5 tips on how to speak VC and raise capital

• Raising money is referred to as the second hardest part of starting a startup. The hardest part is making something people want: most startups die because they don’t do that. But the second biggest cause of death is probably the difficulty of raising money. Get ready to hear at least 50 rejections, and possibly more if the company is truly innovative or if the category is unfamiliar to investors. Fundraising is brutal.

1. Clarify if raising VC funds is the right thing for you and your company

• First question you should ask yourself is if your company can raise money from a VC. The key here is the size of the opportunity. VC’s can only fund your company if the size of the opportunity is large enough. The reason for this is the power law of returns. This close-to-a-mathematical fact explains that the distribution of returns in venture capital is heavily skewed — a very small percentage of startups bring a large percentage of the returns. In fact, for best-in-class funds returning 5x, less than 20% of the investments account for 90% of the returns. That is why VCs obsess with unicorns; they need them to survive. If they don’t think a company can become one, it does not make sense to take a chance on them.

• Second question to ask yourself is if you even want to raise money from a VC. In fact, less than 1% of startups raise VC capital. Most startups fund their ideas with savings, cash flow, crowdfunding and forms of debt.

• Harvard Business School professor and startup researcher Noam Wasserman introduced the idea that most entrepreneurs have to make a deliberate choice between optimizing for financial returns (“Rich”) or optimizing for control of their company (“King”). His research showed that very few get to be both Rich and King — that’s the rare exception. Most founders typically must decide between “bootstrapping,” which maintains equity ownership but limits growth by having to self-fund growth initiatives via cash flow, or raising outside capital, which accelerates growth but risks diluting founder equity and diminishing the founder’s decision rights on the board of directors. A “rich” choice isn’t necessarily better than a “king” choice, or vice versa; what matters is how well each decision fits with your reason for starting the company.

2. Know your risk-profile and your milestones

• Sometimes we see very large first rounds for freshly started companies, where founders explain they are essentially merging the pre-seed and seed round. The underlying presumption here is that the size of the round explains the stage. This is not true. Stage is a proxy for the risk-profile of your company.

• Pre-seed (typical round size: $250k-1m): The first stage of risk is when a company is just getting started. The product is still under development, and the market is being discovered. There is little to no traction, and it is unclear if there will be customers for the product.

• Seed (typical round size: $1–4m): At this point, the startup needs to figure out where, why and how customers will buy its product. Identifying these routes to market, and how to build them effectively, in a timely fashion and within budget could easily determine the success or failure of a business.

• Series-A (typical round size: $5–15m): Once a company starts to show traction and demonstrate demand for its product, the third major risk starts to appear — scale. At this point, the company needs to prove that it has a stable business model that can grow at scale, knows how to make money from its operations in a consistent way, and that it can attract customers beyond early adopters and its geographical home markets.

• How much to raise then depends on 1. the capital-intensiveness of your company and your risk-profile and 2. how much money you realistically need to make it to the next round and hit the milestones.

• Raising too little may impact the chances of converting and successfully raising at the next round, raising too much can be highly dilutive and impact the chances of converting successfully (giving up too much ownership too early can make it hard to attract investors later on).

3. Fundraising should be run as a sales and marketing function

• Even though you have build the greatest product (company) with the greatest features (large TAM, outstanding team, innovative solution) it won’t sell itself. Founders must manage the process diligently and use the same tactics as from their sales and marketing function to improve the likelihood of converting VCs into investors, and securing cash into the bank account.

• This includes tactics such as using a funnel-approach to manage and track investors’ progress efficiently. Adjust your engagement accordingly (focus most of your time on the later stages of the funnel).

4. Build investor demand with leverage

• Fundraising is a game of power and leverage, and at the early stages the balance of power is heavily skewed towards VCs. Unfortunately, a lot of VCs tend to exploit this.

• Anyways, there are way more startups than VCs in the world. For every investment we make, we consider between 100–150 deals and in general +90% of leads are rejected. Also, VCs provide a certain type of investment that is hard to get anywhere else, as traditional capital markets don’t like high-risk assets like startups. For these reasons, VCs find themselves in a powerful position.

• However, VCs are also in a constant state of FOMO and afraid of losing a deal to another firm. To gain leverage, you need to provide solid proof of an exceptional team, a massive market opportunity, and a product that customers love. Nothing, however, is more seductive to VCs than rapid growth, which is the ultimate ace (except maybe getting attention from competing VC firms). So, if you can effectively combine and pitch these elements, you’ll send a powerful signal that your company is one worth investing in.

• If you are not in a good position in terms of the above, save yourself the trouble of a lengthy fundraise that may not convert, and wait if you can. Reduce the burn rate and stay capital efficient until leverage can be created.

5. You only need one investor (to start a chain reaction)

• "I learned the most important rule of raising money privately: Look for a market of one. You only need one investor to say yes, so it’s best to ignore the other thirty who say no”.

• When a company is early on and the power dynamic has yet to shift its way , it can seem like an impossible task to fundraise. Rather than entertain every investor who shows the least bit of interest (remember, most VCs hire analysts whose primary responsibility is to reach out to companies and make sure that every company is on the radar of the fund), focus on a prioritized shortlist of the highest-probability investors. Getting that first investor onboard is so incredibly valuable because it attracts the next investor like a domino effect.

• A word of caution though! The best VCs are quick to say yes or no. You can easily tell if they are genuinely interested or uninterested. However, in between, there are the maybes. Maybes can be divided into two categories: 1. the fake maybe which should be treated as a no and 2. the real maybes or hang-arounds — keep these leads warm and updated, they could be useful for a syndicate if a lead investor emerges.

• Fake maybes are the hardest to figure out because they never actually say no — they will react when you reach out but never show initiative on their own. These are the most discouraging leads because they give false hope and are often a dead end. The best way to deal with them is by politely pushing for an answer and then making it easy for them to decline your offer so you can move on to more promising leads.

• Although there are many VCs, founders would often be better off chasing a few of them. The first “yes” is not only highly motivating, but it also lowers risk, increases value, and creates FOMO for future investors. So, stay focused and trust the process — one is all you need.