is your best defense against competition.
Instead of reading daily news about competition, set up a quarterly, or at most monthly, review of both competitors’ news and more importantly, products. This way you can keep track of what’s happening without the stress involved in following your competitors daily.
Accept and Play “The Idea Exchange” Game
When I was running my startups, I remember that feeling I would get when a competitor launched something that we had previously launched. A competitor stole our idea! Even worse, they executed it better, and no one gave us credit for being first.
Founders often complain about this situation. The reality is that this is now an accepted reality. Today, companies readily copy products and iterate on each others’ ideas. There is no protection for ideas; they are basically free to take.
Founders should just stop complaining and assume that their ideas will be copied.
The product and the business needs to be able to survive in the environment where pieces of UX and user flows are being copied.
In exchange, you as a founder benefit from taking ideas from your competitors’ products. Much like they copy your ideas, you can copy their ideas.
Build Relationship with Your Competitors
While sharing secrets with competitors is a bad idea, being friendly in general makes sense. Competitors are typically the most knowledgeable folks about the space besides you, and it is interesting to talk to them and get their perspective, again, without revealing too much.
Founders tend to run into their competitors at conferences and events, and naturally have the opportunity to connect. By building the relationship with your competitors you are both helping co-create the space, and getting to know your competitors as people.
You never know what the future holds. It may make sense for you to join forces or create a partnership. Markets with big opportunities tend to consolidate, so investing in a relationship with your competitors is likely a net positive for you.
Win with Your Heart and Mind
Once you are in the market, you compete on the product and your unique approach to the problem. No one but you knows exactly what you think and what you are building.
You win because of your unique approach, not because your competitors did or didn’t do something, copied or didn’t copy you.
Ultimately, competition does not matter nearly as much as your vision and your resilience.
You win by imagining the future and taking your customers, your company and the world there. You win with the product that is unique to you, with the business execution that is yours.
No competitor can take it away from you because they don’t see the world the same way. Your competitors aren’t you.
The best founding teams have their eyes set on the vision, their true north, and go there, regardless of what the competition does or doesn’t do.
The best founding teams win with their hearts and minds.
Three years ago I embarked on what, so far, turned out to be the best job of my career.
I am not just saying it, this is actually true – running Techstars NYC city program and working at Techstars has been the best, most humbling job I’ve ever had.
Here is what I learned in the last three years:
I am now an investor in 55 startups, and the thought really blows my mind.
But here is the thing – I don’t think of these investments as investments in companies, I think of these as investments in people. To me, at Techstars, we don’t invest in startups, we invest in founders.
I’ve taken this approach since my first program back in 2014 – invest in best founders you can find. Invest in smart, fearless, resilient founders and get behind them unconditionally.
I am convinced that this 110% commitment, this almost blind belief in the founders is what matters the most. Through the inevitable ups and downs of every startup, what founders can really feel and really lean on is your belief in them.
Prioritizing founders and their interests and their needs can’t be faked. You can’t say you do it. You have to actually do it. And it is a ton and ton and ton of work.
Founders know and feel you are for real and they respond back with raw authenticity, openness and commitment back to you.
Fundraising, founder issues, business introductions, hiring, financial modeling, and just plain simple things like listening and sharing lunches and dinners and responding to phone calls on weekends and evenings all take enormous amounts of time.
But it is worth it, every single second given to the founders is worth it.
The relationships that I’ve built with my founders, the commitment that I’ve made to them have changed me in ways that are impossible to describe.
It feels right, it feels so great to be helpful. It just feels like the right thing to do that made me a much better investor, but way more importantly, a better human being.
Mentor and be Mentored
Mentorship is at the core of Techstars, and I’ve experienced its transformative power myself.
As a mentor to my founders, my core strengths are empathy, complete openness, lack of agenda and intellectual honesty.
Startups are unbelievably hard. The struggle is real. The first job of a mentor is to relate and to empathize with the founder. But it is not just empathy, it is also intellectual honesty and ability to tell them the truth, as you see it, to point them to the data, to make them sober, to help find the right path, is what has been really important.
Yet being a mentor is not the only amazing thing I was able to experience at Techstars. Perhaps most unexpectedly and in a very transformative way I’ve been mentored myself.
Truthfully, I’ve never had great mentors in my career. My closest experience with good mentorship was with my former boss, Paul Kotas who I worked with at D.E. Shaw.
