VCs constantly talk about supporting entrepreneurs through tough times, enabling creativity, building amazing companies, etc. They're not lying -- they really believe it, and it's an important thing for them to believe.
But while they say all this stuff, they're also human. And humans follow their incentives. They do that before they do anything else. So your job is to make it easy for them to act ethically.
That means talk the talk -- you want to build a great product, scale it to an amazing company, hire a great team, etc. That's the only thing you care about. Building a great company that builds amazing products and makes everyone lots of money. But act game theory. Have lots of great alternatives to negotiated agreements with any given VC. Put yourself in a powerful position where you can get favorable terms. Don't give up power/equity on the assumption that "it doesn't matter", or that they'll act magnanimously, or anything like that.
It's way, way easier to have a lovely relationship with people when you're in a position of power. Put yourself into that position.
(There are some investors you can unequivocally trust to act their talk -- notably YC, winfunding, and a few others, but don't rely on that as a general rule)
The only thing I can add: At the beginning of a relationship, everybody is kind. Background checks not just help, they are essential, do them.
Getting into conflicts and power plays with VCs, or just any person at some point, should be expected but there are still huge differences in how people deal in messy situations in terms of morale and ethics. You will find everything between feeling uneasy and facing a nuclear war.
so true. Problem is that in my small business experience, those in power are there because they have very flexible views on morale and ethics (i.e. they think they have morale/ethics, but they actually forget it when their company is at stakes). Being the ethical guy I'm of course totally biased. But the parent post is so right : having ethics/morale can be extremely damaging for you because you'll have to work with people who absolutely don't get how you think and that'll be super exhausting. Know yourself before going into that game.
After a few unsuccessful attempts working as employee in startups, I have decided to build my own. Over time and through multiple setbacks I have learned more about myself and what I want when it comes to the type of company I am building. To me it's very important for my co-founder and I to have control over the destiny of our company. Getting VC money can shift the balance of power and you could lose control over what you have built, which is not ideal. For instance VCs could block an exit opportunity which could result in life changing money for you because the return they get is below their expectations.
This may sound very naive, and I don't claim to understand your circumstances, but make sure you already have a strong, growing business so that you play a strong, iron-clad hand when discussing funding with VCs.
All the best my friend.
Taking VC funding made the experience of owning and operating a business worse in almost every way.
There are many reasons why I wouldn't recommend raising VC money, but I'll focus on just two right now. First, once you take VC funding, it's no longer your company. Think about that - this business that you created from nothing, sacrificed so much for, know inside and out, and poured years of your life into - now you share control with someone who you've spent maybe 8 hours with. And you're going to have to do that again and again over the years.
The second reason is the disparity in the invested interest between the VCs and you. You have EVERYTHING riding on this startup. The VC has almost nothing riding on your company. It's not their money, they get a great salary either way, and they are expected to have most of their investments fail.
There seemed to be more worldly prestige running a VC backed company, but that's probably because we bought press coverage. :-) In terms of my own personal happiness, I've never been happier than when I was running my own bootstrapped company...and I also made a ton of money.
I heard about startups that do something like make medical insurance billing easier. That raises a lot of questions, actually.
* How does one even learn that is an issue?
* It seems like something where getting started is driven entirely by having contacts in the industry.
* There has to be a ton of prohibitively expensive red tape to cut through. Would you just pay a lawyer to figure all that out? Lawyers are expensive!
* It doesn't seem like something that really makes the world better although I'm sure you could tell yourself that it does if it was your business. Is having your business do something you consider positive important?
* Where do you get the knowledge you need to get started in an industry. Say you're really only good at programming and want to start a ...fashion business. How do you even start? It can be hard to use Google when valuable information is buried under an ocean of click bait articles.
One of the reasons why there are so many software startup opportunities is because industries are so siloed. My current startup is in Oilfield Logistics - it's literally software to aid moving sand from a mine to an oil well. I had no idea this problem existed until I talked to a friend that runs a large trucking company, and then dug into it. Key takeaway - talk to a lot of people, in lots of different locations, in lots of different industries.
As for how to get the money to bootstrap - you have to get creative, and that's what makes bootstrapping so much fun. Having a VC write you a check is so...unoriginal. If you can find a customer whose pain is more acute than the rest, you can often get them to pay in advance or have them pay to build it, but offer them a "discount" so you can retain all the IP. Now a customer is funding your startup. Or find the smallest MVP that customers will pay for and only build that. The MVP might be a spreadsheet or Zapier + Airtable. You would be surprised what customers are willing to pay for. They don't care if it's easily deployable, can be easily scaled up, or has a beautiful UI, as long as it solves their problem.
