Building an investor network from scratch sounds daunting. This is true particularly if, like many founders, you don’t happen to be part of a social or economic circle where striking up early conversations with potential investors is a no-brainer.
We recently sat down with three VCs who have also been founders to talk about different ways founders can approach this problem, how to land that first term sheet and what that term sheet should contain.
Today, we’re featuring the first part of that conversation. We spoke with investors James Norman of Black Operator Ventures, Mandela Schumacher-Hodge Dixon of AllRaise and Kevin Liu of both Techstars and Uncharted Ventures.
In part two, the investors cover more specifics about what to ask for in a term sheet and what to refuse.
(Editor’s note: This interview has been edited lightly for length and clarity.)
How do you start a network from zero?
James Norman: It’s pretty varied when you’re a first-time founder. Depending on what networks you come from, your situation can be different. Some people are able to start with friends-and-family money. For people in the demographic I invest in, it’s quite atypical for that to be a thing.
“If you have 50 conversations with investors, I’d say to think of the first 10 or 20 as practice.” Kevin Liu, director, Techstars
Getting to angel investors can be easier. If you’re not already in a network [that comes with] VCs and warm introductions and you want to get your initial capital from the best partners, angel investors can be a good place if you’re really early on and don’t have a product or you want to find someone who really believes in you.
If you do have something that’s working, and you really feel like you can scale this to be something very large, it’s okay to go and find a VC partner — someone like [the pre-seed stage fund] Precursor.
It all depends on your situation. You can go after VCs; some people [are open] to cold outreach if it’s cultivated in a thoughtful, meaningful way where it actually can be a connection.
Mandela Schumacher-Hodge Dixon: Success is planned, premeditated and on purpose. If you want to be successful at fundraising, you have to understand it is a game, and to win this game, you have to understand the rules, the culture, as well as the unwritten rules that you won’t read about in a blog post or hear in a podcast.
Be really clear about what you are building and if you are truly interested in making it “VC-backable.” Because when you make it “VC-backable,” you’re signing up to go as big and as fast as possible. You need to be aligned with the investors about the agreement they’ve made with their LPs on the returns they’re going to have for the fund. There was an agreement before you ever showed up to the pitch meeting.
Once you decide to opt-in to this game, understand which investors are for you and who are aligned with what you’re building — the sector, the stage, the amount and even the partners who you want to work with [inside a firm]. I tell founders all the time: The websites that investors put up — believe them. Go read their investment thesis; they are literally telling you what they’re going to do with this capital they’re going to deploy.
Once you’ve identified those people, make a lead sheet. If you have 10 investors on that lead sheet, I want you to make it 100, because this is a sales funnel — it’s about swinging a bat to eventually convert to a home run, which is your term sheet.
A lot of people also don’t recognize that you need an “assist list” when preparing to secure a “yes” from an investor. You can often build rapport with investors you don’t have any relationship with by first building relationships with people around those investors. A lot of the time, people are eager to get to the GP at the fund, but they don’t really understand that you have to work around those people first, because they’re going to be the intro you need to establish your credibility to someone who doesn’t know you.
Kevin Liu: Prepare. So much of the game actually happens before the meeting.
How do you approach a VC who has backed a similar technology and may be interested but also conflicted?
Norman: Indirect competitors or adjacent startups could be signals that [a VC is] interested in your space as long as you’re not actually going to cross paths with that startup. It’s also an opportunity to reach out to that founder [who the VC has backed previously] and build a relationship, because you have something to talk about. You guys can potentially have a sales channel partnership. If that founder is actually performing well for that fund, they are also going to be your best intro to the investor.
Schumacher-Hodge Dixon: VCs first consult with the founders of the companies in their portfolio who may see this new opportunity as competitive, because their allegiance is to people they’ve already bet on.
Also recognize that investors are never analyzing only you. They’re analyzing you in relation to the founder that just left their office; in relation to the founder that’s coming into their office after you; in relation to all the portfolio companies they have, whether or not they’re directly competitive. So you need to have a level of self-awareness to cut out a path for yourself and stand out — not just as a company in the market, but as a leader and someone who the VC is going to believe in.
I don’t care how beautiful your deck is; I don’t care how wonderful and appealing the story is. VCs are betting on you as the leader of this company and in your ability to attract talent and execute against what you’ve put in your 10-slide deck.
Liu: Also keep in mind that when it comes to the early-stage investing scene, everyone knows each other. That’s how we think about getting the best intel. So when an investor [talks to you] for half an hour and invests in a competitor, getting upset about it is not particularly productive. Recognize that’s part of the journey and share the information that you’re comfortable sharing — but don’t overshare your secret sauce.
Schumacher-Hodge Dixon: To that point, have a deadline. You’ll start to get tipped off if VCs just keep asking for information without putting an offer on the table. You want to give all investors the benefit of the doubt, but there are some bad actors who can extend the conversation a little too much as they try to extract as much information as they can.
Norman: [To Keven and Mandela’s earlier points], you put together a list of not 10 investors but 100. When you try and pitch 100 investors in 10 to 12 weeks’ time, they are going to talk. If you tell them the right story, it’s going to build some momentum, which will get you to the point of a term sheet.
How long should conversations with VCs reasonably go on?
Norman: I like to run a 10- to 12-week process tops [as a founder]. I’m going to choose how many meetings I want to have each week, and I’m going to set up a sales process: How many introductions do I need to get to this many meetings? I’m also going to prioritize who I want to speak with so I have my high-priority people who I feel should definitely do the deal.
I also look for other people who I don’t think will do the deal, but I want to pitch to them first. I’ll do this because, if my story’s a little off or I’m getting a lot of the same feedback — I don’t understand the market or understand [something else] — I want to be able to pivot a little before I go to the people who I know should do the deal. So by mixing up the low-priority, a little bit of medium-priority and a little bit of high-priority people, you really get it rolling. You put yourself in a position where you’ve developed momentum to tell your story. I’ve even recorded myself in the past. You can’t practice enough.
Once you’ve told the story five to 10 times a week, you just become like, “snap, snap, snap.” Then you’re really ready to go hit the people you want to hit.
Liu: Part of it depends on how big the round you’re raising is — whether it’s pre-seed, seed or Series A, these are different beasts. It’s about having enough conversations to build up momentum, similar to what James just mentioned. If you have 50 conversations with investors, I’d say to think of the first 10 or 20 as practice. It’s really about getting in a groove. The next 20 are the ones who you want to push on to give you good feedback. Then the final 20 VCs who you pitch to are usually the ones who, hopefully at that point, [will be willing to offer you] a term sheet and fill out the rest of the round.
Schumacher-Hodge Dixon: I know for a fact that the most successful founders, in raising their round the way they want to raise it, have a clear plan. Once you’re in the thick of it and managing all these relationships, requests for due diligence and so on, it is hard. It’s like a whole other job outside of running your company and managing your team. So I really recommend “measure twice, cut once.” Take your time to prepare.