I’ve been investing for about 2 years now, and I’ve noticed that investors fall roughly into two camps. I call them tops-down and bottoms-up investors.
Tops-down investors
These are investors who want to be sold on the big vision — where is your company going? What trends are you riding on to make this successful? How big can this get? Market size?
Bottoms-up investors
These are investors who want to be sold on your traction and progress. Are your unit economics good? How are you acquiring customers? What steps are you doing today that can be scaled?
Using this to your advantage
Neither pitch angle is right or wrong, and all investors want to know both angles to a certain extent. However, I’ve found that investors tend to gravitate towards one type of pitch or the other.
For example, Dave McClure loves hearing about traction. If you happen to run into him at an event and have only 30 seconds to pitch him, spend just 1, maybe 2, sentences on the high level vision and trend you’re on, but focus most of your time on KPIs and the progress you’re making. Pitch something like this:
Hi Dave – can I tell you in 30 seconds about my company Hippos R Us? Hippos R Us is an online store where you can buy hippos. We are riding on changes in housing regulations and the growing trend of apartment buildings allowing large pets. We have sold 100 hippos in the last month and have sold $200k topline in the last 6 months. We have 50% margins. We are raising $250k to fuel our growth and pour more money into Facebook ads. Does it make sense to chat more about this?
Note that this pitch mostly focuses on progress and what you are doing to move your business forward. It is all about growth, growth, growth. This is a good way to rise above the noise — there are so many entrepreneurs out there who are trying to sell a dream but haven’t done anything with their business. By illuminating your traction, you can be amongst the top 10% of seed stage entrepreneurs who have actually made progress on their companies! While this pitch doesn’t say anything about the market size, note that it does touch on riding a growing trend.
In contrast, other investors prefer big vision pitches. For this kind of investor, spend more time on why your company changes the world, what is causing this shift in the market, or why this is going to be super big, and spend just a couple of sentences on your progress.
For example:
Hi Ms. MoneyBags – can I tell you in 30 seconds about my company Hippos R Us? The birth rate is declining in all industrialized nations. People don’t want children anymore, but yet they need emotional satisfaction, and to fill this void, they have been buying pet hippos. In fact, the pet hippo market has been growing 1000% year over year for the past 5 years, and apartment buildings now allow them as pets. Hippos R Us aims to be THE PLATFORM for purchasing and managing pet hippos to provide people with emotional satisfaction. This makes our total addressable market $5B. Since we started 6 months ago, we now have more than 100 accounts under management. Does it make sense to chat more about this?
Note how this pitch is largely about the trend (why now?) on which Hippos R Us is riding. Also, this pitch sells a much bigger vision — this is a platform that ultimately helps people with their emotional needs; it’s not just about buying and selling hippos. Again, in order to rise above the noise of all the entrepreneurs who are just selling an idea and aren’t doing anything, you’ll want to mention a bit about what progress you’ve made to date.
Ultimately, you’ll want to craft your pitch to sell both the dream and your progress. If you have some insight into who you’re pitching, you can cater your blurb or elevator pitch accordingly. Often, I see a lot of entrepreneurs are really good at creating a pitch from one angle, but the best ones are able to incorporate key elements of both tops-down and bottoms-up pitches. You don’t have time to dive into the weeds in just a few seconds, and so deciding which points are important is key.
I previously alluded to some of my goals for 2017 with an overarching goal of focusing time on pre-seed companies. To be clear, 500 Startups is not making a shift in its priorities — these are merely my own personal views and activities (500 invests in all areas of the “seed spectrum” but with a big focus on post-seed). I’ll talk more later about why I’m spending more time at pre-seed, but for the time being, I wanted to start sharing some more details about my plans.
Rejectionation
The big activity that I’m working on this year is my side project Rejectionathon, which I experimented with last year. It stems from the issues I had when I was first starting my company LaunchBit. Namely, I was afraid of rejection, which meant that I was timid when it came to anything that could possibly end with a rejection — sales, fundraising, partnerships, etc.
Last year, Rejectionathon took the form of an event where teams would run around undertaking challenges that would set themselves up for rejection. This helped people build a thicker skin for that one day, but it wasn’t directly applicable to people’s businesses.
This year, we’re iterating on this concept and expanding it worldwide. The next Rejectionathon on January 29, 2017 in Mountain View will be different. You’ll still be challenged and will set yourself up for rejection, but there’ll be some major differences:
1. It will be directly applicable to your pre-seed startup and will help you advance your startup.
The challenges will no longer be all about borrowing money from strangers or serenading people on the street. Most of the challenges will be focused on helping you move the needle on your business. Challenges will involve pre-selling, doing fundraising pitches for your company, and getting feedback on your product.
2. It will be more focused. The January event will be focused on hardware companies.
If you have a hardware company, the next event will be catered to you. We’ll have challenges around customer development for hardware companies, pre-sales for physical products, and fundraising.
Even if you don’t have a hardware company or any company yet, you are still welcome to participate. Just know that the angle will be about hardware companies.
