It’s been a trying time for founders to fundraise in these turbulent times. On one end, you have investors who took a U-turn on plans to invest this year. On the other, you have investors still deploying or looking to deploy capital. The latter further breaks down into: (a) investors who are taking more calculated bets – raising the bar for the kind of startup that gets the capital, and (b) investors who find the opportunity to invest in the down markets. The latter cohort of the latter cohort seems to hold truer at and prior to the pre-seed stages among microfunds and angel groups.
The Tightening of the Market
Disregarding the investors who aren’t deploying capital anymore, it’s been harder than ever to raise. Here’s why:
- Anecdotally, more startups are looking to fundraise. Many have pushed up their fundraising schedules.
- The standard is much higher now than before. And that includes a stronger consideration for the problem you’re addressing. Is it anti-fragile? Is it recession-proof? If your numbers are down now, will they eventually ‘flip’ back on track post-quarantine?
- Valuations are taking a hit. Where before your startup may have been overvalued (especially in Silicon Valley), many startups are facing “more realistic” round sizes. And flat or down rounds are more prevalent.
- When investors can’t meet founders in-person, they’re resorting to data, data, data. Investors no longer have the luxury to benchmark a gut check over Zoom/email, as they would have in noticing micro-gestures and other situational context clues. Anecdotally, investors are spending much more time and putting much more weight on diligence than before.
And, that’s why founders, more than ever, should (re)consider fundraising strategies. This was something that I learned when I was on the operating side and at one point, working on the fundraising front for Localwise.
Much like when high school students apply for college, founders should have a three-tiered list – SMR, as I like to call it:
- Safety,
- Meet,
- And, reach.
Safety
Safety investors are those that are definitely going to take the meeting. And will most likely invest in you (i.e. at the idea stage, this mostly comprises of family, friends, and colleagues, maybe even early fans via crowdfunding). Admittedly, they can only contribute small sums of money. Each check also carry little to no strategic weight on the cap table.
Meet
Meet investors are investors that will most likely take the first meeting, but you’ll need to do a little leg work to get them to invest. Many of these will most likely stick to being participants than leads in any round. They carry some strategic weight on the cap table – in the capacity of their network, their brand, or advice.
Reach
Your reach investors will be your greatest sponsors. The people who have the highest potential to get you hitting the ground running. These folks usually have crowded inboxes already. And you’ll need to figure out how to best reach them. Unless they reach out to you, you will most likely fall just short of their gold standard. But once you stget these onboard, your relationship will set you up for reaching your next milestone better than any other individual partnership. At the same time, they will be the ones who are most likely going to have true conviction behind your product, your market insight, and your team. They typically lead rounds, and carry great strategic value to your startup (i.e. top tier investors, SMEs, product leaders in your respective vertical). For lack of better words, your ‘dream girl’ or ‘guy’.
Your Priorities
When pitching (and practicing your pitch), go for a bottom-up approach. Safety, then meet, then finally reach. And ideally, by the time you’re pitching to your ‘dream girl’ or ‘guy’, you’d have refined your pitch that best fits their palate.
When prioritizing time and effort, go top-down. Since you have limited bandwidth, spend the most time doing diligence on your reach investors. Then meet. And if you still have time, safety.
Diligence and Reaching Out
During your diligence process, look at their team, their individual and collective experience. Is their partnership, especially the checkwriters, diverse? Were they former operators? Or career VCs? And based on what they have, what do you, as a founder, need the most right now? Also, to better understand the marriage you’ll be getting in to, talk to their portfolio startups and investors that have worked with them before. Pay special attention to the the venture bets that didn’t work out. Was there a break up? If there was, what was it like? How did the investor help them navigate tough times?
It’s easy to be positive and cohesive when things are working out, but how does that investor react when things aren’t going as expected?
After talking to the (ex-)portfolio founders, if you feel like they have a good grasp on what you’re working on and are excited for you, ask them for an intro. Focus on those founders who have gone through the idea maze in your respective vertical, or an adjacent one. If you’re defining a new vertical, or that investor has just never invested in your vertical, but has expressed public interest of pursuing investments in yours, ask founders who have the same or a similar business model to yours. After all, that’s going to be the kind of solid warm intro you want.
In Closing
Though there are other ways to get in front of investors (some more questionable and/or gutsy than others), including, but not limited to:
- Warm intros from friend/mutualLinkedIn connection,
- Cold email/DM,
- Reaching out to a more junior team member (scout/analyst/associate/principal),
- Presenting at accelerator/incubator Demo Days,
- Presenting at a hot conference, like TC Disrupt or SXSW,
- Volunteering at the same non-profit as them,
- Auditing their lecture at Stanford,
- Or, squeezing into their elevator (although most VC offices are pretty lateral)…
… anecdotally, it seems many founders overlook the means of getting an intro from a VC’s portfolio.
Photo by Marvinton from Pixabay
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups!