Founders: warning, investors may be less excited about your idea than you are.
As someone who has pitched to hundreds of investors, I can safely say that, no matter how strongly you believe in your idea, or how unique you think you and your startup are, it is likely that investors will be underwhelmed. Don't take it as a slight. Take it as a sign that you're missing something important.
I regularly speak to founders who openly criticise the fundraising process. Often they're angry about the way investors responded to their pitch, or how they refused even to hear it. This isn't because VCs are bad. There's simply a mismatch in expectations.
I would wager that, in the vast majority of cases, founders are approaching entirely the wrong investors, who will never back their idea, no matter what.
Before you become part of the great resignation (or "great midlife crisis" as I recently heard it called, due to the increasing age of the people who are now resigning!!), here are some things consider:
- Is your business really that interesting?
- Should you raise money at all?
- Have you created proof that your idea is a winner?
- What investors are right for your startup?
- What are investors looking for?
- VCs and the power law.
- Why investors will meet you, even if it's a no.
- Pick a founder-friendly investor.
- If the business isn't the problem, perhaps it's you.
- Investment structure.
- Timescale and end game.
Is your business really that interesting?
What makes you think your business is worthy of investment? Is it a groundbreaking idea that will sell itself? Are you the next Musk or Bezos? Is it a game-changer and the next unicorn? Is it Uber for [enter industry]? Are your forecasts actually quite conservative? Trust me, investors have heard these platitudes a million times, and they're not the least bit impressed.
What investors want to see is passion, humility, and proof. What have done, and what have you actually proven? Do you have customers? If you're pre-launch, do you have pre-registrations? Have you met 100 potential customers and users, and dug into their pain points? How badly do they need what you're building? Will they pay? How much? If they won't, who will?
Should you raise money at all?
Just as important is the reason for raising investment. Are you sure that's what you want?
The moment you raise money, you stop working for yourself and start working for your investors. They, of course, have their own expectations. They'll want targets to be set and hit, regular updates, explanations when things don't go to plan, and - worst case - will probably want a serious chat if things don't work out.
Not all investors understand the risks of early-stage investing, so make sure you set expectations from the start. Be conservative. This is not a 3-year journey, it's probably a decade, at least. Spell out your intentions and the risks before taking anyone's money. It's important that investors know that the percentages aren't good. They will probably never see this money again.
No, if you crave freedom or have had enough of being held accountable, you may not want investors at all. "Owning" a startup that accepts venture capital may not feel like owning it at all!
Have you created proof that your idea is a winner?
Present investors with a high risk opportunity, for which you have produced little validation, and you'll hear crickets. At best you'll receive a reply with one of a hundred different ways that investors say "no".
Present them with a proven business idea, with paying customers and a long waiting list of prospects, and your chances improve by orders of magnitude.
If the business has the potential to become a household name – a genuine unicorn that can stand the test of time – you'll be fighting investors off with a stick.
Most early-stage founders never get close to the latter. More often, they lack the proof they need for investors to feel convinced. Too often founders rely on their own charisma and the strength of the idea. Invariably they find out it isn't enough.
What investors are right for your startup?
Most founders will have heard, at some point or other, how much money is "washing around, looking for ideas to back." It's true. There's never been more capital available for private company investments than there is today; but that doesn't mean it's going to find its way to you.
Private company investing is a broad niche. You have everything from large, established, profitable companies, to late-stage (pre-IPO) companies, right down to the earliest, unproven startups. Your ability to access that capital will be a function of how tempting, proven, and well-thought-through your opportunity appears. It will also depend heavily on how many of the right investors you're able to reach.
Very few founders get this right.
The problem is that different investors want different things. I've seen dozens of founders create a list of, say, 100 investors. Through hard work and hustle, they find an email address or track down the contact on LinkedIn, then they send them a pitch. Some send a blanket email. More diligent founders look up the person they're writing to and tailor one or two lines of their intro.
Then they wonder why only one or two investors respond.
The truth is that investors don't have time time or resources to respond to everyone. Unless you've give them a specific reason, they generally won't bother. In most cases they will open your deck, but they'll probably allow no more than 10 seconds, most of which will be spent searching for the proof, or "traction", slide. Such an inefficient process.
Perhaps more importantly is focus. Most VCs have themselves raised money based on a specific investment thesis. Their limited partners (LPs) backed them because, presumably, they share a belief in that thesis. This gives the VC a mandate to invest in companies that fit that thesis. It also means the VC doesn't have a mandate to invest in companies that don't fit the thesis. So do yourself a favour and find out each investor's thesis. If you're a biotech company and the investor you're targeting has a mandate to invest only in B2B SaaS platforms, it's a waste of everyone's time. Equally, pitching a deep tech fund is pointless if you're building the next TikTok. Do the research.