But something very different happened to me at Techstars. I learned a TON from everyone in the organization. Mark Solon and Nicole Glaros have been incredibly generous and patient with me, and I learned a lot from them.
But the most extraordinary generosity and mentorship came from David Cohen himself. David has made himself available and responsive in ways I could never expect when I took the job. He has patiently, meticulously and deliberately committed to mentoring me and answering any questions I’ve had (and I’ve had and still have many!).
David Cohen truly leads by example and taught me so many things that I know today.
Network is the Magic
I’ve spent more than a decade of my life studying networks and complex systems.
My first company, which was bought by IBM, applied graph theory to software architecture. I’ve studied networks in economics, politics, biology, physics and society. My second company was a social network for entertainment.
So, I know a ton about the networks and how they work. But that knowledge is very different from being INSIDE of one of the most powerful business networks in the world.
At Techstars, the network – founders, alumni, mentors, corporate partners, Techstars staff – is the magic. Period.
Our ability to accelerate the companies, and shortcut the universe through this incredible network is unlike anything else out there. By leveraging the network we are able to go 10x, 100x, 1000x faster than people who don’t have the network.
In the last three years at Techstars, I’ve made a deliberate and conscious effort to invest in this network, my personal network and to build it out. I believe I am literally light years ahead of those who don’t have this kind of network, and I have created an unfair advantage for myself for the rest of my business career.
How to be Thankful
I am so incredibly thankful for this opportunity. I am so glad Brad Feld gave me a call a little over 3 years ago, and asked that I would consider this job.
I am so incredibly thankful for my crew at Techstars — KJ and Jill have been the A-team to help pull off this mission impossible. People at Techstars I work with, our mentors in NYC, our community, our LPs/investors have been incredibly supportive.
But saying you are thankful is not really enough. Being thankful is very different than saying you are thankful.
Being thankful is about pausing and acknowledging others around you. Being mindful of them, being attuned to their needs, spending a few seconds of your life thinking about them.
Everyone can say they are thankful, but are they really?
Being thankful by being mindful and acting on it, leaning in, offering help and being present – that’s what I learned is really powerful.
Trust Your Gut
Life is fundamentally unpredictable.
Startups and venture are so unbelievably hard. Companies that seem to be successful run out of money and fail. Founders who struggle figure things out and create great businesses.
No one can predict what is going to happen. No one knows for sure what will make money.
But ultimately, no matter how you slice this, there is no formula for the perfect startup.
You can come up with million reasons why not. You can find a hole in every single early stage company.
Ultimately, you have to trust your gut, and your gut is tied to your belief in these specific founders. Do you believe in them? Can they pull off the impossible, and if they do, will it be worth while for everyone around the table?
Ultimately, your gut comes full circle and goes back to this one very simple thing – founders first.
I am a fan of having a formal board right after the company raises seed financing.
I’ve seen how helpful the boards are and how often founders are lost and disadvantaged without the board.
To put it simply, a good early stage board helps the CEO identify key future milestones, and helps achieve them.
For 99% of early stage startups profitability isn’t possible, so the company needs to raise another round of financing. To get this follow on capital, the company needs to achieve key milestones and prove hypotheses around product market fit, revenue, customers, users and growth.
A good board helps the CEO by focusing on achieving these milestones. However, in order for the board to be helpful, the CEO needs to run an effective board meeting.
How Not to Run Your Board Meeting
Before we dive into how to better structure board meetings, let’s discuss what not to do.
1. Spending the entire meeting giving the board an update and going through the slides is the not a great use of boards’ time.
Why? Because this leads to focusing on details, nit picking and loss of the big picture.
2. Going through the updates slide by slide makes board members not review materials in advance and not think through their questions.
This format leaves no time for strategic conversations and doesn’t leverage the strength and experience of each board member. The format feels adversarial and creates an odd dynamic, because questions keep coming and CEO is seemingly constantly on the defense.
In short, this format is ineffective.
How to Run Your Board Meeting
A better format shifts the focus of the meeting from reviewing slides to a strategy discussion around just a handful of key topics.
