When is the Right Time to Approach a VC?
Like many things about startups, reaching out to VCs is both an art and a science, and doing it too late or too early can help you less and sometimes even hurt you. This post will try to offer some very practical advice for how to approach these conversations.
1) VCs Reaching Out
In VC-rich ecosystems like Silicon Valley, entrepreneurs will often find it’s VCs chasing them rather than the other way around. If you get an inbound like that, whether it’s a cold call or a warm intro, take a moment to understand motivations and set up context. Unless you know the VC or the firm well, take a quick minute to first look them up on LinkedIn and Google and understand their experience and expertise. And then ask yourself if they are trying to meet you to build a relationship for the future, to share market insights, or in some cases to do a competitive analysis because they are looking at something else in the space. You can take the meeting in all three cases, just frame the conversation accordingly. Or if you decide to decline then take a gentle but firm pass — one very understandable response is you are heads down building the business and could reconnect in the future. That way you don’t get the reputation of being arrogant and hurt a future relationship.
2) Local Norms and the Informal Board
Local business norms do vary significantly in the world and if you are unsure of any particular personality or protocol, the commonsense advice is to ask folks you trust who have been in the market for a while. And if you don’t have them in your network already then this should be a catalyst for building this group around you. Which leads me to the overall advice that every entrepreneur should have an informal board for his startup journey. A formal Board of Directors is for governance, it will not help you as much at the tactical level. And I would argue the more successful you are the more critical this informal Board is to help you deal with increasingly complex issues. Like most human relationships, beyond equity, reciprocating is key to being able to call at any time fellow entrepreneurs, VCs you have already worked with, or advisors.
3) Prepping for the Raise
VCs are looking at hundreds of companies and if you reach out to them too early looking for financing, their initial impression of you is very likely to hurt you. This is especially true of early stage where you have less proof points. VCs also talk to each other and you don’t want to risk a negative signal becoming a systemic issue. To minimize all of this I always recommend entrepreneurs to approach VCs slightly before financing to get feedback and assess their real interest — call it prepping for the raise. If the VCs don’t lean forward in this meeting then you have a reasonable indication they are lukewarm and what you would need to show a month or so later in order to get them on board. This also allows you to vet the VC’s experience without the high pressure stake of actually raising the round.
4) Timing your Raise
A handful of high profile startups run their fundraise process as an effective auction. I think that’s the wrong approach even for very successful companies because it rewards the highest bidder as opposed to the best bidder. So I advocate strongly for companies to raise at least 6–9 months before they run out of cash, given themselves 3 months for closing the round, and have a plan B in case things don’t work out. I furthermore believe in having 3–4 conversations in parallel, not too many more than that since you won’t be able to give due attention and not too few because it exposes you to single points of failure. The parallel processing means if you get traction with any one VC you advance the conversation with the rest, instead of getting stuck in spirals of indecision.
5) Type of VC
All VCs are not created equal. I believe getting the lead is half the battle and that investor is more important to you than all the rest. An alternate strategy is to get commitments from funds that would follow as long as you sign up a lead. Strategics in general take longer than financial VCs because they have longer internal processes. Common strategies include starting the conversations with strategics earlier or providing second closings. In cases where you are closing the round and start getting more interest, a responsible entrepreneur should likely decline opening up conversations with a new prospective VC to focus on closing the current round. In cases where a newer investor is really important, especially if it’s a strategic, you can obviously open an exception but in general it’s better to suppress the FOMO and instead set yourself for the future as an attractive investment in your next round.
This post is inspired by a suggestion from Saurabh Singh. Any other principles around approaching to VCs, comment away! Thanks in advance for any likes.