When and how should you approach a venture capitalist (VC)? Timing matters: If you come to a VC asking for cash too soon, you will just end up with advice. The trick to judging the right moment is to know whether your idea is truly ready for an investment.
Put VCs Sixth on Your List
Some founders think “My first step is to meet VCs and pitch the concept. If they say yes, I know I have something great. If they say no, I’ll go find another idea.” That will not work out well for first-time founders.
Seed-stage VC firms want to invest $500,000 to $3 million as part of your first outside round. To justify that check size, most VCs want to dig into the idea, look at prototypes, speak with customers and experts, and see your well-researched business plan.
Both you and they need to confirm your idea is backable. They expect you as a leader to figure that out for yourself before you approach them. After all, they may be investing some money, but you are investing your time and career, which are irreplaceable. You should be the toughest critic in the room.
If you haven’t proven out the investment thesis before the meeting, then the VC cannot actually proceed and the meeting is not efficient for either of you. In fact, pitching too soon can backfire because if you walk in without even realizing that you are missing key elements, you look amateur and burn credibility.
Instead, put meeting investors sixth on your to-do list.
Go see customers first. Make sure you are building a product that plenty of buyers will love. Building the wrong product is the main reason why startups fail.
Recruit co-founders second so you can bring together all of the DNA needed for success. Find advisors third so that you have wisdom and connections by your side. Identify potential suppliers and vendors fourth and make sure you understand your actual costs to operate and whether you will make money.
And then fifth, win small-dollar investment interest from a few talented angels who can help guide you on building a business and will have a stake in doing so.
Now notice, none of these steps really require you to spend much cash. Yet they each significantly drive up the value of your company. Achieving these goals requires you to evolve your idea into a high-potential business plan that you can explain.
Finally, you are ready to pitch VCs successfully.
Can VCs Help Before You Have Your Ducks in a Row?
If you already know a friendly investor, you can approach them somewhat earlier. But just expect networking and advice, and do not ask for money.
A few VCs really enjoy this period. At Pillar, we are all past founders who started companies and we love to meet people in the formation stage. We do our best to share ideas, contacts, and connections. Then we look forward to hearing your formal pitch a few months later, when ready.
But most VCs are incredibly busy and you may only get one chance to meet them. That is very likely true if the VC also does Series A investing in addition to seed. In that case, it is better to wait until you are polished.
Pass on Them Before They Pass on You
Networking to meet VCs can take up your precious time and energy. And if the VC passes, that will leave you feeling deflated and it will sap your team’s morale. The trick to protecting your own resiliency is to be fussy: Pass on the VCs who are likely to pass on you.
To figure that out takes research. Set aside 10 to 20 hours for this, each time you set out to raise capital. It is best if your seed investor is local. That way they can see you in person regularly (post-COVID) and they are more likely to know people who can join your team.
So start by looking up other startups in your city that raised seed funding recently. Who were the VC partners (and you need to look at partners, not firms) that led the round for each? You also can find records of seed financings on Crunchbase, PitchBook, Google, Signal, the Securities and Exchange Commission (many seed deals are recorded with the publication of a SEC Form D), or business press.
Now start crossing partners off your list aggressively. Plenty of VCs claim they want to see seed deals because all VCs like to be aware of new companies. But if they are not actively seed investing, they will waste your time. So drop any VC fund that has not led a seed deal in the past 180 days. Also, drop any VC fund that is already backing one of your competitors.
For the remaining funds, decide which partner to approach. Read their profiles, look up their past investments, and carefully review any Medium blogs, LinkedIn posts, press coverage, and Twitter feeds. Cross out anyone who looks like a poor fit for your company. For example, if you build robots and they say in a podcast “we never invest in hardware” just believe them and move on.
Next to each remaining partner on your list, use your research to write down the reason why you think they could add value or see a connection to your company. “Sue backed TripAdvisor and may be interested in our site that collects user-generated content.” Or “Beth has a doctorate in materials science and we are developing a new material.”
Finally, put your list in a spreadsheet (here’s an example) and share it with any angels or advisers for comment and refinement. Rank the investors by tier one, two, and three in terms of interest. Create columns, and as with any pipeline, track your targets by entering the date you achieve each step: introduction scheduled, first call, site visit, due diligence, received a pass, received a term sheet.
Prepare Your Materials
Figure out your story (tips on storytelling) and then write a pitch into a deck (template here) and prepare your budget and financials. Take time with the numbers. Don’t forget that investors are finance professionals and so budgets are their native tongue.
All VCs expect a deck. This is the normal way of communicating so most founders write a deck. Any other format (like a long text document or refusing to show slides and trying to pitch by chatting) suggests you are too inexperienced or worse, too stubborn to do it the normal way. That is off-putting for a VC. It’s not impossible to get funded but you just cut your chances.
If you are worried about confidentiality, you can start by sending a teaser deck that removes sensitive data including the financials.
Ideally, you will send a PDF, not a DocSend or some other highly controlled document. Why? Investors do not work alone. The good ones try to hear lots of opinions from lots of smart people before they decide to engage. You want them to share your deck with others at the firm, and you want to make it easy for them to show the deck to experts they know for quick feedback. The harder you make that sharing, the less likely they are to get excited about your company.
Begin Reaching Out
VCs are swamped by mediocre pitches and they want to find founders who know how to sell. So when VCs get busy, they just ignore direct meeting requests and wait for a warm referral. That is why getting a referral is critical.
The most valuable referral you can get is when one of the VC’s existing portfolio CEOs knows you well and can vouch for you and your business.
Otherwise, find someone who knows both of you well enough to vouch for character in both directions. Ideally bring the referrer through your full deck first, so that the referrer can truthfully say “I think this is a great person with a great idea.” The VC will pay more attention.
The least useful referral is from anyone who hasn’t actually seen your pitch, or doesn’t know the investor well enough to have mutual trust.
Finally now, having developed a strong investment thesis, selecting only those VCs who are able and likely to invest, prepared with solid materials, and introduced through a warm referral, you are poised for success. Now go get that meeting!