In addition, effective board meetings have clear structure, an agenda and allow the CEO to keep everyone on track (and actually accomplish things). Here is an example of a two hour board meeting:
- Circulate materials and agenda three days in advance
- Materials review: 15 mins
- Q&A on the deck: 15 mins
- Strategic topic one: 30 mins
- Strategic topic two: 30 mins
- Budget deviations review: 10 mins
- HR/Open hires: 10 mins
- Board minutes/Wrap up & next steps: 10 mins
Send the materials in advance and also give the board 15 minutes to review the materials in the meeting. This is the strategy that Jeff Bezos uses in his executive meetings. Start the meeting by reviewing the materials. This budgets the review time into the meeting and gets everyone on the same page.
Have people ask clarifying questions about the materials. Keep the answers and discussion short. Most questions will likely be focused on KPIs and financials. You will have more time to address financials towards the end of the meeting. Table longer questions for later, follow up as necessary.
The next two segments are the most important ones — key strategic topics you as a CEO need help with. You have an open forum to engage the board and lean on their experience. Questions can range from go to market strategy, sales, competition, next financing, to company culture and hiring.
Whatever it is, the topic is part of the agenda and CEO engages the board deeply around it. This sort of focused discussion feels productive, helpful to the CEO and satisfying to board members.
Next, briefly review financials. Frame the review in terms of deviations/what is not on track. Don’t make the review too open ended, or it is going to take too long. Remind the board of what projections were and how you are doing against your projections. Explain why you are behind or ahead of the plan, particularly around the burn. Ask for feedback and create follow up as necessary.
Next, talk about open hires. Every company, no matter how early, is always focused on hires – whether it is engineers, marketing folks or any other role, it is important to create ongoing dialog with the board about hiring. Boards can be helpful, particularly when it comes to more senior hires, because the directors have experience and the network that CEOs can tap into.
Wrap up the meeting with a quick summary of takeaways and next steps. Make it clear who owns what items.
This structure should generally work for everyone, but tweak as makes sense for your company.
For example, if you feel like you aren’t getting enough time on finance or HR, you can make them strategic topics. In any case, don’t discuss too many topics per meeting as it will make the board unfocused, and the board members won’t be able to help.
Part of the art of being the CEO is to pick the right focus for each board meeting.
Try a structure like this for your board meeting, get feedback from the board on what is working and what doesn’t and keep iterating until you get to a productive and helpful format that works for you.
Só fundadores de série com conhecimento forte de domínio, e tração obtém financiamento rapidamente. Para a maioria dos fundadores, levantando uma rodada de investimento sede é muito mais trabalho, mas há um método para a loucura.
Muitas vezes escrevo aqui sobre o levantamento de capital. Capital permite que as startups possam ir mais rápido e gerar crescimento. No entanto, o aumento de capital não é simples, pelo menos para a maioria dos fundadores.
Vamos começar com o que é provavelmente o pior cenário – você é um fundador que esta sozinho, logo após a faculdade, com uma ideia em um espaço onde você não tem nada experiência. Ou seja, você não tem equipe, nem produto, nem tração, nenhuma experiência em geral, e nenhuma experiência nesse espaço especificamente.
Este caso extremo ilustra as razões pelas quais os investidores estão céticos – esta é uma situação de investimento muito arriscada. Ou seja, você pode ser brilhante, e você pode construir um negócio massivamente incrível, MAS esta claro que e uma aposta muito arriscada.
Investidores, particularmente os investidores anjo, procuram maneiras de reduzir o risco quando eles estão investindo em uma empresa. É por isso que os fundadores, que se financiam mais rápido são os que reduzem o RISCO DE INVESTIMENTO.
Abaixo discutimos os perfis dos fundadores que os investidores gravitam no seu entorno e tendem a investir em.
1. Fundadores de série
Você já sabe disso, mas vou dizer de qualquer maneira. O mundo não é justo.
Fundadores de série que já foram bem sucedidos são MUITO MAIS PROPENSOS a obter financiamento.
Eu já conheci muitos investidores que simplesmente não investem em fundadores que estão fazendo um negocio pela primeira vez. Eles não são pessoas más. Não é apenas uma parte da sua estratégia de investimento.
Quando esses investidores conseguem dinheiro do seus LPs (parceiros limitados, ou seja, investidores que dão dinheiro aos investidores), prometendo-lhes em seus decks que vão se concentrar apenas em empreendedores de serie. Isso não é diferente de um investidor dizendo que só vai se concentrar em cuidados de saúde ou que eles só vão investir em empresas de NYC. É uma estratégia de investimento, e como eu pessoalmente não acredito em investimento dessa forma, eu reconheço que é uma estratégia perfeitamente legítima.