If you have ideas for products or services to improve technical workflow that could also be a space to innovate too.
Try figuring out how much a medical procedure or visit or lab will cost before you have it done, and you will find out very quickly.
I get random ideas all the time and usually deciding to do a project will lead to something. I started with an idea where I wanted to do web analytics initially. Turns out that people liked my app more for the cool graphs that could be easily exported into slideshows and pdfs. The idea changed a lot from talking to people and I found something I never thought people would pay for.
> * It seems like something where getting started is driven entirely by having contacts in the industry.
Get a job in an industry and learn the domain. It's that simple, in theory at least. The "advantaged" have friends and family who educate you on these industries, but it's hard to really get domain expertise without doing the work.
You aren't "only good at programming." If that is the case you underestimate yourself, are lazy, etc. That's not meant to be mean, but you can achieve more.
The challenge is that domain expertise can be a significant investment when:
* You could be doing more fun things
* It might be location specific
* Might impact your earnings
* May result in your settling down to a different life than you expected.
> Say you're really only good at programming and want to start a ...fashion business. How do you even start?
Get a side hustle. For that exact scenario see https://twitter.com/donasarkar and http://donasarkarbooks.com/fashion-design/.
In a LLC/LIMITED company you as shareholder/member of the company, decide of your structure. So if you do decide that you give up some shares/interest to the investors, then that can be the reason why you would loose the control.
But even if you give up all the shares, by means of controlling the initial articles of organization and operating agreement, you can still remain in full control as manager/director of the company.
In case of Limited Partnerships that issue is even better regulated from beginning, as Limited Partnership consists of one or more General Partners who are managers of the business and one or more Limited Partners who are usually investors, but cannot manage the business and often cannot even replace the General Partners.
The issue is simple.
What you decide is what you get in the end.
- VCs won't invest in LLCs or LLPs. They invest in C-Corps. The possible arrangements you described don't apply to VC backed companies.
- You only get to set the terms when you don't need their money. This won't apply to you unless you've bootstrapped to significant revenue or you already have a previous successful exit under your belt.
Set the price of shares at $0.10 or a round number. Raise a normal amount of money like $150k or $250k at a normal valuation like $1M (depends on industry etc). Get someone close to you to put in any nominal amount like $10k and tell investors you already have committed funds. If possible use a SAFE contract to accept funds faster.
Hire a freelance designer to clean up the deck and website home page if that is an issue. Ask friends to review both deck and home page. If possible make a product video walkthrough.
In meetings keep things friendly. Stick to the plan. Pitch and then ask if they are interested. Answer questions truthfully but in line with expectations. Never complain or give excuses for anything. Follow up frequently because investors are often busy and literally might forget they agreed to invest in your co.
Source - closed $250k seed round this month. Woohoo. Back to work.
2. Assume a position of power - you will make this company big even without funding because plan B is in place.
3. Talk to investors from this position. You are smarter than them. You know more about this business. You don't need this particular investor to invest because others have already signed up.
4. Treat investors like shit. Dont look too eager to setup meetings. Schedule meetings a week out atleast. When you drop into a meeting do NOT spend more than half an hour to 45 minutes. Do NOT answer all questions for investors - be selective about information you disclose - push answers to next meeting - make yourself scarce.
5. Do bullshit padding around your entire story. If something doesnt sound too good dont disclose that information. Make up stuff to make things look good.
There are people who will find the points above ethically questionable. These people most likely dont know what it takes to raise money.
From #4: I think it is critical to be efficient with your time. For example, make meetings short and do not waste a lot of your time getting a few extra tidbits for an investor. This has nothing to do with how you treat investors. And treating anyone like shit can backfire, probably not this time but later on. Be nice. Efficient, strong, self-interested but nice. It has much better ROI.
From #5. Do not make things up. On the other hand, do not disclose unrequested information that does not make your project look good
I have noticed a growing trend in generally arrogant founders in the past few years, and it's disappointing to see. I do have a strong "no assholes" criteria, and won't fund such founders no matter how good everything else looks. At the end of the day, a startup is people first, and life is too short to work with assholes.
> Make up stuff to make things look good.
That's gonna backfire.
