Recently, Paul Graham came out with a great (and comprehensive) post on how to raise money. Of the many great “rules,” the ones I find most important (and surprisingly often neglected) are:
- Get warm intros to investors; do not cold email them. Worse is the cold LinkedIn message
- Talk to your investors in parallel for negotiating power and to save you time
- Know what the next steps are with every investor
- Don’t optimize for valuation and don’t raise too much (these deserve their own posts by nature of their continual controversy)
The fact is, much literature around raising your first round is written for entrepreneurs with fundraising optionality — folks who are collecting multiple term sheets with the luxury to choose the best VC fit and terms. If you fall under this camp, congratulations! Enjoy listening to investors sell you for a change.
However, in an environment where the cost of starting a company has gone down, the bar for closing your first institutional round (whether seed or Series A) has gone up.
So, why can’t you raise money? The reasons depend on whether or not your foot made it past the door.
Initial Investor Pass
Why you’re not getting that first or second meeting with the Partner.
- You did not get a warm intro. Cold emails and messages are always a red flag in an investor’s mind. Given the small number of data points investors have at the early fundraising round, external validation is important, and being generally connected to the tech community is one of them. Check your LinkedIn for friends who can connect you to an investor. Or check within your WeWork community.
- Your team lacks experience. Or lacks a product/dev lead. While VCs love young founders, some business verticals are harder to break into without prior experience. Regulated or enterprise-heavy verticals such as healthcare, energy, transportation, infrastructure, security, etc tend to benefit from a CEO and/or head of sales with prior experience or relationships in the vertical. On the flip side, having a team with strong industry experience but lacking a technical lead if the product is complicated is also hard for investors to stomach. Lack of experience will rarely prevent you from getting a first meeting, but may not get you to the finish line.
- There’s something “scary” about the market you’re targeting. It may be crowded, or dominated by a large incumbent, or have previous history of being commoditized, or consists of a small number of large potential customers, or just plain small. Anticipate this and explain how there is a feasible scenario how you will differentiate and gain market share, or how you will move into an adjacent market.
- You did not manage your first meeting well. So much of fundraising and negotiations is about managing your image. Yes, this seems obvious, but is something most in your control. Practice your pitch with your angel investors or friends to develop a clear story. During the meeting, investors are looking for positive signs of confidence, willingness of take feedback, command of details (e.g. marketsize, market dynamics, competitors, current burn/revenues), and ability to lead the conversation. Rather than get defensive, explain clearly why an investor may be misunderstanding your product. Also, don’t underestimate an Associate’s ability to champion your case to the VC Partner.
Post-Diligence Pass
Why the investor is ultimately passing after looking into your company.
- Great team, but not comfortable with the market. Or vice versa. There are few instances where a great team would not get funded; one of them is a great team in a “scary” market where degrees of pivotability is potentially low. Try to mitigate this by always knowing where the investor perceives greatest risk and voluntarily rebutting their concerns.
- An existing portfolio company feels you are competitive. As Fred Wilson puts it, “When a VC invests in competitive companies it’s like an open marriage. It sounds all well and good, but it’s going to create problems down the road.” Honestly, little you can do here if the company feels strongly enough.
- Not enough traction for amount previously raised. Raising a couple million in seed funding sets the bar higher for expected product traction when raising your next round. These days, going into a Series A with ~$1M or less raise in seed, investors expect a basic working product with initial feedback from first pilot customers. You should also be actively tracking your competitors.
- It’s just not the right fit. I never cease to be amazed how much choosing your investor is like being in a relationship (since I haven’t been married to experience that). And even if someone looks great on paper, you just may not have the chemistry.
Very seldom do VCs give you the real reasons for passing to keep good terms with you for future investment optionality. If you are getting the cold shoulder from a few consecutive investors, ask a friend with VC experience to give you some honest feedback.