Investir em fundadores de série com expertise de domínio faz sentido.
Em primeiro lugar, fundadores de série evitam cometer erros bobos em praticamente qualquer aspecto do negócio que os fundadores pela primeira vez fazem. Fundadores de série sabem intuitivamente o que não devem de fazer.
Eles sabem o que NÃO vai funcionar. Por causa disso, eles tendem a executar melhor, crescer empresas mais inteligentes, e obter um rendimento mais rápido. Nem sempre, mas essa é a percepção dos investidores.
2. Fundadores com o conhecimento de domínio
Quando você está começando um negócio em um espaço que você não sabe muito sobre isso, você está em uma desvantagem MASSIVA.
Pense nisso, quando você não sabe algo, você tem que estudá-lo. Para coisas como a física ou a assuntos internacionais, você vai para a faculdade. Você leva anos para aprender, e você tem que pagar para a sua aprendizagem.
Quando você começa um negócio em um espaço que você não estão familiarizado com, os investidores sentem que eles estão te pagando para você aprender o negócio. Isto é, você não está executando imediatamente, primeiro você está aprendendo.
Os investidores não são a sua mãe e seu pai; eles não querem pagar pela sua educação.
Os investidores estão atraídos a fundadores com o conhecimento de domínio. Investidores falam sobre o chamado ajuste fundador-mercado.
Por que esses fundadores estão fazendo este negócio? A resposta que os investidores estão procurando é – os fundadores conhecem muito bem o espaço e identificaram uma oportunidade. Os fundadores sabem que há uma oportunidade com base em seu bom conhecimento de domínio e anos de experiência no espaço.
3. Fundadores com tração
Enquanto seu negócio é apenas uma ideia, os investidores vão achar um 1 milhão de razões pelas quais ele não vai funcionar. Mas se você continua crescendo semana a semana, mês a mês, e crescer seu rendimento e clientes, eventualmente, todas as objeções irão embora.
Os investidores não podem resistir o crescimento de financiamento. Os investidores não podem resistir a tração financeira.
Crescimento e tração são indicadores de um ajuste de mercado e produto.
Eles são indicadores de que o negócio está realmente funcionando. Se você fez um startup antes ou se você conhece o espaço ou não, já não importa. Crescimento e tração significa que você descobriu o segredo e está funcionando, por isso os investidores querem ir a bordo.
4. Fundadores com a experiência e network
Se você não é um fundador de série e não tem uma tonelada de experiência de domínio ou tração, você ainda pode obter financiamento, mas é MUITO MAIS DIFÍCIL.
Há um padrão na indústria, onde fundadores que saem de empresas de tecnologia como Google e Facebook obtém financiamento. Se você passou anos e se provou em um papel de produto ou de engenharia em uma dessas empresas Top Tech, os potenciais investidores tendem a te levar mais a sério.
Isso é porque você provavelmente vem recomendado de uma forte rede de ex-alunos desses lugares que podem atestar sobre você e apresentá-lo aos investidores. Por exemplo, você trabalhou com um dos fundadores cuja empresa foi adquirida. Quando essa pessoa te apresenta aos seus investidores, os investidores estarão prestando atenção.
De certa forma, essa dinâmica não é muito diferente de se formar de uma escola de nível superior. Você se inclina em uma forte rede e alavanca as suas conexões para obter uma introdução aos investidores.
5. Orientados pela missão, Founders intelectualmente honestos
Alguns fundadores claramente destacam do resto. Você pode perceber o quão fixados eles são. Estes fundadores não vão embora e não vão desistir, não importa o quê. Os investidores muitas vezes se referem a esses fundadores como Conduzido pela missão.
Além de ser orientados pela missão, estes fundadores estão profundamente autoconscientes e intelectualmente honestos. Eles são socráticos e introspectivos.
Fundadores orientados a sua missão estão em uma viagem de descoberta. Eles têm um norte verdadeiro, mas são flexíveis sobre o caminho específico que manda eles lá.
