Think like a VC: 4 rules for raising your next VC round
Having bootstrapped 3 startups without any external funding, I made the decision to become a VC just over 18 months ago. The goal was to fully understand how things work on the other side after experiencing the process of fundraising as a double underrepresented founder (black and female).
If you read the startup press it would seem almost impossible for someone like me, a black female founder, to get VC funding. My decision to break into VC is part of my thesis that to solve the problem of diversity, we need to focus on understanding the problem from all perspectives. This would require me to ignore the mainstream narrative. Having acquired my knowledge of venture capital through the IncludedVC and Future VC programs, I took the next step by joining the Pi Labs investment team in September.
So far, I have reviewed hundreds of pitch decks, spoken to numerous founders, and scouted founders who are currently navigating our investment process. Many of these founders are from underrepresented groups and are raising funds for the first time.
By combining my experience as both a founder and venture capitalist, I have developed an alternative perspective around the fundraising journey and why it’s so hard for founders to navigate it successfully — especially if you come from an underrepresented background. To date, I have identified four key rules founders should consider when going through the process. Here goes…
RULE 1: Understand the VC mindset
The biggest difference I have noticed between founders and VCs is mindset. As a founder, understanding this gap can help you successfully navigate the fundraising journey. Simply put, a venture capitalist’s primary goal is to produce a return for their limited partners (LPs). A VC’s ability to raise their next fund (ideally a larger one) and maintain their longevity as an investor largely depends on this.
Because of this, a VC investor’s single most important goal is to pick winners. Although you cannot predict a winner with 100% accuracy, there are patterns and mental shortcuts built over time designed to help the process. Some of these shortcuts risk becoming biases.
Think about it this way: when you are tasked with giving significant sums of money to individuals, you are more likely to favour people with whom you can identify, or who come recommended through your network. This is why I believe pattern recognition and closed networks exist in the industry and it likely accounts for a significant portion of the lack of diversity.
I’m not in any way defending these practices or processes. However, I feel that founders who seek to understand it have a better chance of navigating the process as things change over time.
On the topic of change, I can say with confidence that things are changing. In my case, I’m a member of an investment team committed to diversity and actively looking for ways to address some of venture capital’s inequities. I’ve also seen and experienced the benefits of how greater awareness around such practices and a willingness to challenge the way investments are made can make a difference.
RULE 2: Don’t fall in love with your idea
A common challenge encountered by founders is wrongly assuming VCs are going to love their idea as much as they do. This is definitely a regular occurrence for those who believe that they are building something truly unique. I get it, I used to feel the same about all my ideas. I’d dare anybody to tell me otherwise.
Imagine my shock when the first thing I encountered when joining Pi Labs was the scale of similar ideas and pitch decks submitted to us. There are too many to count, but in most cases the founders believed their idea was entirely unique. Just try listening to a Lyft executive reasoning their idea had nothing to do with Uber.
This is called the uniqueness fallacy or the illusion of uniqueness as coined by Snyder & Shneckel in 1975. I hate to be brutal about this, but if you are a founder, you need to kill any parental attachment you have to your idea.
…but if there’s no such thing as an entirely new idea, how do you get the attention of investors? Well, when we receive your pitch deck, our job is to filter the noise and find the diamond in the rough. In my opinion, the best way to stand out from the crowd is to tailor your pitch to exactly what the VC wants. This leads us to rule 3.
There is no such thing as a new idea. It is impossible. We simply take a lot of old ideas and put them into a sort of mental kaleidoscope. We give them a turn and they make new and curious combinations. We keep on turning and making new combinations indefinitely; but they are the same old pieces of colored glass that have been in use through all the ages.
- Mark Twain
RULE 3: Give them what they are looking for
I believe there are four things VC’s really want to see: problem, team, tech and traction. I have outlined each of them below:
Problem
A big problem or a major trend with a massive market is a key requirement. Big problems/trends usually translate into a large market size which could mean significant returns. What makes you unique is not that you have identified the problem or trend but that you know exactly how to exploit it. Your insight into the problem or trend is an essential factor to communicate to a VC. Share how you discovered the problem. This is a compelling part of your story and one that can make you stand out.
Team
If your idea is commonplace, then your team can be what makes you unique. Your team is the magic sauce that drives execution. That’s why VC’s place so much importance on teams and co-founders.
