Ten Tips for Raising Money from VCs

Yesterday, Semil Shah wrote a great post about having a process for raising institutional money. Semil observed that the most successful founders usually have a game plan for fundraising, and they execute against that plan ruthlessly.

This got me thinking: what are some concrete aspects of a good fundraising plan for companies raising a seed or Series A round? To answer that question, my partner Chad and I came up with a list of ten fundraising tips.

The overlying themes are: 1) don’t waste anyone’s time and 2) build momentum.

Don’t waste time

1) Start with some informal meetings to gauge interest. Meet with some of the investors you’re interested in and tell them that you’re planning to fundraise soon and are looking for advice. You’ll get feedback on your pitch and your round’s timing, and you’ll also have a sense of which investors are most excited about your company. Learning that you’re fundraising a few months too early or that you need to have a better story around competitive differentiation will help you avoid a lot of wasted time and meetings.

2) Research the investors you’re meeting. Just like you’d send a custom cover letter with each job application, you should tweak your pitch to each investor. My fund is focused on data, so when talking to us, you should allot some time to describing the dataset that you’re building and why it’s valuable. Another fund might be obsessed with market size or marketplace network effects, so you would spend more time discussing those aspects of your business.

You should also research the markets an investor likes and the investments they’ve made. If someone is focused on the Internet of Things, then pitching a Bitcoin startup to them will be a waste of time. On the other hand, if they invest heavily in Bitcoin, that’s great – but you should make sure they don’t have any competitive investments.

3) Be transparent and honest. Some founders play games** in an effort to fake momentum. They talk about how “the round is almost full” when it’s completely empty, or how “Big Name VC Firm is very interested” even though the only meeting so far was with the most junior associate at the firm. Don’t be that founder. Investors see through these facades, and you end up looking shady or desperate rather than impressive.

4) Develop an amazing pitch. Setting up meetings is worthless if your presentation is weak. Make sure that when someone wants to hear your story, you can tell a damn good story. Know your metrics. Practice your pitch with as many friends as you can. Write down all of the questions you think you’ll get and prepare strong answers for them.

Build momentum

5) Consider joining an accelerator program if you don’t have any connections to investors. If you get into YC or 500 Startups or Alchemist or whatever other accelerator is in your area, you’ll get to present at a demo day, which is an amazing confluence of capital supply and capital demand. Trading a 5% stake in your company for valuable advice and the ability to raise a seed round is much better than keeping the 5% but not being able to muster up significant investor interest.

6) Consider pitching to angel investors before VCs. Because their checks are smaller and they often have non-financial motives, angels are more likely to invest in your company than VCs. And while you probably can’t raise a full $1m+ round with $10k and $25k checks, it’s definitely possible to raise your first $100k or $200k from smaller investors. Closing investments from a few angels will give you confidence and provide some momentum – especially if those angels are well-known. More importantly, angels are a great source of introductions to other investors, and it’s hard to get a stronger intro than: “I liked this company so much that I put my own money into it. You should talk to them, too.”

7) Talk to sites like FundersClub early in your process if you think you’ll need help filling out your round. Just like angels, crowdfunding sites can help you raise a few hundred thousand dollars while giving you valuable feedback and a great confidence boost. They also provide you with a helpful group of micro-investors.

8) Start fundraising when your startup is showing a lot of potential. It’s smart to fundraise around the time you’re releasing a major product update, or just after you sign a big enterprise deal. On the flip side, trying to raise money during a period of nominal progress makes your job much harder – if not impossible.

9) Pitch to one investor at a time while you’re honing your presentation, then pitch to as many investors as possible in parallel. If you’re pitching to one investor at a time and you get a term sheet, then you’re in a very tight spot. You can either accept a potentially weak offer, or you can roll the dice, say ‘no, thank you’, and hope that you’ll get other term sheets. To avoid this situation, start the fundraising process with as many investors as possible as soon you nail your pitch. By talking to many investors at the same time, you maximize the chances of receiving multiple term sheets simultaneously, and then you can weigh your options and decide which investor is the best fit for your company.

10) Do whatever you can to get the first term sheet. The first term sheet will be a forcing function for other investors you’re talking to, and you’d be surprised (or maybe not) at how quickly everyone’s diligence wraps up when there’s an offer with a deadline attached to it. If you have a handful of investors who are interested but no one is pulling the trigger, ask each of them if there’s anything you can do to get them over the hump. It might just take an extra diligence call with a fund’s technical advisor, or a few more personal references, or a slightly lower valuation. Remember, getting a term sheet puts you in a position of strength, but you are not obligated to accept the offer.

If you have other tips and suggestions that are not on this list, please let me know on Twitter. I’d love to know what tactics and strategies have worked for others.

Note #1: All of these tips apply to seed stage fundraising. Most of them also apply to Series A fundraising, although #6 and #7 make more sense if you replace “angel investor” with “existing investor.” That is, you should pitch to existing investors first to rack up some commitments, then ride that wave as you start talking to new investors.

Note #2: I feel strongly about tips #2, #3, #4, #8, #9, and #10. They are “must haves” in my book. Tips #1, #5, #6, and #7 are suggestions, not mandates.

** Playing games is a waste of time for everyone. Founders who lie about momentum often end up looking desperate and untrustworthy. It’s a similar dynamic to investors who are afraid to explicitly pass. They think they’re “preserving option value” and leaving the door open for future investments, but instead they’re just alienating founders.