As startups and venture capital grow in tandem, fundraising has gone from a formal affair on Sand Hill Road to a process that can happen anywhere from Twitter to Zoom.
While fundraising may no longer require a trip to California, it might depend on whether you got an invite to a private audio app. And while you may not need to be an insider, second-time founders — largely male and white — still have a competitive advantage.
If your intention is to build a company that you want to own and run indefinitely, and/or to grow more slowly and take fewer risks, traditional venture capital is not right for what you want to build.
The growing complexity of fundraising has the opportunity to make tech either inclusive or exclusive. For new founders looking to raise money, let’s dismantle the myths about raising your first check and instead focus on how investors and other successful founders describe the nuance needed to secure money.
What makes my business venture-worthy?
This question is existential, but it should be at the forefront throughout your journey as a founder. Elizabeth Yin, founding partner of Hustle Fund, says startups should be able to hit one of two goals: Reach $100 million ARR by its fifth year or get to $1 billion in valuation in the same time period.
“This is hard to do. And most businesses will never get there — not for a lack of trying — but there’s a lot of luck whether your idea has that much demand that quickly,” she added.
“I think you will know in the first year or two how ‘easy’ or ‘hard’ it is to get customers and whether you think on that trajectory you can get to $100 million a year in a few years,” Yin said. “And if it’s really hard, it doesn’t mean you throw in the towel. … There are many great companies that are not VC-backable where the founders will make a lot of money, but it just means you need to think through where to get your financing. Perhaps it’s from angels. Perhaps it’s from revenue-based financing funds. Perhaps it’s from customer crowdfunding.”
While VC is the flashy gold medal, the rapid growth of emerging fund managers means that a first check can be piecemealed together from a variety of different sources. The options for financing are seemingly endless: syndicates, public crowdfunding, VC firms, accelerators, debt financing, rolling funds, and, for the profitable few, bootstrapping.
“When people go around saying, ‘Do you want to run a VC-backable company?’ that feels weird — you don’t necessarily get to pick how fast you can grow — the market just may or may not be there,” Yin said. “There’s a lot of luck with that.”
Leslie Feinzaig, founder of Female Founders Collective, said that beyond economics, the hardest part of knowing whether your startup makes sense as a VC-backed business is understanding your own goals as an entrepreneur.
“Taking venture capital is not just about building high-revenue, profitable companies. It’s about creating a mechanism by which you, your team and your investors can realize returns from owning a piece of the company,” she said.
“VCs are looking for a few huge winners in their portfolio, with a relatively fast path to that exit, so as an entrepreneur you have to be willing, even excited, to take a huge swing. If your intention is to build a company that you want to own and run indefinitely, and/or to grow more slowly and take fewer risks, traditional venture capital is not right for what you want to build.”
How early is too early to talk to an investor?
So, you’ve weighed the economics and existentialism and you’re still ready to raise venture capital money. Congratulations! Now it’s time to figure out when you are pitch-ready for your wishlist of investors.
Some VCs will say that there’s no perfect metric or magic number you need to hit before approaching a first-check investor. It all depends on the stage and space the startup is in.
“Unfortunately, there isn’t a hard and fast rule. It depends a lot on the idea itself — some ideas are in a super crowded space and may never be able to raise regardless of the traction, while others are highly differentiated and may be riding a trend. These may be funded at the idea stage,” Yin of Hustle Fund said.
If a founder wants to pitch a lot of investors, she recommends focusing on traction so they can pitch more seed investors. “The seed stage is defined by having good traction (aka $10,000 a month in revenue) versus no traction (which is pre-seed).”
Hustle Fund is a pre-seed fund that focuses on pre-revenue startups that have an early version of a product. Yin stressed that this looks different for every firm: “It’s important to do your homework on what each investor’s sweet spot is beforehand.”
Feinzaig offered a different approach.
“I’m a big proponent of building a network before you need it,” she said. “People who invest at the earliest stage are usually betting on the founder/team, so the earlier they can get to know you, the longer they can see you execute and deliver, and the more you can develop a trusting relationship, the easier it is to get them on board when you do need to raise.”
Once you start fundraising, this mentality flips, she said.
“At that point, every meeting is a pitch meeting whether or not you position it as such. You’ll want to have a solid verbal pitch that you can pull from before you start approaching anyone. Ideally, you’ll also want a deck ready, because casual coffees can quickly turn into real fundraising conversations. And you’ll want to have practiced that pitch before you try it out on your highest-priority investors,” she said.
Questions investors expect you to answer during those pitch meetings
You’ve dealt with the inner turmoil, you’ve done your homework, and now it’s time to make the pitch. To limit scope, we won’t talk about pitch deck tips (but there are resources here, here and here for those interested). Instead, let’s consider what investors expect you to answer during those pitch meetings.
“Venture capitalists are interested in funding growth, not keeping your company alive for 12-18 months,” Yin said. “So, working backward, the most ideal story to tell is a growth story. … That’s the kind of situation VCs want to be backing.” Founders should be able to draw a clear line between money in and money out, she noted, and that requires a healthy amount of understanding how businesses work in the long term.
“The more experiments you have done to validate your hypotheses around these pieces of the business, the more compelling your pitch will be,” Yin said.
Here’s Yin’s list of questions for vetting founders:
- Has the founder done enough customer development to be able to articulate who the customer persona is?
- Do you know the “day in a life” of the person you are selling to?
- Do you understand the current alternatives well?
- Can you articulate how those alternatives are being used?
- Is your product a 10x better experience?
- Have you done any customer acquisition tests in various channels around the messaging?
- Do you have a sophisticated understanding of why people buy your product?
- “If a founder can’t answer all of those questions … then I’m not interested,” she said, noting that none of the questions involve revenue. “If you’re not laser-focused on customer acquisition, building a software business is going to be a tough path ahead in today’s market where the biggest differentiator for most businesses is customer acquisition.”
So luck + comprehension = success?
Nope! Most startups fail, and investors are in the unique position to give money to businesses very likely to shutter. The best thing that founders can do, therefore, is to convince investors to give them money even when the odds aren’t in their favor.
Yin and Feinzaig’s comments underscore that a founder’s competitive advantage in those conversations is more art than calculation. Yin wants the founder to have a deep comprehension of the competitive landscape, while Feinzaig expects entrepreneurs to have aggressive self-awareness. And while both have different approaches as to what warrants a first check, both stressed that venture scale is a hard nut to crack.
Next up, we’ll hear from two startup founding teams on how they landed their first dollars and extract advice based on those strategies. The good news is that even in a world ruled by luck, there is active demand and innate optimism in startups and VC. Even if it takes 200 cold e-mails to prove it.