3. We are capping the event at 30 people.
Our past Rejectionathons have been larger events, but in order for attendees to receive personal attention, we’re capping this at just 30 people.
Rejectionathon is like a mini-hackathon for business people. Bring your idea or existing company, and you’ll use the time to advance the business side of your startup while building a thicker skin.
I’d encourage you to sign up today with my special code of 50% off EYFRIENDS. Early bird tickets end today.
If this is your first time raising money, the mechanics of how investors buy into your company can be very confusing. Here’s a quick primer on how investments tend to work in startup companies at the seed stage.
Note: this is super basic, and there are a lot more details that will not be covered here.
Equity
Traditionally, investors have invested in companies to receive equity, or shares in a company. This is the easiest method of investing to understand as well as the most common way of investing worldwide. Simplistically, if I’m an investor who is interested in buying a percentage of your company, I’ll offer you money, and you’ll send me a certificate indicating how many shares — how much of your company — I own.
The number of shares that I’ll own is based on the price per share that we had mutually agreed upon. Let’s say there are 1M shares in your company, and let’s say I’m interested in buying some of these shares and have $100k to invest. We first mutually figure out a price per share, and let’s say that the price we decide is $1 per share. This means that I will receive 100k shares for my purchase (which is 10% of your company). The physical manifestation of this investment is a certificate that says that I now own 100k shares. Later, if you sell the whole company to Google at say $5 per share, I will earn $500k for a net gain of $400k.
The concept of equity rounds (also called priced rounds) is very straightforward. Investors worldwide are familiar with and are used to investing in priced rounds. And as you raise money at later stages, you will most likely be raising equity rounds.
Once you find investors who want to invest and agree on the price per share, everyone knows just how many shares they are getting, and everything is clear.
But, legally, equity rounds can be quite expensive to complete. Lawyers can charge as much as $10k-$30k (in the US) to draft and execute the legal docs for an equity round, and traditionally, founders are responsible for paying for this as well as investors’ legal costs! I personally think this is ludicrous, but this is still common practice. So, in the aggregate, it is possible that you may be required to pay as much as $30k-$50k to get an equity round done. Newer VC firms, though, typically do not pass their costs to their startups, which is much more progressive.
Additionally, the legal docs around equity rounds typically specify a threshold that must be met before the round is complete. For example, if a startup is raising $1m in a priced round, this means that the startup must find enough investors to invest (in aggregate) $1m into your company at specified terms within a certain time period. If the startup is only able to find enough investors to commit to investing $700k, the startup receives NO MONEY, and the round does not get completed. The results are binary. You either raise your full amount or nothing at all. This means that if you are doing an equity round, you need to run your fundraising process very well to ensure that you raise the money you want; your timeframe for raising this round is limited. It also means that the time between when your first investor commits to investing and when you get your money can be quite long — it can take months!
Usually, an equity round is kicked off by a “lead investor.” Typically, this lead investor decides the terms of the round and also invests the majority of the money that will go into your company. That lead investor will also usually help you fill out the remainder of your round with other investors. For example, let’s say you find a lead investor for your $1m round. He/she sets the valuation of your company and terms of the round. He/she may then invest say $500k, and he/she may help you find other investors who will make up the remaining $500k.
In the 1990s, your first round of financing was typically a Series A round between $1m-$5m. Expenses were a lot higher just to get a company off the ground, and so even the first round of financing was large. These rounds were typically done as equity rounds and were led by VCs, since so much capital was required. In addition, the legal costs were just a small drop in the bucket compared to these round sizes.
Convertible Notes
In the 2000s, however, the cost to start a software company decreased dramatically. No longer do you need to set up your own servers in your office. No longer do you need to build a lot of tools – many B2B SaaS companies and infrastructure companies can now do all of this for you. So, startups started raising seed rounds — rounds that took place before a series A.
A few years ago, these seed rounds were typically < $500k, and most teams only did one seed round with angel investors — independent rich individuals — before raising a series A round.
Because equity rounds are much more suited for bigger financing rounds and are a slow way of raising money, convertible notes are better suited for raising these smaller seed rounds. It just didn’t make sense to spend 10% of your round on legal costs and have to wait for months before receiving the money when the angel investors writing the checks were open to moving equally as fast as the entrepreneur.
Raising money on a convertible note is fast — you get your money as soon as an investor signs. It’s cheap (there are a lot of convertible note templates on the internet). There is no minimum amount you need to raise in order to get your money.
A convertible note is a simple document that is effectively a loan. People investing on convertible notes would invest money, and in return, receive an IOU for that amount plus some level of interest at the end of some agreed upon time period (typically 1-2 years). In some sense, angels began to act like banks giving entrepreneurs loans.
However, unlike regular debt, convertible notes had a special kicker. Convertible notes allow investors the option of converting the money into stock at the next priced round; investors essentially have the option to get their money back + interest OR receive stock when the company did the next priced round.
