Raising Money Too Early? A Lesson Inspired by Pear VC
You hear all the time of founders who received funding on just their idea, their team, or their connections (enter, Elizabeth Holmes). That group is the .0005% of entrepreneurs. For the majority of others, there is a formula the investment community is after. More importantly, the early investors are looking for that emotional drive to backup their logical and analytical decisions.
“What do you look for when you’re investing at an early stage?” A very typical question from founders that are unclear in their journey, have not formed a strong narrative, do not know how to build a “winning” team, or have not envisioned how their company will be the next breakthrough. These are all reasons why it’s too soon to fundraise. Even then, the reason to fundraise can be deceiving. Do you have a solid understanding of who’s winning in your space and why? Do you understand what a breakthrough looks like? Are you really a venture-backed idea or are you a really great business? By the way, there’s a difference.
In a recent visit to Alley in Palo Alto to hear a panel of seasoned venture capitalists, I heard one of the most extraordinary answers to this sought after question. Mar Hershenson of Pear VC was asked what she looks for in her next company. Here was the takeaway— Mar considers what your idea and vision are for your product. When she’s done listening to your pitch, she takes the time afterwards to use your product OR since she’s also pre-MVP, she makes an experienced call about whether or not you have what it takes. Then, she imagines all the reasons why it won’t work.
Here’s what I find vastly fascinating about the venture world — VC’s can imagine just about anything. Even at the larger firms with superior analysts and researchers, VC’s can imagine what a world could be like if you were the entrepreneur to bring your idea to life. The majority of these answers are not presented in your pitch deck. Instead, the present themselves in the questions investors will ask to test your idea and you as a founder. That is the difference between the funded and non-funded. Let’s break that down.
Natural Born Leaders and Serial Entrepreneurs
If you brag about your first $1MM company at 17 years old running an online portal that ran script on college essay entries to increase your chances of college acceptance, and your revenue streams were advertising and licensing, chances are you’ll get funded pre-MVP. Everyone else, keep reading.
The unique trait about serial entrepreneurs or ones in the making are they have an air about them. It doesn’t matter if they are an introvert, extrovert, tech driven vs business driven, or even about their age (read about ageism here). These people are special because of their ideas, grit, and as lame and cliché as it sounds, their willingness to fail forward and fast. But while they have all of these super powers, if there isn’t a plan or if the timing is premature, it may be too soon to raise. Comment below on other reasons why.
Starting with the Wrong Goal
Speaking from experience, if you have the wrong goal, you’ll get plenty of No’s from the start. If you want to change the face of communication as Twitter did, you’re probably on the right track. The Mike Maples/Evan Williams story of how Twitter started is an absolute classic. It was a wild idea, but it changed the face of social communication as we know it today. Even then, Williams wasn’t ready to raise money until he saw his breakthrough launch at SXSW.
What is your goal? Have conviction about what your vision will do for the world (or your industry). Think deeper, write it down, say it to yourself repeatedly — kind of like brainwashing. If it’s not hitting the mark with early adopters, then make a change. Sometimes it’s not the right goal, and that’s ok. The most successful founders and companies understand the greater goal, and while these can change, this conviction will help in forming your story, your plan, and overall execution long term.
Marketing Too Early and Presenting Inflated Results
If there is one thing investors can see right through, it’s bullshit metrics showing “traction”. Let’s pretend for a moment you have your product out, and you want to start testing traction, which is a completely reasonable tactic. Inflating your traction by testing in foreign click farm lands, paying off “influencers”, and any other growth hack you have planned is a bad idea.
P.S. growth hacking is an overused and deceiving term to make you believe there’s a magic bullet to gaining traction. Instead, look at the problem to why you’re not creating actual traction and true engagement. Test with a smaller group and build a plan to correct for the holes. Good segue…
A Crack in Your Plan, That Turns Into a Hole — Lots of Them
Another superpower of investors is poking holes in your beautifully crafted, well-thought out plan. It’s probably the most painful conversation you’ll ever have. You found your product/market fit (great read by Merci Grace, Lightspeed VC), your go-to-market was in the bag, and now all you have to do is scale, nbd! Not exactly. On any given day, an investor will be pitched over 100 times, and it’s their sole purpose to find what’s wrong with your plan.
With the sophistication of modeling tools and the ability to predict growth on the outset, be prepared. Understanding your market size is one thing, changing user behavior, predicting growth and applying monetization is another level — be on that level.
Part of your plan will also include how you deploy funds and who will be joining you on your journey. If you have a couple superstars already working on your venture (for free) and your strategy is sound, this offers great leverage. The fact is there is a lot to consider when you’re building a company. Be diligent to remove as many obstacles as you can before meeting with investors. It’ll only take about 30 seconds for them to be diligent in taking your plan apart.
Moral of the Story
This is a journey. As teams become more sophisticated and more money is being distributed, it only makes sense that you will need to up your game. Savvy investors like Mar Hershenson and other early stage investors are eager to work with you, but understand where you are in your journey. Ask yourself without prejudice if you’d give millions of dollars to what you’re building right now. It goes without saying — startups are not for the faint of heart. Do your homework, get people excited, have conviction, and make sure you love what you’re doing. The money comes when the passion is there too.