What are investors looking for?
If you're an early-stage startup, there are 4 groups you can approach, all of which are quite different.
Friends, family, and fools.
First, you have friends and family (or FFF as some people call them, adding fools to the mix!). These people are often willing to invest for reasons other than making money - usually to support someone they know and believe in. Of course they're hoping to make a return, but this is usually of secondary importance. If they get their money back, they'll usually be happy. Any more than that is a bonus. If you have no proof your startup will work, these are probably your only hope of raising money. You need people who will bet on you, not your idea.
Next come angel investors. These guys are more serious, perhaps considering themselves "semi-professional" investors. They definitely invest to make money, although often they're also supporting the entrepreneurial ecosystem. They may be exited founders, or successful professionals, who love fostering innovation.
Experienced angels usually understand the timelines, legals, and likelihood of success, and they're fine with it. They don't need your business to become a unicorn. If they help you go from wannabe founder to becoming the boss of your own business, that alone will make the majority of angels satisfied. Deliver 3x or more over the span of the investment, and they'll consider it a good investment. Increase the X or reduce the timeline, and they'll be happy.
Now the one everyone talks about: VCs.
The venture capital sector has many critics, and it's an industry that's been hurt by the actions of dubious operators over the years. It's not a "bad" industry, of course, and there are some truly great VCs. You'll just have to do the research to find them.
Most first-time founders automatically think that VCs are where it's at.
What better validation can there be than getting Sequoia to back you?
The crucial thing about venture, though, is the investment criteria. VCs are only interested in the tiniest minority of ideas. In some ways, it doesn't actually matter how likely you are to succeed. If your startup doesn't tick the "power law" box, there's almost no chance a VC will invest in you, even if your business is a sure thing.
(The possible exception here is CVCs - corporate venture capital companies - where there exists the additional motivation of finding, investing in, and possibly ultimately owning a company or technology that's important to the corporate's core business or industry. In such cases, if the idea aligns, the power law rule may not apply.)
Most founders waste far too much time chasing VCs, when they'd be far better speaking with angel investors and family offices. Granted, they're harder to find, but they're also more likely to invest. For VCs, there's no such thing as medium success. For them, an investment is either a game changer or it's a statistic.
Family offices, by and large, offer much more patient capital than VCs. Family offices are established by wealthy families, who have already accrued a large amount of capital. Their goal, unlike some angels perhaps, is not to get rich, but to preserve and grow the family's wealth. This drives different behaviour. Family offices, in my experience, are less concerned with the power law. They aren't competing with other funds to attract capital or demonstrate industry-topping results. They don't tend to make a lot of noise, and as a result they're harder to find. Family offices, unlike VCs, may be interested in "safer" investments. If they find a good business, with the potential to become profitable or to deliver a large (but not power-law large) capital return, they may well look at it.
Of course there's no rule. Some family offices operate more like VCs, or perhaps specific family members are involved. As a general rule, though, these investors have a less focused scope, and therefore are likely to be a fit for a larger number of founders. What's more, like angel investors, family offices operate much more autonomously. If the manager of the FO, or a family member, takes a liking for a deal, they invest. There's no need investment committee or approval process.
VCs and the power law.
The power law is the name given to the phenomenon that, in venture capital, the vast majority of returns come from a tiny minority of deals. More-or-less, it's a universally accepted truth in the venture capital industry, yet it's something most founders miss completely. The fact is that very few deals are compatible with venture capital. Urban legend says that VCs are expecting 9 out of 10 of their investments to fail. I don't think that's true. What they are willing to accept, is that most of their deals won't deliver power-law-like returns. They're fine with that... as long as each of those deals has the potential to be the one that does.
VCs are not, in reality, looking for good companies to invest in. Instead, they are striving to ensure that, when that power-law opportunity arises, they don't miss it. In Australia, for example, in recent years - if you invested in Canva, your fund was undoubtedly a huge success. As a VC, you look like a genius. If you didn't get into the Canva deal, you look below-average. It's pretty binary.
So unless a founder's idea has Canva-level potential, which most ideas don't, the founder would be far better off finding and courting the other investors in this list than wasting their time with VCs. Sadly it doesn't happen that way.
Founders all over the world waste vast amounts of time chasing investors who simply aren't a fit.
Why investors will meet you, even if it's a no.
Founders often seem annoyed when an investor meets them, only to become disinterested almost immediately. The founder feels their pitch didn't receive due time and attention. This is directly related to the previous point.
Remember that VCs' primary (if not sole!) objective in not to miss that big opportunity. As such, it behoves them to see every possible deal. That's why they're often so active at promoting themselves, constantly talk about "deal flow", and why they employ analysts to help them review a large number of deals. For VCs, it's important to turn every stone, so unless there's something blatantly amiss, they'll often take a meeting, just in case you're the next Google. When they meet you, however, experience tells them quickly that you're not. The sooner they get you out and the next founder in, the better.