Eles irradiam poder e grandiosidade, e fora que possam ser jovens e inexperientes e precoces, eles conseguem convencer os investidores com sua mistura de entusiasmo e conhecimento. Fundadores orientados com a missão tem energia contagiante que atrai investidores. Os investidores decidem lançar os dados juntamente com estes fundadores.
Ao levantar capital, pensa sobre os tipos de fundadores que tendem a obter financiamento. Qual desses fundadores é você?
Este blog foi traduzido por @SamyRusso
Este post foi traduzido por @SamyRusso
A chance favorece as mentes preparadas’ – Louis Pasteur
Um dos objetivos das companhias passando por Techstars e outras aceleradoras e assegurar financiamento. A maioria das companhias vem com o foco de acelera o seu negocio e depois assegurar capital para continua a acelera o crescimento. Como o acionista comum na empresa, Techstars está completamente alinhada com estes objetivos.
A realidade é que a maioria dos startups precisam de conseguir o financiamento para crescer e se tornar empresas reais. Não é típico que você ou a sua aceleradora podem ganhar dinheiro se você não consegui recursos, e certamente muito improvável que alguém possa ganhar dinheiro se a sua empresa não cresce.
Então, nós o amamos quando as empresas conseguem financiamento.
Mas nós já vimos um padrão claro com as empresas que se apressam em conseguir financiamento muito cedo – eles realmente têm mais dificuldade em fechar o financiamento. Por quê? Aqui estão os 9 pegadinhas de investimento seed que vai ajudar você a entender o que está errado.
Falta de Preparação
Para estar pronto para conseguir recursos, você precisa ter um bom conhecimento do problema que você está resolvendo – por que você começou este negócio; o ecossistema do seu negócio – clientes, oportunidades de mercado, a concorrência, ir ao mercado, canais de distribuição, preços, e muitas outras coisas. Vão te fazer muitas perguntas e, em seguida, alguns dos potenciais investidores. Se você não estiver preparado vai entrar e vai ser um grande turn-off.
Falta de tração
Muito poucas empresas obtem financiamento seed sem algum tipo de tração. A menos que você seja parte de uma equipe de empreendedores de série e, mesmo assim, os investidores esperam que vocês tenham tração do cliente / usuário. Isso não significa que você tenha ajuste perfeito do mercado do produto. Isso significa que tem primeiros indícios de que existe um problema e sua solução / produto vai ter uma chance de abordá-lo.
Sendo puxado para dentro do Fundraising
Então você não estava pensando em levantar dinheiro, mas você se encontrou com um grupo de investidores, e eles disseram que você realmente deve fazer. Outros fundadores do seu entorno te disseram que você deve fazê-lo também. Você, então, decidi em dar-lhe um tiro. É um erro. Você não está pronto – você não se preparo, você não planejou isso. Não levante recursos no relvado e no tempo de outras pessoas. Controla o seu destino através da preparação, marcando as caixas e, em seguida, indo e levantando dinheiro. Ninguém está indo embora, e os investidores não vão dizer não a uma reunião com você mais tarde, se você disse não a eles quando você não estava pronto.
Perseguindo as pessoas erradas
Este é um grande problema, e isso é ruim. Todos os investidores são diferentes. Eles gostam de diferentes setores. Eles escrevem cheques de diferentes tamanhos. Só porque eles são investidores não significa que eles são tem que se o investidor certo para você. Fazendo uma pesquisa, entendendo o que um determinado investidor gosta e por que você pode ser um candidato é importante. É igualmente importante obter uma introdução de alguém que você conhece e que também conheça o investidor.
Não fazendo um bom pitch para Angels e VCs
Angel investidores, micro VCs e VCs são todos muito diferentes em termos de seus objetivos e estilos e, consequentemente, como eles precisam ser abordados e como fazer o pitch. Um investidor Angel que escreve cheques de 25K-50K pode querer um par de reuniões e um micro VC que escreve cheques 100K-250K estará envolvido por um mês e podem ou não investir. VCs demoram mais, eles escrevem os cheques maiores, e gostam de lead rounds e tomar lugares no conselho. Se você não entende como envolver cada categoria de investidores corretamente, você vai perder tempo e pode não obter o resultado desejado.
