Why Entrepreneurs Struggle Raising Their First Round of Venture Capital

Aaron Dinin, PhD
Jun 25 · 7 min read
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Photo by Christian Erfurt on Unsplash

“That was one of the best presentations I’ve heard in a while,” the VC said. “You’ve clearly got something special here.”

“Thanks!” I responded. My first company was participating in a startup accelerator, and I was wrapping up a meeting with a VC I’d been connected to through the program. I’d never raised capital before, and, to that point, I’d been unsuccessfully fundraising for a while. But my skills were improving, and I felt like I was getting closer to success. I was hunting for my lead investor (back when I thought that was a real thing), knew I’d just nailed my pitch, and I was feeling increasingly confident this guy might be it. It was time for the big “ask.”

“So,” I continued, “We’re looking to raise about $1.5 million. How much would you want to invest and what kind of terms are you looking for?”

“Oh, I’m sorry,” he replied. “I’m going to have to pass. The company isn’t a good fit for me.”

“I don’t understand,” I said. “You literally just told me it was one of the best presentations you’d seen and that we’re clearly working on something special. What more could you possibly want from an investment? Isn’t your goal to find great founders working on great companies?”

He chuckled. “Not really,” he said. “But you’re not the first person to ask me that. I hear it a lot. People like to think ‘venture capitalist’ is a generic term that roughly translates to ‘someone who invests in any high potential startup.’ That’s not actually true. Most venture capitalists are extremely specialized. We stay in our lanes, and we only invest in what we know. If your startup doesn’t fit within my investment thesis, it doesn’t matter how great it is, I won’t invest.”

That conversation was the first time I’d heard someone use the term “investment thesis.” I’d been pitching investors for a while at that point, but pitching investors isn’t a great way to learn about how investors operate because they usually aren’t very transparent. And I don’t mean they’re intentionally deceitful. It’s just not their job to explain each detail of the venture capital process to every entrepreneur who walks through their doors. And we can’t blame them for that. Does Apple tell every visitor to an Apple Store how they manufacture their processors? Of course not! Why should VCs be any different?

However, occasionally you’ll run into a VC like the one I was speaking with. They’re usually older, more established, and more experienced VCs. They’re often in the twilights of their careers — whether they’ll admit it or not — which puts them at a point where the personal fulfillment of mentoring and sharing their knowledge with young entrepreneurs brings them more value than competing with other VCs for the next great deal.

When you meet VCs like this, don’t let the conversation end once it’s clear they’re not going to invest. The advice these kinds of VCs give is often worth more than any check they’re going to write. You just have to learn to ask the right questions and listen carefully to their answers.

“Why is that?” I asked. “If you can tell a company is going to be a great company, why does it matter whether or not the company fits your investment thesis? What’s the point of even having an investment thesis if it’s going to cause you to miss out on great deals?”

“Because I can recognize that I’m an irrational idiot,” he said with a big grin. “My investment thesis isn’t something someone forces onto me from the outside. It’s something I force on myself. It’s to counter my natural human tendency to make decisions based on emotion rather than logic.”

“What’s wrong with basing decisions on emotions?” I wondered. “Don’t risky bets like startup investments require some level of gut instinct?”

“No, never,” he said, more seriously than he’d been the entire conversation. “Think of it this way. Do you trade stocks at all? Have you ever tried any ‘day trading’?”

“I tried day trading with bitcoin,” I responded. “I was terrible at it. I always made the wrong bet.”

“Exactly!” he said. “Most people who attempt to day trade with any type of investment — whether it’s stocks, or cryptocurrencies, or commodities, or whatever — end up losing money because the way the market moves tricks people’s emotions. You were bad at trading bitcoin because a sudden uptick in the market while you were holding cash created FOMO — fear of missing out. You were worried the ‘big move’ everyone had been talking about was finally here, and you didn’t want to be the idiot sitting on your cash, so you invested. But it wasn’t the ‘big move,’ you invested after everyone else, and got left holding the bag when the price went down. Then, the same thing happened in reverse. As the market kept going down and you were seeing larger and larger losses, you finally got the nerve to cut your losses and sell. That’s when the market went back up. Logically you knew you were supposed to buy low and sell high, but your emotions forced you to do the exact opposite. And you paid the price.”