That said, it's a fine line between good storytelling and out-right lying. You should be telling a story "based on true events", not a fantasy epic that's easy to pick apart. Credibility is everything. And just like watching an implausible action movie, playing with the truth is easy to spot, and the fastest way to damage your credibility.
#4 looks reasonable if you remove the first sentence (“treat investors as shit”).
That is pretty much every company out there. Company leaders revise their history to make them more attractive, come up with visions in hindsight and add ethic concerns etc.
OP did not say what you claim he/she did.
Outright lying always bites you in the end.
- A clear, succinct, well-designed deck does make a difference.
- Talk to your users. How do they use your product? How often? Include this in your deck.
- Venture Deals and Mastering the VC Game are helpful books
- Read early slide decks of now successful companies. Many are available online (e.g. Airbnb).
- Warm intros help. If you know someone who knows a VC and can intro you, ask!
- Different VCs have different investment strategies. Your TAM might not move the needle on a 1B fund, but it could on a 20M one.
- The best story is a growth curve that’s up and to the right.
- For later stage: not to sound demeaning, but VCs often act like lemmings. An offer on the table makes rallying others easier — reach out to those who gave you a “VC pass” (ie nevder responded to your email, or didn’t follow up after a meeting) and see if they’re interested now.
- If possible, get feedback on your deck from someone who has successfully raised.
- Don’t tell VCs which other VCs you’re talking to. You’ll be tempted, but don’t.
- Take notes after each meeting. What were the objections? Stumbling points? Use this feedback to improve your deck.
- Giving a range for your valuation or amount you want to raise makes you appear indecisive and lacking in confidence. Give specific figures.
- Be capable of justifying why you want to raise X. How’d you come to this figure?
- Stories help. How’d you come to this idea? If you have direct exposure to the problem you’re trying to solve - especially if it’s a business problem - incorporate this into your pitch.
- Make sure you’re talking to people who can make a decision within the firm.
- Don’t copy and paste cold emails. Personalize them.
- This can be a discouraging process. But it’s a numbers game. You only need one yes to get the ball rolling.
- Multiple offers help with negotiation :)
- Good luck!!
Between the ubiquity of pay-per-minute cloud computing for every imaginable service, tools to enable extremely productive remote employees, and thousands of software companies ready to handle the complexity of payments, email, ecommerce, hosting, etc, starting a tech company is easier and cheaper than ever.
1. Be certain that you want to raise capital. By raising you're irrecoverably giving up leverage to investors. You will always be beholden to investor expectations going forward. If you're a mission-motivated founder, you will inevitably reach a point where investor motivations will be at odds with your motivations. This isn't necessarily a bad thing, but it's important for you to go into this eyes wide open.
2. If this is your first round, this will likely be the point where CEO, board, shareholder rights get defined (e.g. what needs to happen to approve an acquisition? fire the CEO? issue more shares?). Make sure you have a good legal team that can help walk you through all of the minor consequences of the structure.
3. Make sure you're educated regarding share classes and different treatment for classes. Make sure you understand "preference" and "participation". Make sure you're getting favorable terms on these points. Having a good legal team helps a ton here.
4. The best way to create leverage is to increase demand. Optimize your process so that it culminates in an auction dynamic - where multiple interested parties are bidding to win. This requires intentionally shepherding parties through a gated process, pulling back people who are trying to move too fast and pulling forward laggards.
Having been through this several times, I've been bitten by all of the above. I'm happy to have a deeper discussion if you would like. Please reach out to me at advait at goguardian dot com.
Ok.. first thing you'll hear from blogs, interviews on Youtube, and everyone else in the echo chamber is about growth. Growth growth growth growth.
Just for a moment, forget growth.
Think about engagement. What VCs and investors realllly care about is stickiness ie how often are people using your product. This is true across B2B + B2C. (yes there are examples of low touch point high revenue businesses, but let's forget about those for a second).
What you want to prove in the early days is how good your product is for a small subset of people, not how good your product is to everyone. (this is where the (in)famous saying "do things that don't scale" comes from.. partly anyway)
Instead of saying to an investor that you acquired 100k users.. tell them:
- 30% of our users acquired in the first 7 days return back to the platform every day for 10 days
- 20% of users acquired within 3 days of a company key event sign up and make a 'revenue' transaction
- 20% of users refer their friends with a 80% conversation rate
- time on site is X minutes and users typically return 4 times per day
- social media / community engagement on your main channels
- site traffic is split 30/70 new vs returning users
There's that thing that Paul Graham from YC said to Brian Cheksy from Airbnb. "Go out and find 10 people that absolutely love your product, and go from there"*
Also.... one of the biggest pieces of advice with VCs I can give you:
Make sure you set the agenda and set deadlines to work to.