Technically speaking, when the maturity date comes around and the startup has not yet raised an equity round, an investor could call the note, which means he/she could ask for his/her money back plus the accrued interest for the duration of the note. What happens if your maturity date comes up and you don’t have the money to pay it back and are not raising an equity round? You can discuss with your investors if they’d be willing to extend the maturity date by a year. This is quite commonly done, so don’t be afraid to ask.
Most Silicon Valley investors won’t call your note when the maturity date arrives. This is because, if you have the cash to pay the note, it must mean that your company is doing well, so an investor would prefer to have equity in your company instead of the debt repaid in cash. If your company is not doing well, you wouldn’t have the money to pay off this debt AND if you do, removing the money could cripple the company. So, calling the note is detrimental in most cases.
Outside of Silicon Valley, there are a lot of investors who don’t care and may call your note on the maturity date. Be careful in choosing your investors — especially if an investor has never invested via a convertible note before.
So let’s say a startup raises an equity round from a big VC after raising a convertible note round. How does an angel investor convert his convertible note into equity? The convertible note specifies the mechanics in which the investor receives shares. Those conversion rules, however, are conditional — the price at which a convertible note converts into equity during a priced round is dependent on the valuation of the equity round. So, when an investor puts money into the company on a convertible note round, he/she doesn’t know how many shares he/she will receive until later. This ambiguity is sometimes a deterrent to investing on a convertible note, especially outside Silicon Valley.
Lastly, because convertible notes are technically debt (even though most investors convert their notes to equity later in priced rounds), it’s unclear what the tax implications are for both investors and companies. At the advice of some accountants, some companies issue 1099s to their investors on the accrued interest — even when they are not paying their investors this accrued interest. Other companies don’t do this because they are not actually paying their investors any money. On the flipside, investors will often pay taxes on this “accrued interest” even though they are not receiving any cash. This is another deterrent to investors investing on a convertible note.
Convertible Securities
As a happy medium, both YC and 500 Startups created Convertible Securities. Convertible securities have properties that are akin to both equity and convertible notes.
Convertible securities, in so many ways, act like convertible notes. Like convertible notes, there is no minimum amount you need to raise to get your money; they are a cheap, free, and limited legal bill; and they can get signed quickly.
BUT, the biggest distinction is that there is no interest rate. Convertible securities are not loans. As a founder, you do not need to worry about investors asking for their money back because there is no maturity date, and investors do not have to pay taxes on any so-called accrued interest.
That said, convertible securities are still new and a lot of investors are unfamiliar with this format of investing. Also, there is still the ambiguity about the price per share at the time of signing, which may make some investors feel uneasy.
All in all, this is probably my favorite format of raising money at the seed stage. More later on the details and nuances of some of this.
Dear elizy: I was wondering if you would mind giving some insights on startups with a small team (in my case, the sole founder) and are looking up to scale up the business? Would you recommend growing the team first and then consider fundraising? Do you think VCs would be happy to fund a startup with a sole founder? Or would VCs think the startup is not capable of acquiring quality teammates?
– Flying Solo from Hong Kong
Dear Flying Solo: Great question! Unfortunately, it really depends on the investor. There are some investors who adamantly will not back solo founders because they think it is just too hard to start a company alone. Then there are many others who do not care.
At 500 Startups, we don’t care whether you are a solo founder. Solo founders aren’t given a break – they are expected to achieve as much as companies with multiple founders, which inherently makes it harder to be solo. That being said, we have backed a number of solo founders over the years who have gone on to do quite well.
As far as raising money goes, every early stage VC is looking for “big ideas with big markets” (subjective) and strong teams. So having a strong team – regardless of whether your teammates are co-founders or employees – will be important in raising money. Unless you have a strong track record, it’ll be difficult to raise money with no teammates.
To attract such strong teammates, unless you have a great network, often you’ll need to show some execution progress on your idea to show that you are serious about your business and worth teaming up with.
Given where I think you are, I would recommend starting with whatever team you’ve got now (sounds like it is just you?) and work towards product/market fit. In parallel, for skills that you are deficient in, I’d start looking for someone with that skillset and use your progress on your business as a way to demonstrate commitment. This person may eventually evolve into a co-founder or may turn into an early employee. In my mind, the only difference between a co-founder and an early employee is the level of equity and control on the company. So whatever you do, don’t rush into teaming up with someone who has significant equity and control if you’re not 100% sure about him/her in terms of skillset-fit as well as compatibility-fit.
Founder: And then that angel investor said, “This is definitely interesting. Lemme intro you to these two people.” This has happened 3x in the last 2 days but none of these angels have written a check – is this bad signaling?
Me: Oh, not necessarily. Angel investors are not professionals, so it’s not necessarily bad signaling since they may not do many investments. Unless you’re talking about a really prolific angel. Did you ask him to invest?
Founder: I didn’t ask because I thought that if they actually wanted to invest, they would ask? We went with the strategy of asking all of the angels we were in touch with about “advice on fundraising” with the idea that the conversation would naturally transition to an investment if they were actually interested.
