Before meeting any investor, you’ve got to make sure these are in check, whether is it your personal attitude towards your business, or the workings of the business itself.
We have compiled a simple checklist for you to keep track of the mindset you’ll need towards your business in order to convince every investor you meet.
1. Realistically, are you venture scale?
Even without venture capital, you can build a valuable business.
Yes, you can rely on funding alone to succeed.
But, if you want to raise money, you should possess the skills to help multiply your money and the money of your investors.
Investors are looking for quick gains: What makes you think that they will invest 1 million in your company, if you can’t even turn a dollar of your company’s assets into $10?
Also, how fast can you grow? There is a tremendous difference between getting to $1M annual revenue in 6 months or 6 years.
This matters for two reasons:
1) Investors will extrapolate your future growth rate from your past performance
2) When you’re raising venture money, you’re building with someone else’s money and there is an often unacknowledged cost to that — namely your ownership and ultimately the funders’ returns.
The asset you can provide to your investors is the most important.
VCs are searching for high velocity, high return investments. Startups with clear long-term assets are more valuable, which could be a database of genetic information that’s 20X broader than any competitor, or market share in an industry where there is 15+ year lock-in. At the bare minimum, make sure you are building a business, not a product.
(If your go-to-market plan is to leave this to the salespeople you plan to hire at some future point, this ultimately will not work — certainly not for venture scale.)
Bottom line is if you are not venture scale, but you’re raising money — or spending — like you are, you have a problem.
2. How competitive are you?
As a founder, you have to stay focused on solving the challenges directly in front of you.
People usually mention how “you are your only competitor”, but realistically, if you want to be venture-funded, these are 3 things you must take note of:
- Equal Footing Competition: When you start raising money, whether you realize it or not, you automatically become part of a peer group, a peer group which involves other companies that have raised as much as you have, or to a lesser extent have comparable metrics (revenue, traction/adoption.) If you are way behind in your peer group, you won’t stand out in a weekly VC partner meeting, all else being equal. You could still come out ahead, but your team, market, and defensibility will have to be that much more impressive.
Call your round based on traction, and use the earliest label which can apply. Be within a cohort where you can compete effectively: it’s the adult version of redshirting for sports teams.
2) Lion’s Share Mentality: Assuming that your startup is successful and that you’re tackling a valuable market opportunity, 2–4 direct, formidable competitors will likely arise in your space. Most founders don’t look this far ahead, but by then you’re either at the front of the pack, or not — and in the latter case you will lose out on investor’s money. Why?
Because as a venture capitalist, you will want to invest your money into a prospective company and get the most amount of shares possible from that company. Why divest when you can acquire the largest amount of shares from the #1 competitor in the industry, knowing that company will succeed in the future?
Hence, you want to stay competitive and at the top of the ranks just so that you will be every VC’s first choice and never the last.
3) Sector bias: Don’t get discouraged just because you are in a less competitive funding sector. While many funds are generalists, the reality is that they will typically focus on the most profitable sectors, and sectors with structural risks, like health care or education, may be tougher to close investment. This is also a good reason that sector-focused funds are becoming a lot more common. You should take advantage both of them and of strategic angels in your sector, who can crucially help you navigate hard-to-open sales doors with their industry connections.
3. Are you right-sizing your fundraising based on fund dynamics?
Want to know the truth about VC firms? Simply by looking at the size of the fund, you can tell if your company is the right fit or not. The secret rule of thumb that most VCs have: any single investment needs to be able to return their entire fund. A friend at a $800M fund confesses to me that she won’t take a meeting unless she can see clear sightlines to a $300M business.
On the other end of the spectrum, angel investors can have a fantastic outcome with a $50M run rate company, and consequently may be willing to take risks much earlier. Don’t waste your early fundraising cycles if there isn’t a fit, especially not in pursuit of a brand name for your term sheet.
4. Where are you on the seed gradient?
Know the stages, metrics, and amount of your round, so that you stand the best chance in your cohort — review my 2nd question for you again.
(Two quick notes: We defined a category we call seed plus for between-stage companies who are not quite ready for a competitive series A, but have significant traction and may have passed a growth inflection point. Also, these buckets apply to less capital-intensive businesses like software, rather than hardware or deep tech.)