Don't let investors lead this.
This is your business, don't suffer fools or people that are 'too busy'.
*Might not be an exact quote :).
P.S: I am not suggesting you to become short sighted at series A but it was a context to help you understand my point. Just wanted to remain grounded and help you understand with achievable targets.
1. be authentic.
2. don't sell.
3. explain your vision of the future in simple terms
My foil decks promised everything short of Pluto in the solar system. From the VCs I heard back next to nothing. Net, I wasted huge amounts of time.
So, I had to ask, what was missing from my pitch? It became clear: The VCs want most of all traction, significant and growing rapidly. They want more, but traction is the biggie. So, they want at least real users, hopefully real revenue, hopefully real after tax earnings. Basically the VCs want to buy part of an airplane already at 5000 feet up and at Mach 0.5 and gaining altitude quickly. They wouldn't buy into a Boeing 787 still on the ground.
But for information technology startups, the world has changed a LOT since the start of Google, Facebook, Microsoft, Cisco, Apple, etc. Now, for lots of startup opportunities, by the time you have the traction the VCs want, you can very well no longer need the VCs check and certainly not want the VCs term sheet, BoD seats, or much of anything else.
VCs are not for all startups. My joke is that the VCs are looking for traction significantly high and growing rapidly where there are five co-founders, each with credit cards maxed out, and each with a pregnant wife.
True, some startups will need a big shot of equity capital, but that's nearly impossible since such a startup will have a tough time getting the traction for an equity check for even 10 cents.
IMHO, at this point, information technology VC is a goofy thing that has to find some really strange situations. Instead of strange situations, now often or usually, a startup with the required traction won't need or want a VC equity check.
One way to handle VCs at low effort is to follow the Hollywood advice, "Don't call us. We'll call you.". Really, if your startup has the traction the VCs want to see, then they might notice you and call you. So, get on with your work. If some VC calls, maybe listen. Otherwise waste no time contacting VCs.
It’s a power game. Every single aspect of it. The typical situation is they have power over you because you need money and they have money. Your job is to convince them that they need you more, because money is easy to find but future billion dollar startups are actually quite rare. In order to do this, you need to create a reality in which they are losing out on a limited time opportunity by not meeting you and then handing you a big check.
Borrowing a term from poker, the best way to walk out of the meeting with a firm commitment or big check is to walk in with “position” on the investor. Ways of having position include:
- warm intro from another investor who already put money in
- any chart showing a core metric (revenue, users, deals) going up and to the right
- any press
Basically anything that conveys a sense of momentum. Momentum is a huge part of the game as well. It’s critical to create a sense of urgency. Investors are pack animals. Getting the first close or “lead” is at least half the battle. After one person commits, it becomes much easier for others to fall in line due to social proof. Do whatever it takes to generate momentum and communicate that to investors. The train needs to be leaving the station by a certain date, are you in, yes or no.
Try to find a good candidate for a lead investor. You could do a “party round” of $1M with a ton of people all writing smaller checks from $25-200k. But in my experience this is a bad idea, because none of the investors have enough skin in the game to really dig deep and help you out if the shit hits the fan. And if this your first funded startup, the chance of shit hitting fan approaches 100%. You want at least one investor who is deeply, deeply committed to your vision and most importantly to you. This will help you navigate pitfalls and avoid a situation where, say, you raise a convertible note (debt) and after 1-2 years when you’re still trying to find product market fit, some disgruntled investors try to ask for their money back.
Don’t use a convertible note with a due date. Use a SAFE if you can get away with it. If the investor doesn’t want to use a safe, get a very specific and detailed explanation why.
Do treat all the investors with respect. But don’t let them get away with power tripping. This is one thing infuriatingly common especially among big names. If you take their shit, they won’t respect you. But you also can’t blow your cool. Call them on it, explain that you’re serious and don’t want to play games, and be prepared to walk out of the meeting if necessary. Don’t walk out unnecessarily or be a dick yourself. But be prepared to show you mean business, and if they don’t, then you have better things to do.
Do listen to investor feedback, especially if they are ex founders or have domain expertise. But don’t lose sight of your vision or try to shift your entire strategy bass on one person’s feedback.
