Raising early stage venture capital has never been easier and yet I watch so many entrepreneurs struggle — less than 1% ever raise a dime from VCs. The venture capital game is all about pattern matching. To have a chance of raising capital you really can’t afford to be different. If you are, you really are doing it all wrong. It doesn’t have to be this way.
In the late nineties I began thinking about raising capital for a startup idea I had. My father was CEO of an ATM switch startup in Silicon Valley that had just been acquired giving him a front row seat to what would become known as the Dot-Com era. He encouraged me to get started, but he never told me how hard it was going to be.
I began putting my idea on paper and eventually made my way to the Valley to try my hand at raising venture capital. I had no idea what I was doing — I WAS doing it all wrong. I bought a few books about raising venture capital, but thinking back on it I’m pretty sure the people who wrote those books had never raised any money themselves. Blogging was just starting to be a thing, but there weren’t any VCs with blogs. I was learning as I went and it was painful and humiliating. I was turned down by almost a 100 VCs before I figured out what I needed to do to close a round.
Mistake One: Being Right
Each time I met with a VC I kept detailed notes of their questions, concerns, and suggestions — VCs have a lot of suggestions. My business model didn’t survive a single meeting. I continually changed it in light of what I was learning from each meeting. The funny thing is that the first VC I met wouldn’t have recognized me or my business if he saw my final pitch — we were both completely transformed. If you’re struggling to raise capital it is time to question EVERYTHING.
Mistake Two: Being Different
Much of the changes I was making to my pitch and my plan were related to fitting into the patterns the venture capitalists were revealing to me. Their questions provided a roadmap to the “right” answers — it took me a while to figure this out, but once I did my meetings started going a lot better. Today most successful venture capitalist maintain blogs and social media accounts that provide very detailed explanations of the patterns they’re looking for. Read those blogs ASAP. They’ll tell you everything you need to know to get in the door and past the first few hurdles.
Start with the simple things:
- Who is your lawyer? How many startup clients does he have? How many financings has he done this year? If he doesn’t do more than 12 financings a year you really ought to find a real securities lawyer to help you out. The number of financings that fail as a result of poor representation would shock you. Don’t be different hire the startup lawyer everyone else is hiring.
- How is your company set up? Are you incorporated in Nevada? Are you organized as an LLC? Do you have a creative idea for raising equity and debt with a royalty interest? The quick and easy answer is to organize your company in Delaware as a C-corp and raise capital in a convertible note or in priced preferred stock round. Don’t be creative here — you want to look like everyone else.
- What does your team look like? Are you all business people? Marketing? Sales? Are you planning to outsource your software development? You better start looking for a few technical co-founders. Venture capitalist want at least half of the team to be technical and they don’t want you to outsource your development to China or India — they want you to own that part of your business.
- Does your business conform to a current investment theme? Venture capitalist have investment themes and those themes change regularly. If you are trying to raise money for a business in last year’s theme you’re going to struggle.
I could go on and on revealing the patterns that investors are looking for, but you can do it yourself by reading their blogs. CB Insights put together this cool periodic table of VC blogs to give you an idea of what the universe looks like. If you’re serious about raising capital quit reading this and get busy reading these: