Let’s talk about how startup founders get funded—and why they don’t. I get about a dozen questions each week via my website from first-time entrepreneurs asking for help getting their company funded. I don’t do that. But I do know a ton of venture capitalist (VC) and angel investors, so I asked a bunch of them what works, what hurts, and what they look for from the very first contact with an entrepreneur.
Their answers, quoted below, plus my own general advice from launching 11 startups (five of them venture-backed), will help you get noticed.
Determine Whether You Should Raise Money
First, make sure you really need the money. There are several good reasons a startup should not seek any kind of outside funding. Here are the big three:
- Raising money takes a ton of time, energy, and focus—and you’re better off using it to build out the idea, the product, and the company.
- Raising money leads to dilution. If the idea, the team, and the product are good enough, your concept is likely investable. But it’s also likely that the same team can turn the idea into a minimum viable product (MVP) and generate a bunch of revenue quickly. If you don’t have investors, you get to keep more (if not all) the equity. That’s where the real money is.
- Raising money is all about timing. You might not be ready. I’ve turned down venture capital on a couple of occasions because I still had some thinking to do. You don’t get to think once you sign a term sheet. You’re too busy executing.
Remember, you don’t raise money to build your product, but to finish it. You don’t raise money to find your market, but to own it. You don’t raise money to develop your sales process, but to repeat it over and over again.
Avoid “Spraying and Praying”
I talked to a bunch of my investor friends, but not all of them. This is because some don’t invest in first-time entrepreneurs. Each VC firm, investor, and angel has a thesis or a sweet spot, and they rarely stray too far from it. If you’re not getting any response from investors, you may be setting your target too broadly.
Most of the pitches we receive have nothing to do with the focus or requirements of our fund, which are clearly stated on our website. This wastes our time and communicates that the entrepreneur is just spraying and praying — and is not the kind we are looking for.
The thesis is the single most important thing to consider before contacting an investor. Investors are looking for fit. They’re not just writing a check—they’re going to do some connecting, advising, and other heavy lifting to help their investment succeed and pay off.
The reason we pass on deals is usually because the fit is not there. It is important for entrepreneurs to try to find that fit with a firm — timing, stage, sector, geography, business model, etc. — instead of simply trying to convince us that their business is a great one.
Know Your Shit
You have to have an unshakeable handle on the problem you’re trying to solve, your customer, your competition, and the industry you’re disrupting.
It’s very important to know the drivers of their business well before pitching. It is not about the pitch for me. It is about knowing the business and proposing a compelling opportunity.
You have to show how your solution is unique and competitive, but also know where its flaws are.
They should know the real current competitive situation in the market they are targeting, and the partnerships they need to develop to become a player in that market. These are almost always the weak points of the pitch.
Fit is a factor too. Steer away from talking about the game-changing possibilities of your product; instead, explain how it fits into the market.
Put Together a Great Team
The single biggest factor for a pre-revenue startup is the quality of the leadership team. You need background, intelligence, motivation, and passion.
Background: Investors like repeat entrepreneurs because of their understanding of the making, the selling, and the growth a startup requires. Your team should have someone who understands these three things and how they happen in the market you’re trying to penetrate. Can one person embody all of this? Possibly, but unlikely.
Intelligence: Startups require a great deal of thinking on your feet, inventing as you go, and making snap decisions with precious little data. Your team should be able to do these things without blinking.
Motivation: Startups are all or nothing. If you’re less than 100% focused on the company, that focus can plummet quickly and precipitously—and take the startup with it.
Passion: Everyone is in the startup industry for the money, to some extent. But no amount of money can act as the sole motivation for a founder from beginning to end. The founding team has to love what they’re about to do, or they won’t do it.
Realize Revenue Matters—Eventually
In our case, revenue is not important. Most of our initial investments have been in pre-revenue companies. Again, to me what matters is a great understanding of the business and its drivers.
For early-stage investors, revenue today isn’t as important as revenue opportunity. In fact, some first-time founders get so hung up on existing revenue streams that they nickel-and-dime themselves down to a less-appealing small-time pitch.
I heard a great quote a long time ago from Lucius Burch: “The problem with first-time entrepreneurs is they tend to dream too small.”
The decision comes down to simple math: The lower the risk, the higher the expected return, the greater the chance they’ll invest.
There are lots of things you can do to de-risk a venture that has no revenue.
Create a Spending Plan
When everything is right — the team is excellent, the idea is amazing, and the opportunity is promising — what’s the final missing piece that keeps a company from landing investment? A spending plan, or, as one investor put it: “Use of funds in a detailed and well-thought-out strategy.”
Some first-time founders get so caught up on getting to “yes” that they have no idea what to do when “yes” is a real possibility. Many others just get the strategy wrong, and a lot of that goes back to whether or not the company is ready for investment.
There are a lot of ways for an investor to say no (including “maybe”), but the one that comes latest in the process is often the most heartbreaking:
Come back in six months and we’ll see where you are.
Again, you don’t raise money to bring an idea to reality; you raise it to bring a near-reality startup to a substantial return. You need to show that path, including a detailed breakdown, post-investment, on a timeline, with every dollar accounted for.
Play the Relationship Game
Raising money is a relationship play, not a lottery play. Treat each first contact like the beginning of a relationship. Most investors are publicly reachable, with websites that spell out their theses and contact processes.
First-time founders cannot assume anything about the person they are talking with. Don’t jump into your presentation. Find out what the investor is interested in, and ask them what they would like to know about you and your business.
Investors are people, they’re smart, and they’re not jerking you around. As entrepreneurs we need to find out who they are, find a good fit, and start building a relationship.
We pretty much will meet and try to help anyone. The second meeting is the tough one to get!