Yeah…
So here’s the old adage in its entirety: If you ask for money, you’ll get advice. And if you ask for advice, you’ll get money.
The truth is, this adage sometimes works…but more often than not, it doesn’t. If you are fundraising in America, you really should be asking for exactly what you want – ESPECIALLY WITH ANGEL INVESTORS.
Let’s dive into this more. (And feel free to jump in the comments to tell me how wrong I am… :) )
1. Angel investors don’t see themselves as investors
They really don’t. And this becomes more and more true everyday. Why? Because now on sites such as AngelList, you can plop down $1k into a syndicate, and even if you do 10 deals a year, you’re still only investing $10k a year – just like you might into your 401k plan. These angel investors are really just everyday upper middle-class people. Mostly tech workers.
First and foremost, angel investors see themselves as whatever their profession is. So, let’s say you ask for advice from a UX designer who is doing, say, 5 deals a year; you’re going to get advice about your design. He/she isn’t going to think of it necessarily from a fundraising perspective. This is especially true if you’re talking with other entrepreneurs who happen to be angel investors. Flip the situation around: if someone thought you were rich and came up to you asking for advice, you’d think they wanted advice, right? You wouldn’t just start throwing money around. It’s really no different as you climb the entrepreneurial success ladder.
For VCs, it’s their job to invest money. They can’t take the fund money and use it towards non-investments. But angels – it’s their money. They are not necessarily going to use it towards investment-related activities. They could buy a boat. Or a car. Or redo their backyards.
Even if someone presents an exciting opportunity in front of them, they may not even be thinking about investing their money. You need to be clear about what you’re looking for so that an angel investor doesn’t have to try to infer the situation.
2. Many angel investors write small checks and are not going to initiate a conversation about your round
As a follow-up to #1, many angel investors write small checks, and so they are not thinking about starting your round. It doesn’t mean that they would be averse to writing a check earlier in your round, per se, but they don’t really want to negotiate terms with you. They also would prefer that there are other people in your round so that you have enough capital to achieve your milestones.
Unless you dive into the weeds around your fundraising – i.e. explicitly talk about your round and who is in and all that jazz – angels would just rather avoid the headache.
3. Angel investors don’t want to have an awkward conversation with you
Which leads me to my next point. VCs already beat around the bush and hate saying uncomfortable truths because they don’t want to ruin potential financial opportunities down the road with you. But angels are even worse. They are not used to delivering tough news or feedback, since it’s not their job. They want to be your friend. Heck, in many cases, angels may be your friend or your friend’s friend. It’s just awkward to talk about fundraising. Here are some awkward things about fundraising that they may want to avoid thinking about:
You may not want them in your round since you didn’t ask, and so they won’t ask you about your round
You may have too high of a cap, and they don’t want to express interest in your round only to back out
You may not have enough traction (either fundraising traction or revenue traction), and it’s awkward to ask about traction if you’re not a professional investor
All in all, I would just come out and be explicit with what you’re looking for. Now, I know that it can be awkward to ask for money or ask someone to look at your round, so here are a couple of phrases that might help you out:
Hey – since I know you do some angel investing, I wanted to get your thoughts on our round…
I’m curious if this is the type of angel deal you might be interested in?
Would love to know what other people’s thoughts are on this topic. Feel free to comment below.
I just passed my two year mark at 500 Startups. The other day, my colleague asked me how many company pitches I’ve personally seen. When we were calculating it out, it came out to about 20k!
To be fair, this number includes pitch emails like this (including a response from my former colleague, Sean Percival).
(In fact, the vast majority of pitches I’ve seen probably fall under this category, and these only take a few seconds to read and archive. This is how you get to see 20k pitches!)
That being said, it’s been quite a ride to see so many pitches in just two years. Here are some learnings and what I immediately think about when I see a pitch:
1. Ideas are a dime a dozen…and it’s important to stand out.
As an entrepreneur, you think your idea is unique. If you’re still in the early stages of your entrepreneur-education/journey, you may even think you need to protect your idea and not share it with anyone. Even if you’re in the later stages of being an entrepreneur, you still feel like your idea is unique or at least maybe there’s only one or two other companies out there like you because that’s what you read about in TechCrunch.
It turns out everyone has the same ideas.
This isn’t a bad thing, but it means that you need to go in with the mindset of figuring out how to stand out. The good news is that if you’re making progress on your business, you can show that you’re executing. Most entrepreneurs overpitch their ideas but underpitch how they’ve been executing (revenue, traction, setting up infrastructure, etc.). This can set you apart because the vast majority of businesses I see at the seed stage are just ideas with no action.
2. Speed matters.
Not only is it important to show what you’ve done, but if you’ve been executing on a fast time scale, then that’s even more impressive. At the seed stage, there are companies who have been around for 5 months and others for 5 years. You are not only being benchmarked on hitting milestones but also on your pace.
