By Joe Procopio
Let’s talk about how a startup founder gets funded. And why they don’t.
I get about a dozen questions a week via my website from first-time entrepreneurs asking me to help them get their company funded. I don’t do that.
But I do know a ton of VC and angel investors, so I asked a bunch of them questions about what works, what hurts, and what they look for from the very first contact with an entrepreneur.
I’m going to use their answers, mixed in with my own general fundraising advice from doing 11 startups, five of them venture-backed, to help you get noticed.
First: Should You Raise Money?
There are actually several good reasons why a startup shouldn’t seek any kind of outside money. Here are the big three:
Raising money takes a ton of time, a ton of energy, and a ton of focus. That’s time, energy, and focus that’s not going to be spent building out our idea, our product, and our company.
Another good reason not to raise is dilution. If the idea is good enough and the team is good enough and the product is good enough, it’s likely investable.
But it’s also likely that the same team can turn their idea into a minimum viable product and generate a bunch of revenue quickly. In the latter scenario, we get to keep more, if not all, of the equity. That’s where the real money is.
The most obvious reason not to raise is that we’re not ready. I’ve turned down venture capital on a couple of occasions because I still had some thinking to do. We don’t get to think once we sign a term sheet. We’re too busy executing.
We don’t raise money to build our product, we raise to finish our product. We don’t raise to find our market, we raise to own our market.
We don’t raise to develop our sales process, we raise to repeat our sales process over and over again until we’re sick of our product, our company, and ourselves.
“Spraying and Praying”
Notice I said that I talked to a bunch of my investor friends, not all of them. This is because some of them don’t invest in first-time entrepreneurs. At all. It’s not in their thesis.
Each VC firm, each investor, and each angel has a thesis, a sweet spot, and they rarely stray too far from it. If we’re not getting any response from investors, we may be setting our 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 to us that the entrepreneur is just spraying and praying — not the kind of entrepreneur 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 trying to write 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. So 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.”
We Need To Know Our Shit
We have to have an unshakeable handle on the problem we’re trying to solve, our customer, our competition, and the industry we’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.”
We’ll need to be able to show how our solution is unique and competitive and also 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 here too. We should steer away from talking about the game-changing possibilities of our product and instead talk about how it fits into the market.
We Need a Great Team
“The single biggest factor for a pre-revenue startup is the quality of the leadership team — background, intelligence, motivation, and passion.”
Let’s break those down.
Background: There’s a reason investors like repeat entrepreneurs, it’s for their understanding of the making, the selling, and the growth. So our team should have someone who understands those three things and how they happen in the market we’re trying to penetrate. Can those all be the same person? Possibly, but unlikely.
Intelligence: This isn’t intelligence as in SAT scores. Startup takes a great deal of thinking on our feet, inventing as we go, and making snap decisions with precious little data. Our team should be able to do those things without blinking.
Motivation: Startup is all or nothing. If we’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 startup for the money, to some extent. But I can tell you first-hand from both sides of the table that there is no amount of money that can act as the sole motivation for a founder from beginning to end. The founding team needs to love what they’re about to do or it won’t get done.
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 a 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, 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.”
We Need a Spending Plan
So when everything is right — the team is excellent and the idea is amazing and the opportunity is promising — what’s the final missing piece that keeps a company from landing investment?
“Use of funds in a detailed and well thought out strategy.”
Yeah. Some first-time founders get so caught up on getting to yes that they have to idea what to do when yes is a real possibility. But 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 the latest in the process, the most heartbreaking, is:
“Come back in six months and we’ll see where you are.”
To paraphrase what I said earlier, we don’t raise money to bring an idea to reality, we raise money to bring a near-reality startup to a substantial return. We 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.
So now that we know we’re investable and we’re prepared to pitch, we should treat each first contact like the beginning of a relationship. Most investors are publicly reachable, with websites that spell out 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. We need to find out who they are, find 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!”
This article first appeared on Medium under the same headline