Many entrepreneurs view the venture capital industry as shrouded in mystery. It can be hard for them — and especially for first-time founders, or those from outside the Bay Area— to separate fundraising myths from reality. Unfortunately, these mistakes often close doors that otherwise should have been opened. In the hopes of changing that, I’m going to outline a few key misconceptions that I see derailing pitches day after day. After all, raising funds should be accessible to any great entrepreneur — not just to those lucky enough to befriend insiders.
Myth #1: You can expect to raise on a first meeting
One of the most confusing things about Silicon Valley is that almost anyone is willing to meet with you, but the likelihood of building a deep relationship is very low. In an environment where FOMO is at its maximum, and we are trained to expect the unexpected, investors optimize for optionality (i.e., we rarely give a hard no; just a not now). Creating gravity around your company can’t happen overnight. It takes time and requires multiple touch points.
Venture investing is incredibly risky. Any seasoned investor will tell you that a large part of any investment comes down to the team. It takes time and validation from an investor’s network to determine whether they believe a founder to be worth the risk of investment. That’s why your first VC meeting shouldn’t be your actual first meeting; you should already be known to the VC before you walk in their door. Before ever meeting with a fund, take the time to build relationships with people in their portfolio companies, their advisors, and even their professional networks. These are the people whose opinion we trust, so if they believe in you, it is far more likely that we will, too.
On the flip side, your lead investor could have a huge impact on the future trajectory of your company and even your life. Would you marry someone you just met? In most cases, you are signing up for a 10+ year relationship with someone who has the power to heavily influence your compensation, your ownership, and your strategy. Take time to build relationships and collect data points on firms and individual partners while simultaneously creating easy opportunities for them to do the same for you.
Lesson learned: Be known before you walk in a VC’s door, and do your research to know if it’s a door you even want to enter!
Myth #2: Your pitch deck doesn’t matter
There are plenty of stories of famous founders with multi-billion-dollar companies who raised funding on a one-slide deck, a notoriously ugly deck, or no deck at all (the napkin myth looms large). With very few exceptions, the people who perpetuate these stories are either lying or, at a minimum, grossly exaggerating. Sure, a deck is helpful in controlling the narrative and providing investors with collateral to convince their team that you are worth a big check. However, what most people don’t realize is that when it comes to pitch decks, the process is just as important as the final product.
Building a deck forces you to craft a narrative that makes sense, provides tangible data points on your business, the market size and the market need, and crystallizes your vision for the future. Whether or not you use the deck itself, you better know those points like the back of your hand if you are going to successfully fundraise.
Lesson learned: Be prepared, and know your story and fundamentals inside and out.
Myth #3: VC is the only way to scale your business
Venture funding has been glorified in recent years, but the reality is that VC is not the right growth strategy for the majority of businesses out there. Companies like Spanx, Mailchimp, Github, Indeed, and GoPro were able to get off the ground, scale revenues, and reach escape velocity before accepting outside investment. When you take venture funding, you are committing to building a scalable, hyper-growth business — even if that means accelerating “straight into the ground.” Companies that take on venture capital are typically expected to grow 50–100% year-over-year and fundraise at increasingly high valuations every 12–18 months. Many companies that could have become viable, profitable businesses die untimely deaths because they weren’t a fit for the venture capital model (or at least for the specific venture capitalists with whom they partnered). Success in this environment requires grit, expansive vision paired with aggressive execution, incredibly lucky timing, and a lot of personal sacrifices along the way.
Today it is cheaper than ever to start and build an internet-based business. There are also more options than ever to fund your vision, including government and foundation grants, friends and family (who are increasingly attuned to angel investing), small business loans, private equity, and good old fashioned bootstrapping. It’s important to weigh the options before taking on funding, because once you step on the VC treadmill, it can be hard to step off.
Lesson learned: Explore all fundraising options — not just VC.
Myth #4: Raising a big round means you have achieved success
In the last three years, the number of funding rounds over $100M have tripled. Drop into any coffee shop in the Bay Area and you will surely hear, “That company just raised a $100 million-dollar round; they’re crushing it!” As your resident cynic, I am here to remind you that round size is not necessarily correlated with business success; there are countless examples of companies that have raised hundreds of millions of dollars, only to fail spectacularly.
Besides the fact that large, late stage rounds often mean significant dilution for founders, companies that raise too much capital can get distracted by their scale and miss obvious market opportunities. Too much capital can also result in irresponsible decision making involving hiring, spending, and scaling. It’s not over until the fat lady sings (or the market bell rings), so founders who are worth a fortune on paper are still just that — on paper.
Lesson learned: Focus on building real value, not paper value.
Myth #5: VCs have all the right answers
If you talk to any remotely authentic venture investor, they will tell you that being a VC is like being a consultant or a parent; we are completely accustomed to our advice being ignored. We’re trying to help you avoid the mistakes we’ve seen countless other entrepreneurs make, but we also know that nobody knows your business like you do.
If a potential investor pushes back on your go-to market strategy, your business model, or your vision, and what they’re saying doesn’t resonate with your deep market knowledge and equally deep belief in your approach, be confident in your response. Throughout the journey of scaling a company, your patience, your conviction and your drive will be tested relentlessly. You will have countless doubters, and you will encounter endless challenges. If you can’t fight your way through, you are not likely to succeed. Listening to feedback is important, but you must also have conviction in your vision. When we give you advice, it will be well-reasoned and well-intentioned, but don’t be afraid to push back.
Lesson learned: A smart investor will know that at the end of the day, you are building your company, not us.
Encouraged by the reduction in costs required to start a company and the explosion of investment dollars, no shortage of optimists have predicted the pending “democratization of venture capital.” While the distribution of opportunity has indeed started to normalize, true meritocracy still has a long way to go. Those who know the rules of the game enjoy a significant competitive advantage. My hope is that by opening up the playbook just a little bit, I can contribute a small amount to increasing your odds of winning — whatever winning means to you!