VCs don’t chase entrepreneurs!
Or, do they?
I came across a question on Quora, which I am sure every first-time entrepreneur has asked him at some stage of his life.
There are two parts to this question:
- How do you get investors to notice your startup?
- Do entrepreneurs receive investment proposals from investors without reaching out themselves?
Let’s answer Q2 first.
ENTREPRENEURS CAN RECEIVE INTEREST MAILS FROM INVESTORS
Honestly, it isn’t that unusual; and there are multiple reasons behind that.
Reason #1. Investors are in the business of investing
I always say — businesses are in the business of making money. And the business of an investor (institutional or not) is no different. They are in the business of making money, and the only way they are going to make money in the business of investing is by picking out the horses that they think are going to win the race. You, as an entrepreneur, are always looking for that next winning sales or marketing strategy, or thinking of that next great product feature that will make your product a hit. You don’t spend your time sitting idly in your chair for the sales to manifest out of thin air. The same way, an investor is always on the prowl for that next startup to invest in. Do startups approach them all the time? Yes, obviously. But that doesn’t mean they don’t keep their eyes peeled looking for a startup that they may have missed amidst all the chaos.
Reason #2. For Institutional investors, their investment process is not very different from how it works in the world of sales
Ever managed the business for, let us say, a B2B SaaS product? (Specifically, the sales function is what I am interested in here.) If you haven’t, then maybe you can find someone in your network who has. Go ask them about the process. There are multiple parts of their team.
- There is someone on the constant hunt for generating leads for the business. This person/team would do both. Look at startups that reach out to them, as well as reach out to startups in their areas of interest that they get to know about. (Now, they can get to know about these startups in different ways. The founder(s) at one of their portfolio companies can tell them of a promising startup they came across, or their friends are working on. They get to know about it from their network — maybe even their girlfriend. They read about a startup they didn’t know existed, or at least didn’t know was doing this good.)
- In both the cases, whether the startup has reached out to this person or the other way round, they would get on a call to understand what is it that the startup does exactly, how has their journey been so far etc. etc.
- If they like what they hear, they will run in up the flagpole to see how the partners feel about the business.
If all goes well, the startup gets inducted into the whole process after which it would be clear if the startup is getting funded or not. (A lot is involved in this process. Multiple rounds of communication, sharing termsheets, negotiations, final due diligence.)
Reason #3. Early bird gets the worm!
It is a dog eats dog world we live in today. The competition is fierce for everyone; and the world of institutional investors is no different. This is a known fact that a very very tiny percentage of startups are the ones that stay standing at the break of dawn, with most of them fading into obscurity in the darkness of the night. So, it stands to reason that the race to back these very few winning horses is quite intense.
The result? Any investor worth his salt wants to be the first one to back up an up and coming business before someone else scoops it up.
They are always on the prowl, always on the lookout, looking at all startups that are present over there. In my last startup, we had received mails/messages from four different investors within half a day of us creating just the AngelList page for the business. The kicker? We weren’t even looking to raise capital; we just wanted to establish the AngelList page so that we can start sourcing tech candidates via their job portal.
Trust me on this. If someone somewhere has talked about your startup at least twice, then there is a good probability that some investor or the other has heard of you at least once. If they had heard of you more than a few times, you would have heard from them. They would not have waited for you to reach out. They are pretty forward and aggressive in that respect; they don’t mind asking you out themselves. :-)
SO, HOW TO GET INVESTORS TO REACH OUT TO YOU, AND WHAT TO EXPECT WHEN THEY DO?
- Traction. The first rule always has to be traction. Be it in terms of number of app downloads, or the ARPU (average revenue per user), traction is the only game in town.
- Media mentions and hoopla obviously helps in getting you noticed. But it won’t do you much good if your traction is jackshit. So once again, remember, traction is the only game in town.
- Focusing on the right metrics. If there is one metric investors like even more than number of users, it is average revenue per user. This is what gives an indicative idea of what your LTV, and therefore LTV/CAC ratio is going to look like, and believe me — it matters a lot.
- Guerrilla warfare. Hustle. Hustle like your life depends on it. Remember, entrepreneurs are hustlers. They are improvising all the time. As a cash strapped startup, your ability, willingness and zeal to hustle should be unparalleled. And that needs to show in what you do, how you do it, and the efficiency and efficacy of those measures.
- Having an engaged community of users/customers. Engagement translates into sales and brand champions. If customers are taking out the time of the day to talk to you, then the chances of them evolving into being the brand ambassadors and biggest champions of your business are amazingly high.
What to expect:
Just because an investor has reached out to you, don’t take that has having won half the battle.
The journey has just begun, and it would be just as hard, time-consuming and uncertain as it would have been had it been you who had made first contact. The only difference between you reaching out and this scenario is elimination of that first phase of anxiety, where after having sent mails to investors, you don’t even know whether you are going to hear back from them or not.
Everything else — right from you having to convince them of you being the right ones to be in this business and having what it takes to make it a success, to the final due diligence — it is all going to be the same!