“The best way to prevent that kind of emotional response to a market is by developing a thoughtful investment thesis with the help of extensive market research and analysis. Then stick to that investment thesis no matter what. You won’t always win that way, but, if you have a good investment thesis and you stick to it, you’ll be making decisions based on logic and research, which has a better chance of succeeding than investing on instinct, which can be easily manipulated by forces beyond your control.”

He paused to take a sip of coffee. Then he continued: “In startups, it’s the same thing. My partners and I have spent years developing and honing our investment thesis. We know lots of different kinds of venture capitalists can make money on different types of investments. None of that matters. We focus on what we know best, which are companies in a certain set of industries generating a certain amount of revenue and with a specific growth trajectory. Those are the kinds of companies we’re looking for, and they’re the only kinds of companies we’ll invest in because our research and analysis tells us that’s the kind of investment where we’re most likely to be successful.”

“Wow,” I said. “I had no idea. From the outside, it looks like venture capital is — for lack of a better word — random. It seems like investors choose to invest because they like the founders, or think the industry is hot, or see a bunch of other people investing in a certain company and just follow along. But the way you’re describing it, that doesn’t seem like the case at all.”

“To be fair,” he argued, “All those ways of investing can be true and it can still not be random. Some VCs base their investment thesis on certain kinds of founders. The accelerator model is a good example of that. Startup accelerators are really just investors who put their money into super-early companies based more on the potential of the founders than the companies themselves.

“Investing in ‘hot industries’ is another type of investment thesis. Historically, in a hot industry, lots of mediocre companies will get acquired by bigger companies in an ‘us too’ way. This allows investors to exit regardless of whether or not a specific company was actually good. That means investors who invest in hot industries are investing based on the probability of more companies being acquired and having good exits. Do you see how that’s another type of investment thesis?”

I nodded in agreement. “I can see how that could be an investment thesis,” I said, “but what about investors that just wait for a bunch of other people to invest? Are you telling me that being a lemming is really a type of investment thesis?”

“The idea that investors are lemmings that only invest because everyone else is doing it is one of my favorite VC myths.” He made a gesture with his arms that I think was intended to resemble a lemming, but it looked more like a penguin waddle. “Investing in companies because other people are investing in them isn’t a mindless decision. It’s a smart tactical choice. Objectively, which company is more likely to succeed: one that can only raise a small amount of money from a small number of investors; or one that can raise lots of money from lots of investors?”

I rolled my eyes. “I suppose the latter,” I answered.

“Exactly!” he said. “So they’re not being lemmings. They have a difficult job to do, they’re making incredibly risky bets with lots of money at stake — not to mention maintaining their professional reputations — and none of them got to where they are by being capricious and random.”

“I never considered that,” I said, “but I guess you’re right. I’ve never really thought about investing from their perspective. Maybe that’s why I haven’t had much luck fundraising.”

“I guarantee it’s why you haven’t raised any money yet,” he said. “Always remember, as a human, your natural inclination is to underestimate what you don’t understand. If something well established, popular, and successful looks easy or simple or random, that doesn’t mean it is easy or simple or random. It actually means the exact opposite. It’s complex, difficult, and extremely well thought-out. Underestimate it at your own risk.”

That’s a lesson I never forgot. As an entrepreneur seeing other companies raising millions of dollars in venture capital while struggling to do it myself, I assumed venture capital was random and unstructured. But I was underestimating the industry because it was an industry I didn’t take the time to understand. Once I stopped doing that — once I devoted the necessary time and energy to learning about venture capital — it put me in a place to understand its complexity and its nuance, and that helped me raise my first round of funding. If you’re struggling to raise your first round, maybe it’s time you do the same thing.

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Aaron Dinin, PhD

Written by

I teach entrepreneurship at Duke. Software Engineer. PhD in English. I write about the mistakes entrepreneurs make since I’ve made plenty. More @ aarondinin.com

The Startup

Medium's largest active publication, followed by +732K people. Follow to join our community.

Aaron Dinin, PhD

Written by

I teach entrepreneurship at Duke. Software Engineer. PhD in English. I write about the mistakes entrepreneurs make since I’ve made plenty. More @ aarondinin.com

The Startup

Medium's largest active publication, followed by +732K people. Follow to join our community.

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