A strong team with the relevant industry background or technical know-how will outperform a great idea.
The story of your team and how you met is an essential ingredient of your storytelling. There is no other team quite like yours. Highlight the key characteristics that make your team stand out. For those of you who are solo founders (I have been one on many occasions), my only advice is that it means you need to demonstrate you can put together a strong team from the beginning.
Tech
Your technology is a key consideration for venture capital investors. The mainstream adoption of no-code tools means that many of the barriers to entry in the startup world have been removed. This means tech defensibility now plays a major role in investment decisions.
At Pi Labs, we prefer to invest in tech-first startups rather than tech-enabled startups. This means we are usually looking for next-generation tech which is far more valuable than a startup that is solving a problem using tech.
That doesn’t mean that simplicity is not valuable, but you need to consider what makes you defensible. For every product you build, there will be 100 copycats behind you. That’s just part of the startup game. How do you intend to defend your market position?
Think about the answer to this question. Don’t forget to spell it out in your pitch decks and in all your meetings. VCs are definitely thinking about it and founders who can communicate this will definitely stand out.
Traction
Traction can come in many forms from revenue generated, to users acquired, to follower counts. Regardless of how you think about it, early traction will make you stand out. Too many first-time founders still think they can raise capital on just an idea. Five years ago this was probably the norm but things have moved on significantly.
There is one thing I believe that speaks louder than any words and even louder than the most spectacular idea. That is traction.
Traction will make you stand out, not just because it’s a strong indicator of product-market-fit, but it shows your ability to execute. Speed of execution above all else is the key to a successful VC-backed startup. If you are able to show you can execute, then you are putting yourself above the crowd.
RULE 4: Understand the process
The last piece of the puzzle to help navigate the fundraising journey is to understand the process. This ties back into understanding the VC mindset. Every communication you have with a VC from your pitch deck to meetings has an intention behind it. Your pitch deck is effectively your storybook. If you have fully considered the problem, it should flow in the pitch deck. There are lots of great resources out there that outline how to put one together. Do some research, and figure out which works best for you.
However, I will say the best thing you can do is remember the goal is to stand out from the sea of decks. As a VC, we see hundreds each week. When I first started, this seemed exciting. After a few months, not so much. Too many founders believe that to stand out your pitch deck needs to be professionally designed with all the bells and whistles.
I disagree completely.
The pitch deck should definitely look presentable and there is no excuse for poor design or clip art pictures. There are lots of free pitch deck templates out there. However, the most important thing about a pitch deck is the story, the problem, an exceptional solution, a strong team and defensible tech. These are the essential points that you need to focus on.
Pitch meetings
The fundraising process is going to be a marathon of meetings. For some VCs it could take 1–2 meetings but for others, it can go into several meetings before a decision is made. Each VC has its own process and it’s essential you ask them to provide you with some details around what to expect.
Although the nature of meetings varies widely, I think the intention behind the meetings remains the same. The goal for early-stage investors is to determine how well you communicate your vision. Also, do you seem like someone who can go on to raise more funds? Because you may have what it takes to raise with one VC but you have to be able to repeat this across several VCs over several fundraising rounds to be able to create the returns the VC is expected to produce.
Even the best of ideas will not get funding if the founder cannot communicate.
Final thoughts…
The biggest lesson I’ve learned in my time at Pi Labs is that early-stage venture capital firms are a lot like startups. They go through their own fundraising journey with countless meetings and decks when it comes to raising their own funds from LPs. In some cases, it’s even more brutal on the fundraising side of the VC journey.
In my first week at Pi Labs, I received a masterclass on fundraising from our business development team. If founders could see the number of emails, meetings, and daily grinding that goes into actually raising a fund, you would perhaps understand why the fundraising process is so arduous.
As I learned from our fundraising team (thanks Levi and Henry), the secret is not to focus on how hard it is but instead focus on understanding the process, the mindset behind the process, and the art of grinding it out.
Successful VC funds understand that fundraising is a marathon and you need persistence to win.
If you think like that when you approach your fundraising you will be able to manage your expectations and stick at the grind.
There it is. My alternative view to understanding the fundraising journey from the perspective of a founder-turned-VC. Hopefully, it helps you to think about fundraising differently.
For more updates from the team and for a look into life at Pi Labs, follow us on Instagram and subscribe to our monthly newsletter.