This is one of my favorite startup presentations of all time on going fast by Mike Cassidy. Demonstrate that you can pull the trigger on things quickly — whether it is getting customers, hiring and firing employees, or product development. Convey this in your pitch.
3. If you are in a super competitive space, it’s important to address competition upfront.
If you are in a super competitive space — areas like cleaning or food delivery, for example — it’s going to be harder for you than you can ever imagine, even if you are making progress quickly. In these areas, investors are not just seeing a handful of companies doing the same thing but hundreds or thousands.
To give yourself the best shot at getting noticed, you need to do 2 things:
Demonstrate immediately — not at the end of your pitch — that you are aware that there are other businesses like yours. This shows that you have thought about the competitive landscape, and despite knowing that it’s competitive, you believe there is an opportunity for you to outcompete all other companies.
Being in a competitive space isn’t a bad thing — Google was like the 8th search engine to enter the scene, and they turned out OK — but you need to address the landscape.
Address where you fit into this landscape. This is about really understanding how you are different from the other players out there.
For example, I was talking last week with a company that is a new type of job board. They showed me their problem slide which said something to the effect of, “There are so many people who are unemployed and so many employers who cannot find good talent…blah blah blah.” Online job boards have been around for a couple of decades and even today is an incredibly competitive space! Everyone understands this problem. So, this is not the correct problem to outline in this pitch. The right way to outline this problem is to tell me why existing job board solutions suck or are ineffective and to be super insightful into the nuances of why this is the case. After that, present a differentiated solution that doesn’t have these same nuanced issues. In some sense, if you are in a crowded space, your job is to say, “The problem is that Companies A, B, and C suck, and here’s why.”
If you can do this, this will help you at least get attention on your pitch.
3. I treat referrals and cold-emails the same (for the most part).
In the beginning, I thought referrals from others would be much higher quality than companies emailing in cold. Sometimes this is true. Often it’s not. It depends a lot on who is giving the referrals. It would turn out that “famous” investors referring companies don’t necessarily refer better companies, and founders don’t necessarily refer great companies either. A lot of founders are doing favors for their friends by putting in a good word. On the flip side, there are some people whom you wouldn’t have heard of whose referrals I value the most.
4. How people present themselves in pitch emails tell me if I should NOT take a meeting
I use pitch emails as a good proxy for finding the most on-point, sharp founders. Really, I can’t tell immediately who is on-point and sharp, but I can tell who is not. Meandering email copy is not a good sign. Bad spelling and lack of punctuation = also not a good sign. Bad grammar is excusable if you are a non-native English speaker, but if you are a native English speaker, that’s inexcusable. Use a company domain name as opposed to a Gmail, Yahoo, Hotmail, or AOL email address. Otherwise, your business doesn’t seem serious enough yet.
These all seem obvious and not worth addressing, but you’d be surprised just how many pitches have basic mechanical issues. If you are not good at paying attention to detail, ask a friend who is good at that to help you proofread. Getting in the door with your best foot forward is so important because it’s easy for your email to get ignored or lost.
Use bullet points when possible rather than paragraphs. They are easier to read. Bullet the key awesome things about your business. Here are some example bullets:
Revenue: now at $15k MRR, growing 30% MoM
Monthly churn is < 1%
LTV to date is $700; CAC via blended paid channels is $250
Pilot customers include Samsung, MSFT, and Oracle
CEO previously founded a marketing tech company and sold it to Marketo; CTO previously worked as a software engineer at Google X; have worked together for 2 years
If you are sending a deck, refer to this post, “The ideal email deck.” Your email is just to pique interest in getting a meeting, not to get an investment.
There are a ton of other learnings from having done this job for the last two years, but these are the things that come to mind when I see pitches.
Here is a typical conversation I have with a portfolio founder just about every week:
Founder: I’m having a tough time closing our round.
Me: How much are you raising, and where are you now?
Founder: I’m raising $1m, and we’ve got about $200k committed from angels.
Me: Got it. How many meetings have you done so far?
Founder: A LOT!
Me: How many is a lot?
Founder: Oh, maybe about 15-20?
Me: Oh…that’s not a lot. Let’s talk again after you’ve done 200 meetings.
A major problem with fundraising is that it takes up A LOT of time, but if you’re going to fundraise, you have to be dedicated to the process. Too many entrepreneurs half-heartedly fundraise while running their business, and that doesn’t usually work out very well. So how do you know how long you should attempt to raise money before throwing in the towel?
I made up a rule of thumb: 5-100-500. Over 5 weeks, meet with 100 investors to close $500k in your seed round. If you want to close $1m, double all of these numbers.
Why does this rule work?
Disclaimer: I can’t guarantee you’ll be able to close any money, even if you meet with a million investors. On the flip-side, you may be able to close your whole round within 5-10 meetings. This is just a rule of thumb.
Here is why I have this rule of thumb:
1) You need to do enough meetings in order to figure out your pitch and find the right investors.