5. Do you have a startup Olympian mindset?
Those who are drawn to founding companies have grit, creativity, and determination. High growth companies require all this — and more. I sometimes liken the process of finding great entrepreneurs to seeking Olympians. The Olympian is one who has configured her life to support training, has a team assembled to handle the various aspects of growth, and is ruthless about trying what works and discarding what doesn’t. She literally dedicates her life to the building of the business and is willing to take the brunt of it all.
Can you face the facts about your business without getting defensive or going into denial? Can you grapple with hard realities and find solutions? If an investor does not move forward, please don’t take it personally, or see it as a fatal blow aimed at the business you’re building. Ask for feedback, learn from it, and look for investors who are excited about your business.
6. Are you willing to optimize for investor fit?
Nothing is more painful than watching startups being ill-served by investors who do not have the best read on their strengths or market dynamics or simply have different values. You may be thinking, “Well, I don’t care about fit as long as I get funded”. Yes, but when you’re spending years of your life on your startup, having the right partners at the table is worth getting right. The worst case scenario is that you build an 8-figure business, only to have one of your investors vetoing a profitable exit that doesn’t align with her/his economic interests. How do you prevent this?
Make sure that you and your investors match up on:
-Product principles and prioritization
-How involved you want them to be
-How they handle it when things don’t go well
Also, speak with other entrepreneurs in their portfolio, which will help you answer the key criteria I mentioned. Reference checking is a two-way street! Finally, remember not to ignore your gut. With team members and investors, ask yourself this one question, “Who am I most excited about collaborating with?” Winning as a startup founder is about building something amazing, but it’s also about building relationships, supporting your team, and having fun on the journey. As you gear up for your seed round, make time to reflect and refocus.
Every Investor Is Different
Additionally, as a startup founder, you have to take note of the minute differences when you approach different types of investors. Not every investor would want to partner up with you, even if you adopt all the qualities and mindsets aforementioned.
I will further elaborate below:
Investors: What Is The Difference Between Angels & Venture Capitalists
The difference between an angel and a VC is that angels are amateurs and VCs are pros. VCs invest other people’s money and angels invest their own on their own terms. Although some angels are quite rigorous and act very much like the pros, for the most part they are much more like hobbyists. Their decision making process is usually much faster–they can make the call all on their own–and there is almost always a much larger component of emotion that goes into that decision.
VCs will usually require more time, more meetings, and will have multiple partners involved in the final decision. And remember, VCs see LOTS of deals and invest in very few, so you will have to stand out from a crowd.
The ecosystem for seed (early) financing is far more complex now than it was even five years ago. There are many new VC firms, sometimes called “super-angels,” or “micro-VC’s”, which explicitly target brand new, very early stage companies. There are also several traditional VCs that will invest in seed rounds. And there are a large number of independent angels who will invest anywhere from $25k to $100k or more in individual companies. New fundraising options have also arisen.
How does one meet and encourage the interest of investors? If you are about to present at a demo day, you are going to meet lots of investors. There are few such opportunities to meet a concentrated and motivated group of seed investors. Besides a demo day, by far the best way to meet a venture capitalist or an angel is via a warm introduction. Angels will also often introduce interesting companies to their own networks. Otherwise, find someone in your network to make an introduction to an angel or VC. If you have no other options, do research on VCs and angels and send as many as you can a brief, but compelling summary of your business and opportunity
What Is The Mindset When You Meet An Investor For The First Time?
If you are meeting investors at an investor day, remember that your goal is not to close–it is to get the next meeting. Investors will seldom choose to commit the first day they hear your pitch, regardless of how brilliant it is. So book lots of meetings. Keep in mind that the hardest part is to get the first money in the company. In other words, meet as many investors as possible but focus on those most likely to close. Always optimize for getting money soonest (in other words, be greedy) .
There are a few simple rules to follow when preparing to meet with investors. First, make sure you know your audience–do research on what they like to invest in and try to figure out why. Second, simplify your pitch to the essential–why this is a great product (demos are almost a requirement nowadays), why you are precisely the right team to build it, and why together you should all dream about creating the next gigantic company. Next make sure you listen carefully to what the investor has to say. If you can get the investor to talk more than you, your probability of a deal skyrockets. In the same vein, do what you can to connect with the investor. This is one of the main reasons to do research. An investment in a company is a long term commitment and most investors see lots of deals. Unless they like you and feel connected to your outcome, they will most certainly not write a check.
