In Step 0 of this series, I have described the arsenal one should have ready when preparing to make a funding pitch to a VC. Assuming you have most of the materials I suggest or, at least, are in the process of gathering the bits and pieces, you now approach one of the more difficult phases of securing funding — getting VCs to listen. If you spent most of your life on Sand Hill Road or have been funded a bunch of times before, you can skip this section. For the rest, to be honest, the process is often unpleasant. It doesn’t help that, in general, Venture Capitalists who have not been in your shoes don’t make it any easier. But you shouldn’t set your expectations too high either (less disappointing that way). Most of us working on “the other side” simply get too much email to dedicate the 15 minutes such a document would deserve. Don’t expect just to hand over your business card, however cool, write a quick follow up, and have the doors open. Again, bandwidth is the issue — not your fault. Here are some suggestions on making the process smoother.
YOU should… decide if you really want a VC.
VC firms tend to invest in companies that have graduated from the “design on a napkin” stage of their development. And going to most firms with just a dream and an idea is usually a waste of time not because the idea is bad, but, rather, because it’s too early for VCs to get involved. Most VCs want to do a Series A investment as Preferred Stock and invest $1.5M+. This implies that your company should be worth $3M+. Hard to find a million dollar idea, let alone a three million dollar one. You might want to start smaller. I suggest…
- Practice your pitch in public. There are a number of events in New York City where I live that regularly select companies to do a “mock” presentation to members of the investment community. Usually, it’s a 3-5 minute pitch followed by a 3-5 minute Q&A session. These events are well attended. There are real VCs sitting on the panel that reviews and critiques each presentation. I am a regular on the panels hosted by The Hatchery and Entrepreneurs Roundtable. Not only does your pitch get better if you are presenting, but you get to meet some of the people on the panel and in the audience.
- Try to get into a Startup Accelerator.YCombinator is the one that gets the most buzz and hosts some great companies, but there are others. Nation-wide, there is TechStars. In New York, there are also NYCSeed, ER Accelerator, and a few others. This answer on Quora gives a nice list of others for New York. Unfortunately, it lumps “incubators” and “accelerators” together. The two things are different — incubators “incubate” ideas to get companies to form around them. Accelerators take the earliest stage startups and get them ready for funding using a specific process. The reason for getting into those programs is two-fold. First, you get to surround yourself with other companies trying to get started. This is an invaluable source of support and expertise. Second, VCs like to act as mentors in these programs. I am a mentor at TechStars NYC and NYCSeed. There are other VCs (if they are any good) milling around these places as well as locations like General Assembly and Betaworks. Good place to get a head start on the fundraising. They usually have specific rules for application and selection. If you need to get going, I’d check them out. I am only giving examples for New York where I live. Other cities have their own.
- Get on Angel List. I know it has “angel” in the title, but many VCs (including this one) subscribe and follow the companies listed there. It lets VCs triage the companies that interest them and lets you read which VCs are interested in the technologies your company creates.
- Consider bootstrapping. There is nothing wrong with financing your company with the money earned from your own work. My first company, before Sequoia came in, was funded just that way. Just make sure you’re in a market that can wait for your product. Bootstrapping is great, but does slow things down.
- Consider angels or seed investors. They tend to be easier to reach than VCs and like early stage companies more. There are some great ones in New York and other parts of the country. I often recommend angel investors I know to companies that are too early for our fund. Just make sure that angel and seed investors are, indeed, “smart money” — that they actually add value to what you are doing and have a track record of getting graduates from their programs funded by larger funds.
If you’ve done these things or feel that you can skip the incubation phase, you are ready to approach an investor. Pardon the cliché, but “you don’t get a second chance to make a good first impression,” so care should be given to the way you make your introduction…
- Figure out which firms are “right.” Best way to do so is to browse companies in this space and see who invested in them in the early stages. A good resource for finding investment histories of companies is CrunchBase. Keep in mind that VCs don’t invest in competitors to their portfolio companies. So, if your company is a better version of something they already have, don’t waste your time. However, if your company is different, think about how you will differentiate yourself in the introduction. It is important to find a VC with an appetite for “the space” in general and look for holes in their portfolios. Now, most VCs have a play in cloud computing. But which part of Cloud Computing? System provisioning? Storage? Virtualization? Think how you would be complimentary to the companies they already have.
- Do your homework on the investor. If they are a modern VC, they will tweet, maybe blog. They will have their presentations as slides or videos somewhere on the internet. Decide if this is a person you’d enjoy meeting. If the investor strikes you as an arrogant ass with a blackberry talking about numbers you don’t understand, skip them. There are plenty of fish in the sea. If it’s someone with a friendly attitude and actually says things that you find interesting, make your approach.
- Try to get an introduction from a friend. I know this is easier said than done, but referrals are the best way to get a VCs attention. Make sure the referral is from a good source. Portfolio CEOs are the best. Other VCs are good as well. Just make sure they actually understand what you’re all about and why you want this particular introduction. If they decline to make the intro, don’t be upset. I, for example, make it a point not to introduce people around simply as a favor and feel I put my professional reputation on the line every time I make an intro. If I think your company is not right for a particular investor, I won’t make the introduction.