For your first 20 meetings or so, you may still be figuring out your pitch. You’ll need to figure out what messaging resonates with investors and what people’s general concerns are. You may feel discouraged after the first 20 meetings, but you should push through and have even more meetings because by then you’ve learned how to pitch your company effectively.
In addition, not every investor you pitch will be in your audience. For example, with my company LaunchBit, an adtech company, we pitched a whole series of VCs who had done adtech deals. It seemed like those people would be a good fit, right? Wrong. What I didn’t realize was that those investors felt over-indexed on ad deals and had been burned by companies that were adtech companies before, and they wanted to get out of investing in ad businesses altogether. Likewise, often investors will do a one-off deal in a space in which they don’t usually invest because they knew some founder really well who offered them a piece of their round. You won’t figure any of this out unless you do a lot of meetings — and you’ll need to do a TON of meetings to then get a decent group of people who are truly interested in your space, thesis, and vision.
So, write to a lot of investors. Get a lot of intros!
2) You need to create urgency by having lots of meetings packed together.
If you are not meeting with enough investors, then you won’t be able to create urgency.
Investors have no reason to come into your round now – even if they really want to – unless there is a chance they cannot invest later at the same price.
Seriously. Think about that. As an investor, it’s in my best interest to wait and get more information if I know I can get in at the same price in 6 months. Right?
As an entrepreneur, you need to create urgency amongst all relevant, potential investors to whom you’re talking. A good way to do this is to pack a lot of meetings together.
Let’s say you do 4 meetings a day for 5 days straight. That means in one week, you can do about 20 meetings. If you did this for 5 weeks, you would easily hit 100 meetings, which is about how long it takes to raise $500k in a pretty fast, efficiently-run fundraising scenario. (Of course, there are always the exceptional baller people who are either in a hot space or have a famous name who can do this in a week, but for the most part, a very fast fundraising situation is about a 1-2 months.)
Packing your meetings together also ensures that all investors are “progressing” at the same time. Ideally you want investors to all be in the same place with their process so that if one commits, the others are able to commit to. So, let’s say you start your fundraising process with VC firm A today and start your process with VC firm B in 4 weeks, and let’s say A commits. B is too early in the process with you to make a decision, and so now B has to decide whether or not to speed up or just decline altogether. But, you need both A and B to be seriously interested in order to negotiate your round. The ideal situation is to start your process with firms A and B around the same time.
What happens if I get to 100 meetings and have not closed my first $500k?
If you cannot close $500k after doing about 100 meetings over the course of about 5 weeks, then it’s probably not worth spending anymore time on this fundraising process.
One of the reasons for having this rule of thumb is to know when to stop fundraising. Sometimes you just need to throw in the towel on fundraising, make more progress, and then go back out and hit the pavement again later. And that’s ok. There’s nothing wrong with that.
The good news is that if you follow this 5-100-500 rule of thumb, then you’ll know the upper bound of time you’ll spend on this process AND you’ll also know that you put in solid effort in trying to make it work.
In the past, the venture industry was a closed club all-around. If you wanted to meet with a VC firm, you needed a warm introduction. Today, most investors would still prefer warm introductions, but this is starting to change, because:
Investors now realize that great deals can also be found outside of typical Silicon Valley networks
There are many more VCs now beyond the traditional firms; these VCs are hungry and are going to out-hustle traditional investors
Many warm intros are often weak and are a crapshoot anyway
So, if you want to meet with investors, I would still HIGHLY RECOMMEND you get warm introductions. (See my other posts: Who to ask for an intro?How to ask?)
But, in parallel, while you’re waiting for these intros, you should also strongly consider cold-emailing investors directly. It doesn’t hurt.
Cold-emailing investors is fairly similar to selling your product. I’m going to assume you have a relevant list of investors you want to email and that you have their correct contact information.
Here are a few tips on cold-emailing investors:
1. Keep your email short
Just like in selling your product, you’ll want your email to be concise and readable on a mobile phone. (See my post on how to write a cold-email for selling products) ~3 sentences with maybe a couple of KPIs as bullet points. Build rapport. Say something compelling. End with a call-to-action.
2. Bullet out the best part(s) of your company
Include a KPI or two or social proof as bullets that can be scanned quickly. Mention what’s best about your company. Compelling bullets include things like:
$20k MRR
Growing 30% MoM
Marquee beta clients include: Google, Boeing, and P&G
Ave sales cycle is 20 days
LTV to date is $1000 and CAC is $280 via Facebook ads
Won TechCrunch Disrupt
Team previously worked together at Facebook and built FB Messenger
CEO previously won a gold medal in rowing at the London Olympics
CTO was nominated for the MIT 35 innovators under 35 list
Traction helps and are good bullets if your traction is good. But, you can include bullets about your team’s background / domain experience / personal achievements. Or startup competitions you’ve won. Anything compelling about your team will work. But just put your best foot forward – what is most impressive? Avoid vanity metrics.
