So you are an entrepreneur and want to get funded by angels or VC´s. Sounds straightforward. Except that it is not. As a VC, I see hundreds of teams every year and only a handful of them truly understand what it means to be ready for investment. I thought I would share some light into this complex issue from the VC perspective. I hope anyone who reads this would do the same. So here we go…
Obviously there are a lot of pitfalls when raising funding and since we investors really are in the business of saying NO, you should understand how we think in order to be successful. Let´s start with few fundamentals:
A Startup does not need money. You need help. And contacts. And someone who will disagree with you. If money is the only thing you need, you shouldn´t be talking to angels or VC´s — instead talk to a bank.
Investors have a special business model. We say NO to most of you. In fact 98–99% get a NO THANKS. For the rest, we are really looking for the home runs since half of our investments will not be successful. We just don´t know which half. And since we only have one business model, it is mostly about growth.
VC´s run a portfolio — you do not. Our investors (LP´s) value us with multiple metrics like ROI, multiples and the allocation of capital. Oh that one… it means what is the portion of the fund we allocate to the companies that did not fly and to the ones that did. But since we run a portfolio, we have multiple bets. You only have one. And sometimes that causes friction.
Ideas come and go. Execution matters. So investors are very metrics-driven in their thinking. So show the metrics and your ability to get shit done. A great idea is a good start, but great execution is always better.
So how should you do it then — what is the recipe for success? Honestly, I do not know, but here are few tips:
Do your homework. Most entrepreneurs forget this. But they should not. If you check where we have invested before, you should get a pretty good understanding what we value. And ask around, many people will help you to understand what we look for. And you can always ask us. Consider investor meeting as a sales call. Would you go to a customer with no background info? I would not.
Team is everything. When you peel of everything, there are people left. So tell us why you are the best possible team to solve this specific challenge. Tell us what you have done before. And cherish the personal chemistry — it is all about connecting with people. We only invest into people we like. Because life is too short for two things; working with assholes and drinking bad red wine.
Show the real traction and metrics. This is where many startups fail. Most of them show what they are going to do after the investment. That is nice, but we are really interested in what you have done before. What have you achieved. After all, most of us can tweak MS excel to show the “hockey sticks”. The metrics. They are not for us, they are for you. How can you run a business if you do not measure what´s going on? Revenue is an outcome of what has already been done — the leading indicators are much more interesting.
Cherish the cap table. Hold on to your shares. Many times we see startups with a destroyed cap table even before they are trying to raise a seed round. Not good. We invest into people, so the founding team must have most of the upside. As a rule of thumb, after the seed round 75% of the shares should be owned by the founders/mgmt, after the A round more than 50 %. Keep your startup fundable.
Be active. Resilience is a virtue. If you just send us a deck and never follow, you will not get funded. We never say a definite NO, we just say Not Now. So you can always come back when you have more traction. Not following up is like saying “never mind”.
Getting funded is not easy and sometimes it is not even the right choice. The best money always comes from customers and being cashflow-positive provides you with leverage. You should never consider VC investment as a means of acquiring resources, more of a strategic choice. Once you take that path, there really is no way back. There is no Free Trial.
So when should you raise funding? This is the most difficult question. As a general rule, once you have found the initial product-market fit. When you think you need some fuel to the flame. That is the right moment. You still most likely will pivot, but if you have an investor who has been there, they will support you to find the right product-market fit. Unfortunately many have not been there… and they might get nervous. But every investor understands running a startup is the hardest form of business. If they do not, walk away.