DO NOT hire a firm to “shop the deal” around. Not at this stage. I want to hear from the founders and the founders only. Personally, I will never take a company that hired someone to “help” with fundraising seriously. Sorry.
- Connect via LinkedIn. Many VCs use that network. And you do not need to get to the most senior partner in the firm for an introduction. Just make sure that the introduction is personalized vs. boilerplate. Explain why you want to connect: company, goals, space, etc. Keep it brief. Go for the associates, principles, and venture partners — they are more likely to respond. Chances are you’ll get connected and will then have their email address.
DO NOT say you are a “friend” unless you really are a friend. Some of us pre-date Facebook and feel that the word “friend” still carries some weight. Join a group I’m in, find a common acquaintance already connected. Just don’t bullshit.
- Send a brief introduction. Send your “Elevator Pitch” as part of the introductory email and attach your “Executive Summary” (see Step 0). If you follow the guidelines in that step, the investor should be able to quickly tell you if there is further interest or not. Title should include the words “introduction” the company name and a tagline. Avoid spam filters and don’t say “Viagra” (or Cialis) anywhere in the text. Check your grammar and spelling — words matter.
DO NOT send the deck or any other megabyte attachments. You should include a link to your website or a demo invite if you have them. Concise, to the point, and sent from ONE individual to ONE individual. The introductory email should be personal. If I detect that it’s something from MailChimp, chances are it will get deleted.
- Have some patience. VCs should respond to your intro (more on that later) but there may be a conference, an offsite, or a vacation you don’t know about. If you haven’t heard back in two weeks, send a reminder. If there is no response within a week, note down that investor’s name, never speak to them again (for this or any other company you start) and laugh at them all the way to your IPO.
DO NOT be a pest. Do not send constant reminders, twitter DMs, or blog comments. Give the VCs time to digest.
- Accept “NO” for an answer. Do not try to argue over email, do not try to change their mind. If they misunderstood, it’s their fault. If your message is unclear, make it better next time. Just say thank you, move on, and hope to meet the next time around.
Hopefully, you’ll get an indication of interest asking you to send over the deck and the real process can start. If not, do not give up — there are plenty of investors out there.
Meeting investors is a chore. However, it is an important and meaningful step in your company’s early life. Hopefully it is a start of a relationship. And it blows my mind to see a cavalier, nonchalant attitude towards companies trying to get in the door that some investors display. If there were no startups there would be no VCs. It’s not chicken and egg. Companies matter a lot more than investors.
- Be reachable. Deal flow is what Venture Capital is all about. We should make ourselves available and reachable to startups. Most modern VCs, as I mentioned, are on LinkedIn, Twitter, AngelList, and other social networks. Most attend conferences, trade shows, events, even meetups. We should be using Hashable. We should have an infinite supply of business cards at all times.
- Respond. Time to get off the high horse and realize that startups are what make investors successful. We should respond to your email, in person, within two weeks either asking for more information or giving you a succinct reason for why we are not interested. A VCs email inbox is not a void. If a VC decides to declare “email bankruptcy” because they are too behind on their email, they should announce that in public.
- Delegate intelligently. There may be others at the firm who are better qualified to make a judgement on your company. The VC should forward your intro, with comments to another member of the firm after which you should leave him alone. There is nothing wrong with that and not a sign of rejection — it is a good thing.
- Guarantee attention. We should guarantee that at least the elevator pitch will get read and given some thought. This is why it is so important. We should look at the LinkedIn profiles of the founders. We should peruse their blogs. There may be times when we are busier than usual, but that’s why it takes two weeks to get back to someone.
- Show respect. These people are knocking at your door trying to have you join them in fulfilling their dreams. There is nothing worse than a condescending VC. That doesn’t mean you shouldn’t be harsh when necessary. But be honest and critical, rather than just dismissive.
- Offer to help. Sometimes, the idea is good, the founders are good, but it’s just too early. A VC should have a network of early-stage and seed funds to which a company can be referred. I save these referrals for companies I honestly believe in but in which I can not invest because of its stage. I will take a meeting or a breakfast with an early stage company I like just to help. We are part of the same community and should take care of each other.
CONTINUED: Step 2 – The first meeting
- Getting funded: Step 0 – Prepare (thansys.com)
- Angel Investors Outshine VCs For Entrepreneurs (fastcompany.com)
- Changes in Software & Venture Capital – Part 2 of 3 (bothsidesofthetable.com)
- VCs are now selling their ideas to entrepreneurs (observer.com)
- Investors Flock To Boston To See TechStars’ 12 Cool New Startups (Here’s A Peek) (techcrunch.com)
- Just Write Checks, Be Humble but Unstoppable, and Boston VCs Are Dinosaurs: 10 Highlights from Angel Bootcamp (xconomy.com)
- Why Every Angel Should Beg to Mentor at an Accelerator (tydanco.com)