This leads me to my next point…
3. Make your email readable and scannable.
Investors don’t have time to read a ton. So, not only should your email be concise but it should also have great formatting so that it can be scanned in just as couple of seconds.
If an investor wants to see your deck, he/she will have no qualms asking for one. But attaching your deck on the first email could lead to your email getting caught in spam filters and whatnot.
5. Use an email tracker.
Find out if your email is being opened. There are a ton of extensions you can use to track whether your emails are being opened. I use Hubspot’s extension.
This helps you decide on what cadence to follow up.
6. Your call to action should be to get a meeting
There’s no way you can convince someone to invest off of your cold-email. So, you should try to get a meeting. This may seem obvious, but I receive a lot of cold-emails asking if we’ll invest. You can just say something like, “What’s the best way to discuss?”
7. Don’t be afraid to follow up
VCs’ email inboxes tend to get a barrage of emails. So if you ping say even 3x in a week, it’s unlikely that an investor will even notice that you’ve pinged multiple times! At a minimum, I would follow up within the week if you haven’t heard back.
I realize cold-emailing can be very uncomfortable for a lot of entrepreneurs. I get it – it was a scary for me, too, when I first started cold-emailing potential customers for LaunchBit.
Side note: if this is scary for you, I’d recommend checking out my side project Rejectionathon which is a one-day event to help founders get over their fear of rejection. (Discount code: EYFRIENDS for 50% off)
The reality is that fundraising is really a sales job. And like in sales, you’ll need to do a lot of investor meetings in order to close anyone. This means that you’ll need to somehow get a lot of lead volume. Warm intros, for many people, will not get you all the volume you’ll need, so cold-emailing investors can help get you get there.
Has this happened to anyone else? You write an investor an email – maybe something like this:
Hi Bob,
Thanks so much for taking the time to meet with me last week about my company LaunchBit! Per our conversation, I wanted to see what happened in your all-partner meeting?
And then *surprise surprise*, Bob does not write back… What now?
When I was an entrepreneur, I wasn’t really sure at what point to follow up. And sometimes I felt like I was writing to a black hole. And am I bugging this person too much? Does this person hate me? Hello?? Anyone there?
Now that I’m on the investor side, let me explain a little bit about what ends up happening – at least if you email me:
We meet. I tell you I’ll think it over / discuss your deal / figure out next steps by X date. I go to my next meeting. And either close the loop at the meeting or say the same thing. I go to my next meeting. In fact, I do all of my meetings back-to-back…for most of the week. While I try to actually follow through by X date, inevitably I’ve erroneously overcommitted, but it’s still in the back of my mind. But I’m juggling so many meetings that I haven’t had time to sit down and think yet or take action, so I still have nothing new to tell you while also having been in your shoes, I realize time is of the essence. And then you email me, and this becomes top-of-mind again, but I still have so many meetings that I haven’t gotten around to it. And then a couple hundred emails pile on top of yours, so it goes to the back of my mind again. And then you email again with a new update. And your deal becomes top-of-mind again, but the cycle continues.
It’s pretty bad, and I know this happens for a lot of VCs. I’m not justifying this behavior – it’s not right, and investors should change their behavior, but I wanted to illuminate what is really happening and how to navigate this.
1) Keeping pinging – be persistent
Don’t be afraid to keep following up. I used to think that investors would get annoyed if I bugged them so much. Frankly, now on the other side of the fence, I have so many emails in my inbox, I don’t even notice if someone has pinged me three times. Some tips on following up:
Send your follow ups when you say you will
If you get no response, follow up within the week – ideally 3-4 days later
If you still get no response, ping again 3-4 days later
HAVE A CALL TO ACTION! If you just send an email saying you have a business but no action you want the recipient to take on it, you will likely not get a response because the recipient won’t know what you want.
If you are writing to American investors, direct asks are best, because recipients are busy and don’t want to spend time interpreting what you really want. Are you asking for a meeting about your seed round? Or are you asking for something else?
This kind of goes without saying – don’t be an asshole. Emails like, “Listen stupid, you haven’t responded yet” don’t work. Be polite and direct
In fact, don’t even address the fact that the recipient hasn’t responded yet. It sounds desperate. Just pretend that he/she never received the email in the first place. And in fact, sometimes that happens.
To be honest, this was all kinda intimidating to me when I was starting out as an entrepreneur. I was a bit afraid to keep pinging a black hole inbox. If this is scary to you too, here’s a quick plug for my side project event called Rejectionathon, which can help with this. Rejectionathonis a one-day event in SF & NYC that helps founders build a thicker skin and get over their fear of rejection. The next one is in two weeks on Sept 10 and use my code EYFRIENDS to get 50% off.
If you cannot get ahold of the investor by email, try different channels. Almost every investor is on multiple platforms: email, phone, Facebook, Snapchat, etc… Try them all! In fact, email is probably his/her most saturated channel, so it may be hard to get attention there. But if you are friends with him/her on another platform, then pinging off-email may yield better results. When in doubt, there’s also always the good ole fashion phone.