Who you are and how well you tell your story are most important when trying to convince investors to write that check. Investors are looking for compelling founders who have a believable dream and as much evidence as possible documenting the reality of that dream. Find a style that works for you, and then work as hard as necessary to get the pitch perfect. Pitching is difficult and often unnatural for founders, especially technical founders who are more comfortable in front of a screen than a crowd. But anyone will improve with practice, and there is no substitute for an extraordinary amount of practice. Incidentally, this is true whether you are preparing for a demo day or an investor meeting.
During your meeting, try to strike a balance between confidence and humility. Never cross over into arrogance, avoid defensiveness, but also don’t be a pushover. Be open to intelligent counterpoints, but stand up for what you believe and whether or not you persuade the investor just then, you’ll have made a good impression and will probably get another shot.
Lastly, make sure you don’t leave an investor meeting without an attempted close or at very minimum absolute clarity on next steps. Do not just walk out leaving things ambiguous.
Negotiating and Closing the Deal
A seed investment can usually be closed rapidly. As noted above, it is an advantage to use standard documents with consistent terms, such as YC’s safe. Negotiation, and often there is none at all, can then proceed on one or two variables, such as the valuation/cap and possibly a discount.
Deals have momentum and there is no recipe towards building momentum behind your deal other than by telling a great story, persistence, and legwork. You may have to meet with dozens of investors before you get that close. But to get started you just need to convince one of them. Once the first money is in, each subsequent close will get faster and easier.
Once an investor says that they are in, you are almost done. This is where you should rapidly close using a handshake protocol. If you fail at negotiating from this point on, it is probably your fault.
When you enter into a negotiation with a VC or an angel, remember that they are usually more experienced at it than you are, so it is almost always better not to try to negotiate in real-time. Take requests away with you, and get help from YC or Imagine K12 partners, advisors, or legal counsel. But also remember that although certain requested terms can be egregious, the majority of things credible VCs and angels will ask for tend to be reasonable. Do not hesitate to ask them to explain precisely what they are asking for and why. If the negotiation is around valuation (or cap) there are, naturally, plenty of considerations, e.g. other deals you have already closed. However, it is important to remember that the valuation you choose at this early round will seldom matter to the success or failure of the company. Get the best deal you can get–but get the deal! Finally, once you get to yes, don’t wait around. Get the investor’s signature and cash as soon as possible. One reason safes are popular is because the closing mechanics are as simple as signing a document and then transferring funds. Once an investor has decided to invest, it should take no longer than a few minutes to exchange signed documents online and execute a wire or send a check.
So what will you need to prepare?
Do not spend too much time developing diligence documents for a seed round. If an investor is asking for too much due diligence or financials, they are almost certainly someone to avoid. You will probably want an executive summary and a slide deck you can walk investors through and, potentially, leave behind so VCs can show to other partners.
The executive summary should be one or two pages (one is better) and should include vision, product, team (location, contact info), traction, market size, and minimum financials (revenue, if any, and fundraising prior and current).
Generally make sure the slide deck is a coherent leave-behind. Graphics, charts, screenshots are more powerful than lots of words. Consider it a framework around which you will hang a more detailed version of your story. There is no fixed format or order, but the following parts are usually present. Create the pitch that matches you, how you present, and how you want to represent your company. Also note that like the executive summary, there are lots of similar templates online if you don’t like this one.
1. Your company / Logo / Tag Line
2. Your Vision – Your most expansive take on why your new company exists.
3. The Problem – What are you solving for the customer–where is their pain?
4. The Customer – Who are they and perhaps how will you reach them?
5. The Solution – What you have created and why now is the right time.
6. The (huge) Market you are addressing – Total Available Market (TAM) >$1B if possible. Include the most persuasive evidence you have that this is real.
7. Market Landscape – including competition, macro trends, etc. Is there any insight you have that others do not?
8. Current Traction – list key stats / plans for scaling and future customer acquisition.
9. Business model – how users translate to revenue. Actuals, plans, hopes.
10. Team – who you are, where you come from and why you have what it takes to succeed. Pics and bios okay. Specify roles.
11. Summary – 3-5 key takeaways (market size, key product insight, traction)12. Fundraising – Include what you have already raised and what you are planning to raise now. Any financial projections may go here as well. You can optionally include a summary product roadmap (6 quarters max) indicating what an investment.
Click here to download the PDF version of our checklist!