Não tendo uma estratégia global
Mesmo que você saiba que você está indo atrás de que e porque, você ainda precisa de uma estratégia. Uma estratégia implicaria planejar todo o processo de captação de recursos, com quem se reunir primeiro, e com quem se reunir mais tarde. Você começa por levantar alguns quantos milhares de anjos, ou você vai direto para VCs? Tomando as decisões certas sobre a sua estratégia de financiamento, especialmente se você é um fundador fazendo isso pela primeira vez, é realmente importante. Não tendo uma estratégia aumenta a chance de não captar o capital que você precisa para crescer o seu negócio.
O problema “Eu sou especial”
Mas é claro que você é! Eu também. Quando você vai a um cassino e joga, você pensa – todos esses otários em torno de mim, eles vão perder, mas eu? Não não. Eu sou um vencedor. E isso é triste, porque como empreendedor você realmente é especial. Todos nós somos essa raça corajosa, incansável, louca, e imparável. Mas a realidade é que não é uma boa aposta para fazer quando se trata de financiamento seed. Você estará melhor estando preparado e ganhando por causa disso.
Não percebendo que você está em uma corrida
Quando você está de captando recurso, a palavra viaja ao redor. Os investidores são pessoas, e eles falam. Não porque eles são ruins ou contra você. É natural comparar as notas em qualquer indústria, e VCs não são a exceção. Quando você está indo captar recursos, você precisa fazê-lo rapidamente e manter todas as conversas alinhadas. Uma vez que você começar captar, você tem que correr a corrida até que esteja concluído ou você decida parar, porque simplesmente não está dando certo. Perceber que esta é a corrida antes de entrar.
Ficando sem balas
Pode ser uma analogia engraçada, mas faz sentido. No início do processo, você tem uma arma carregada e você começa a disparar tiros e ter todas essas grandes conversas. Em algum momento, especialmente em um ecossistema menor, você percebi que você já conversou com praticamente todos. Não há ninguém faltando. Você disparou todos os seus tiros, e sua arma está agora vazia.
A má notícia é que se você já se reuniu com todos os investidores, e eles não lhe escreverão um cheque, então você não pode voltar a eles no próximo mês e tentar de novo. A boa notícia é que se você volta a eles em 6 meses, e mostra o progresso, e o seu, desta vez, você receberá o cheque. Demora algum tempo para recarregar a arma, e as únicas balas permitidas na recarga são as balas de tração reais.
Como e quando conseguir financiamento
Então como você realmente ganha isso e obtém financiamento? Duas coisas – preparação e tração. Tenha todas as suas coisas em ordem. Sua plataforma, o seu pitch, a sua estratégia de financiamento, com quem que você está indo falar e por porque, consiga as introduções, etc. Esteja preparado.
Mas mesmo se você estiver preparado, pode não ser suficiente neste dia e idade. Vemos cada vez menos pessoas financiando ideias e plataformas. Os investidores querem ver tração cedo. Algum tipo de indicação de que não só é a sua ideia muito boa, mas que você conversou com os clientes, construiu o MVP, e ter algum tipo de tração – prova de que você pode fazê-lo e ele pode funcionar.
E se você acha que é muito difícil e complicado, peça ajuda! Converse com colegas empreendedores que fizeram isso antes. Aplique a Techstars e nós podemos ajudá-lo a acelerar o seu negócio e conseguir o financiamento. Realmente pensa muito bem do financiamento. Se prepara. Seja atencioso. Ganhe.
Last week we wrote about questions that investors ask founders during investor meetings. This week we are reversing the table and talking about questions that founders need to ask investors.
Most founders spend little time asking investors questions, and that’s too bad. Good investors love it when you ask them questions, because it shows that you are thoughtful and don’t think of them as just a walking wallet.
By asking the right questions, you can avoid happy ears, avoid a MAYBE, and really qualify investors in your funnel. By asking questions and getting clear answers, you minimize the chance of wasting your time with investors who will not invest.
1. Are you interested in potentially investing in my company, and if so, what are the next steps?
No first meeting should end without you asking this question. Be direct. Do not be shy. Whether you are meeting an Angel investor or a VC, ask this question before you end the meeting. Every investor by the end of the meeting will make up his/her mind.
They will not decide to invest, that basically never happens or happens very rarely. Most likely though, the investor will decide to pass, because most investors pass on most companies. And some investors will want to continue the conversation.
By asking this simple and direct question, you will know exactly where you stand. If the investor indicates interest in continuing the conversation, then ask about the next steps. Listen carefully to what the investor is saying.