Make sure you take time for self care and have strong support networks during fundraising. It is very emotionally intense to pitch your heart out, the stakes are high, and not everyone is nice. Take time and space to recover and recharge emotionally. Remember that you’re selling investors first and foremost on you and your team. And mostly you. If you seem tired or stressed, or anything other than happy, alert, comfortable, and crushing it, that is a bad signal.
Don’t be afraid. Remember why you’re doing what you do. Realize that even if you get destroyed in the next pitch meeting, nobody is going to die. You’ll sleep it off. Tomorrow is another day and another chance to try again. Every pitch is an opportunity to practice and to improve your craft. Celebrate every success, even if it’s just learning one tidbit from a VC who decided to pass. And embrace the failures, because you will have them. It hurts to get rejected when you have so much on the line. But if it was easy to close seed rounds then everybody would be doing it.
Don’t worry too too much about valuation, at least compared with investor quality. Better to have a committed lead investor who backs you 100% at a $3M valuation than some rando coming in $5M.
Finally, after you close the big bucks, shred your pitch deck and don’t use it to inform your next product plan. The exciting part of the pitch deck is typically big picture vision stuff. Don’t lose sight of that, but focus on the next step of product. Go back to being scrappy even with $1M in the bank.
Next do everything @coffeemug said :-)
* Think about it from their point of view. How clear is your message?
* Take advice on how much to ask for so you don't sound too green
* They will care about ROI but also the quality of the team. Theory is great but only a good team can deliver the theoretical ROI.
* Try and back up claims with facts e.g. We have a market of X billion - according to whom?
Have MVP if you want to limit dilution.
Draw a small salary... Don't work for free.
What rules? Could you elaborate?
1. Do you really need an investment.
2. GOTO step 1.
- be honest, don't exaggerate facts
- find a shared vision, find the right investor
- get it done and get back to work
• Don't bother cold emailing me, you'll end up straight in the trash. Don't even think about reaching out on LinkedIn, I open it once a month to mark everything as spam. Instead, find someone we know in common and ask for a warm intro. I receive way too much inbound, and a referral from someone I trust is one of the best ways to skip the line.
• Have a good deck, and make sure I see it before I talk to you. For the majority of new startups, a deck is the best way to share your story, and I will make my decision of whether to spend time talking to you in person while reviewing a deck.
• Understand what I'm looking for: (1) solving a real problem that matches my investment thesis (look it up on our website), (2) a team that's worked together before and is uniquely qualified to solve this problem, (3) a market that has the potential to build a billion-dollar monopoly, and (4) a real business model and a realistic path from zero to a billion.
Another why many of our investments come through referrals. People who know how we operate as a fund and as value-add investors recommend us to companies just as much as they recommend companies to us.
Thinking of it in the other direction: our LPs invested into us based on our access and ability to get into good deals that match our fund thesis. We are able to find companies that match that thesis, and able to get founders to accept an investment. Rarely do these deals end up being the same ones that cold email us.
If you're a hedge fund with a specific strategy, you go out and specifically pick stocks, it isn't the stocks coming to you to pitch you. VC investing isn't that different. We are strategically positioned such that we hear about companies as they're fundraising and find a way to invest in the ones we like that match our thesis.
I wonder how long it will be before people feel some shame advocating for overtly classist and exclusionary network-only policies in public at least.
VCs aren't charities. Seed investing is a business with very high quantity and low quality at the top of the funnel. Any investor who tells you they aren't giving more weight to a lead that comes recommended vs. one that doesn't is lying to you. It could be as simple as 5min to review the initial pitch vs. 1min.
Which is a shame for the reasons you say - it limits it to the old boys' network.
- I had a ton of success cold-emailing VCs. I was able to cold email my way into Accel, a16z, NEA, etc.
- I raised $16M through 3 rounds and was heavily oversubscribed in each round *without ever creating a deck*. My pitch was a conversation that included a compelling story I got really good at telling.
- No counterpoint on your third bullet. This is spot on. :-)
• Out of ~70+ companies I've invested in, exactly one reached out cold (and I had already met the founder once before socially). I do take a look at each of the companies that reach out cold, but I'm bombarded with these email, so I give them about a tenth of the attention I can afford to give to someone who comes with a recommendation already.
• The best companies can raise without a deck if they have a strong personal connection or really good traction to get past the screening stage. In my mind, the deck is the most effective way to succinctly pitch a company before I meet the founder. We don't actually use it in the initial conversation.