Pick a founder-friendly investor.
Taking money from an investor is a bit like starting a relationship. Unless something goes wrong, you may be together for the next decade. You'll get to know each other intimately, and you'll be spending a lot of time together. Before you take an investor's money, try to find out what they're like.
Many founders think that due diligence only works one way, but it shouldn't. As an entrepreneur, it's your responsibility to ensure (as well as you possibly can) that the investor is the right partner for your company. The best way to do this? Speak to the investor's other portfolio companies. And don't ask the investor for intro's, or they'll pick their favourite. Just do your research, reach out at random, and have a chat. Most founders will understand, and should give you a few minutes of their time - especially if they like their investor. If they're not willing to talk, it may be a red flag.
This is just my personal opinion, and not the view of DQventures, but in Europe and the UK (my homeland), Notion Capital, Superseed, and the nicely-named Playfair Capital have a reputation for being founder friendly. In Singapore, where DQ is headquartered, we're fans of Openspace and Wavemaker, and if you're early-stage but post-revenue, there's nobody we like more than Investigate VC. Down Under we love Blackbird, based in Sydney, whose approach and track record speaks for itself.
If the business isn't the problem, perhaps it's you.
Any experienced investor will tell you the importance of the founding team. Investing is more a case of picking the right founders than identifying great companies or ideas. If you have a brilliant idea, have proven there's a market, and have demonstrated the potential for scale, yet you still can't raise money, there's a good chance investors have reservations about you.
Are they worried you'll clash with them, or with your team? Have you demonstrated any worrying behaviours (lack of attention to detail, missing meetings, not replying to messages) that suggest you'll struggle to execute or be difficult to work with? Are you terrible at pitching?
Remember, it's uncomfortable for investors to say that you're the problem, but if they can't give you a good reason for passing, there's a decent chance it's you. Time to get a co-founder?
As mentioned above, after more than a decade launching, running, investing in, and advising startups, I'm convinced that only a tiny minority of companies are genuinely a good fit for VCs. If you can't scale to be a global company, with hundreds of millions in revenue, then you're not right for VCs. The problem is there's so much hype around VC-backed companies, that founders automatically assume this is the way. In all likelihood, it isn't.
Before you throw yourself headlong down the venture capital path, have a long hard think about what you actually want to achieve. Do you want to be raising money for the next 5-to-10 years, or more? Do you want to end up a minority owner of a huge company? Are you ok not having control?
There are many ways of building a company, but very few founders manage to build a large business, quickly, where they own the majority of the company's shares, and remain in control. Maybe a better outcome would be a smaller, self-funded business, which grows gradually, provides a great work-life balance, and requires you to answer to nobody.
Or perhaps there's something in between. Well-known digital marketer, Rand Fishkin, built a very successful company called SEO Moz in the early 2000s. The company grew big, and raised a bunch of external capital, but Fishkin himself left angry, disenchanted, and filled with bad feeling. His next company is called SparkToro, which he is growing, and funding, in a completely different way. The company is growing well, the investors are well placed to make a money, and the founders and their team appear to have a great mix of culture, flexibility, and potential returns. How they did it, and the documents they used can all be found here.
Timescale and end game.
Last but not least, you need to make sure your timescale and long-term goals are aligned to your investors'. Do you intend to build something as large as possible, maximise its value, and then look for an exit? VCs may be right for you, after all. Are you building your dream company, which you want to run forever (making an exit less of a priority)? Perhaps not such a great fit.
It's true that, if you build a great company, there will probably be opportunities for your investors to exit, especially if you have a good relationship with them and want to help make that a reality. It's important to discuss these things in advance though. A family office may be happy to stay with you for as long as it takes - often they're not looking for an exit, perhaps not even in the current generation. They don't need the money. Funds however, have raised money from limited partners who are expecting a return. Although open-ended funds are becoming more common, there is often a formal timeline, with an expectation of a return in five-to-ten years. Angels probably want that too - they want to make a return while they're still young enough to enjoy it. (Most angels are between 30 and 55 years old, so more than a 10-year time horizon can get uncomfortable!)
There are many factors to consider before you start raising money: how much freedom you want, how big your idea is, how long you intend to keep going, what your end game is, and who you want to spend your meetings with. It's worth taking the time to think through these factors before you start pitching. Not only will this save you from wasting time on the wrong investors, it may help you avoid future confrontations caused by misaligned expectations. It may even make you decide not to raise money at all. Whatever you decide, I hope this is useful. Feel free to connect if you think I can help. Good luck!