For example, if the investor says keep me posted, or I am traveling the next few weeks or I have a lot of things I am working on – this is known as a soft NO or definitely not now. When an investor is vague, assume he / she is not interested.
On the other hand, if the investor proposes to set up a follow up meeting or a call in the next week or so, this means there is interest. Listen carefully to what the next steps are and decide if the interest is real.
2. What is your investment process, and how long does it take?
If the investor is interested in taking the next steps, you need to ask about the whole investment process. The process will vary widely depending on the type of investor.
Let’s start with an individual angel investor. Most likely, the process will be 2-3 meetings and some diligence and reference calls. It is pretty light, and depending on the check size and where you are in your round, it is totally fine to ask to commit in the end of the second meeting.
Some angels like to co-invest with others, and that often prolongs the process. If others are involved, this means more pitching and more coordination between the group or a syndicate. Ask how long will this take, what will be total check size and actively manage this process. Often times, co-investors will drag the process and the initial angel may change her mind about investing.
Similarly, angel groups have a clear process that is typically not fast and involves multiple meetings and diligence calls.
Typically, a formal angel group will assign a team of angels to an investment committee for each deal. You will need to meet with them at least a few times and then, if things go well, present to the entire angel group. After that, there maybe more diligence.
The process for Micro VC and VC firms varies, but in general takes 3-4 meetings to get a positive decision. Every firm meets regularly to evaluate the deal flow. When you hear that you will be talked about during the partner meeting this week, in general, this a positive thing, but be ready for a quick NO coming out of that meeting.
If the VC is engaged, you should be meeting with more and more partners in the firm as the process unfolds. For larger checks, you will be invited to present at a partner meeting. That would be a critical meeting for a YES decision. If a firm has a seed program and writes smaller checks, then you might be able to get a positive answer without presenting to the entire partnership. Read 8 Things You Need to Know about Raising Venture Capital for more details about raising from VC.
3. What is your check size?
Another important question to ask is the check size, because you want to know your result in case you are successful. Knowing the check size helps influence the timeline and, frankly, the effort you put into this particular pitch. For example, if you are raising a $1MM round you can’t spend a ton of time with people who write $25K checks. You simply won’t be able to get to the finish line if you focus on those.
What you are looking for is to start your round with smaller checks, but quickly move to bigger ones as you have more and more committed. For $1MM round for example, you want to spend most of your time on $50K, $100K and hopefully get one check of $250K or more.
Oftentimes you will hear a range. An angel can say I invest $25K-$200K, or a VC invests anywhere from $300K to $5MM.
Ranges, in general, aren’t great because they lack clarity. There may be complexity or another message behind them. For example, an angel who says $25K-$200K may only invest $25K personally and then syndicate out the rest. The syndicate may or may not come through, so you can’t count on that money.
Similarly, when a VC names a range, it might actually mean that they do seed exceptionally rarely. If you dig in, you will find out that the only $500K check the VC wrote was for a serial founder they knew from before and that their minimum is $2MM for other investments. This is important to understand, because if you are raising $1MM they aren’t the right investor for you for now.
4. How many more investments are you planning to make this year?
Surprisingly for founders, not all investors may be actively investing. Even more surprisingly, they would still take meetings to learn about the company. Angel Investors may be out of cash and tell you they aren’t liquid. Or they could plan for, say 6 investments per year and already did 5. In that case they would be much harder to get the check from.
Number of investments per year is called pacing, and the disciplined investors pay a lot of attention to it because they want to be investing continuously through the year. For example, if a VC has a seed program, and you are talking to them in October, and they decided to fund 10 deals a year and they already funded all 10, there are no more checks left. With this information, the founder should reduce the chance of being funded by this firm to basically 0.
Another, much more subtle issue with VC would be capacity. Some partners just don’t have the bandwidth to take on any more investments. In that case, they would still meet with the founders, but they just can’t invest. Asking about ability to invest upfront saves a lot of time.
5. Who else needs to be involved to make the decision to invest?
ABC in sales is to find a champion and to find who can cut the check. Similarly with fundraising, when you are dealing with angel groups and venture firms, it is important to understand who will be involved in making the decision.
Some angels tell you that they co-invest with friends. This can be both a good thing or a bad thing. The good is that there may be more capital available if you succeed, the bad is that the decision is distributed. Be sure to meet everyone who is involved in making a decision, don’t let other people present the business on your behalf.
Similar with VC firms, understanding the process of decision making is important. In most VC firms, associates will not be able to make a decision without involving a partner. Which partner is making a decision? Can you meet them? Again, making sure that you meet with the decision maker is critical on the path to getting a YES. Another way to think about this is that if you don’t meet the partner, it is basically a NO.
6. What is the last company backed, and why?
This is a simple but relevant question. You are testing for how quickly the answer comes, how enthusiastic the investor is and when was the investment made.
It can be quite telling one way or another. Has it been a really long time since last investment? If so, what does it mean? Is it that the investor has a high bar or is it that they don’t have capital left to invest this year? Ask about the number of planned investments question and you will have the answer.
You also want to hear the WHY. What made the investor write the check? Was it an amazing founder, vision, market, etc? Listen carefully to the answer, as it should be helpful to figure out what the investor will look for in your startup.
7. Have you invested in a competitor, or evaluating investing in one?
You should ask this question 100 percent of the time, because unfortunately, some investors will not tell you this unless you ask.
If an investor invested in a competitor, even if it is not a super close competitor, the chance of you getting a check from them is close to 0. It really is 0. VCs don’t invest in competitors, and angels avoid doing it too. The reason is that it is hard to help both companies, since they are competing. It is essentially a conflict of interest.
Evaluating investing in a competitor is much more subtle. It is typical that when a venture firm is planning to make an investment in the space, they do a lot of digging and research. Part of the research is that they would reach out to all competitors and try to get more information. A VC is trying to do its best to pick the best company in the space.
You may get a call from an associate of a firm saying that the firm is interested in the space and wants to talk. You will be asked a lot of questions, and at times, even move through the process only to find out in the end that it was a so-called “brain suck”.
This may seem very unfair to the founders, but it is the reality of what’s happening in the market. To avoid wasting time and getting hurt, ask about competitive investments or research upfront.
8. What are your concerns about our business?
This is a great question that Steve Schlafman from RRE ventures suggested founders ask.
Why wouldn’t you invest in my company? How do you see the risk here? What do you think won’t work / I am doing wrong?
By asking this question directly, you are accomplishing several things. First, you are signaling that you are open to feedback and value it. Secondly, that you respect the opinion of this investor.
More importantly, you are likely getting valuable information, a perspective of an investor who sees dozens and hundreds of companies per month.
The concerns will range from market size, to acquisition channels, to competition and pricing. Having this information can help you work through the concerns and address them during the investment process.
9. What is your follow on strategy?
Some investors follow on. i.e. put more money into the companies, and some don’t. Both strategies are perfectly fine, but it pays off to know.
Specifically, if you are raising money from angels, say $1MM round, and most of your backers do not follow on, this means that you may have a hard time raising a second seed. Most companies need more capital before they get to series A, and most of this capital comes from insiders – investors who already invested. If most of your insiders don’t follow on, you will need to go outside to raise more capital. This can be tricky, especially when you are post seed and before series A.
With VC firms, the dynamic is different. Some VC firms deploy a smaller amount of capital at the seed stage with the idea of leading series A. The follow on strategy is to lead series A. However, there is a potential issue that founders need to be aware of – IF the firm decides to not lead series A, there may be a signaling issue to the rest of the market. It pays off to connect with other founders that the firm backed to get the color on this dynamic.
10. How do you help companies you back?
Many investors talk about being a value add in addition to $. Ask how exactly does this particular investor help and ask for specific examples involving companies the investor backed.
Some investors come with a massive network. Some larger VC firms will help you recruit and scale. Some smaller angels are great at pricing and financial modeling. Some investors really understand distribution.
Whatever it is, investors like being asked this question and it is helpful for the founders to know.
11. Who are some of the founders you backed that I can talk to?
Much like how investors reference check founders, the founders should reference check investors. Ask for 2-3 founders that this investor has worked with.
You don’t necessarily need to connect with them after your firm’s meeting with the investor, but it is a good question to ask and see what the answer is.
Great investors will have raving references from the founders they supported and less than great investors will be reluctant to name names.
And now we want to hear from you. Founders, please tell us what questions you asked investors during the first meeting that you found helpful.