3) Be nice to an investor’s assistant and ask for help
It goes without saying that you should treat an investor’s assistant with a ton of respect. But, take it one step further. Be friendly. An investor’s assistant is actually the MOST POWERFUL PERSON at the firm. He/she controls the investor’s calendar, and while the investor still may not 100% follow that calendar, he/she may be able to nudge the investor or slot you in for another meeting if you are still having trouble.
4) Create urgency
Lastly, make sure to create urgency for your situation. If you’re trying to get in touch because you are raising money, it helps to create urgency. An investor will make you his/her top priority if your deal is going to close tomorrow. Now, the question here is credibility – you can’t say your deal is going to close in a week unless it really is. And, a big mistake that entrepreneurs make is to say, “Oh my round is closing next week and we have a ton of interest.” And next week comes and goes and no one has committed to the round! And all of a sudden the entrepreneur looks either like a liar or someone who cannot follow through.
So the urgency you create must be real and something you know 100% you can deliver on. Here are some things that can say to create urgency:
You have a Demo Day coming up on X date, and your price will likely go up afterwards. Side note: 500 Startups is taking new applications for the next batch.
You are in 2nd meetings with a number of investors (this must be true!) and you expect the round to close soon.
You only have $X left in the open round and about $Y amount of high level interest from the investors you’re talking to, so you need to know soon.
You are only raising a small $X on a convertible note at $Y cap, and after you hit that, the price will likely go up. (Note: use this only for investors who don’t lead rounds)
Creating urgency is a good thing, but remember, you must be credible, otherwise, it can backfire on you and your character.
As for me, I’m trying to rectify this behavior in VC by starting with myself. Here are some of the things that I’m doing to stay more on top of things:
I very rarely take meetings. Taking too many meetings is the root cause of many of these problems.
But, I now talk with even more entrepreneurs, because I’ve moved almost all of my communications to email. You can figure out all the key parts of a business (except for the team) by email quickly, and you get a paper trail of notes without doing extra work. And, it automatically goes to our CRM. I’ll talk to the team last with a meeting if we get there. I learned this technique from my mentor / friend / investor David Hauser who actually invested in LaunchBit without even taking a meeting with me! All of our communications were over email.
I use Inbox Pause based on Tony Hsieh’s Yesterbox philosophy to process email faster about 10x faster than I used to mostly.
I block out time everyday for no meetings so that I can think and email.
This is still a work-in-progress, but I’m getting there, and I hope other VCs who struggle with this will work on ways to be more responsive to entrepreneurs as well.
Portfolio founder: There’s an investor who wants to invest about $500k.
Me: Oh great! Who is he/she?
Portfolio founder: That’s the problem. Person X isn’t well-known. I want “value-add” investors in my round. So, I’m thinking about declining the money.
I have this conversation all the time with portfolio companies. This happens especially when founders start getting a lot of inbound requests from investors to meet, and so they think that they have a lot of investor options. And maybe they do. It’s easy for investors to request meetings, but it’s an investor’s job to meet with lots of entrepreneurs. Let me be clear: this does NOT mean they will necessarily invest. In fact, it is a long road between a first meeting and an investment in many cases — except when there is urgency. Urgency is, essentially, caused by FOMO. If your round has a lot of room in it, even if an investor wants to invest, he/she doesn’t have any incentive to come into your round now because there’ll be opportunity later at the same price. From an investor’s point-of-view, there is no reason to take on more risk now — it is much better to continue waiting for more information until there is the chance that he/she will not be able to invest at this price.
If there’s a no-name investor who wants to join your round AND you don’t yet have any money committed (or limited investment dollars committed), then I strongly recommend taking that deal seriously. Some things to consider:
1. Dollars are always green regardless of who is investing
Money is money. If you have a long way to go in your round, money from anyone is a huge help towards getting to the completion of your round. Even in the rounds that I’ve seen with the biggest names, often there are also no-name investors.
Often, it’s these no-name investors who jumpstarted the best deals in internet history. Most investors like social proof — that you are getting a lot of traction with your round — and no-name investors are often the people who help provide fundraising traction that brings in bigger names later.
2. Don’t confuse no-name investors with being no-help
Not every investor can be famous like Ashton Kutcher. But, there are a lot of no-name investors who are former operators — either at their own startups or at larger tech companies — who would still be value-add from an operational perspective even if they are not household famous. In fact, these are the investors that I personally like best!
That being said, if the prospective investor is not able to provide operational help, that can also be OK. Just providing dollars at the early stages of a round is helpful to jumpstart fundraising traction.
3. Do due diligence on your prospective investors
This leads me to my next point — if you are not familiar with a particular investor, it’s important to do due diligence on him/her. While it’s ok if he/she cannot help you operationally, at the same time, you don’t want him/her to be a pain in your side either. There are a LOT of ways an investor can be a pain in your side. He/she can call you all the time to complain, bug you, and question your decision-making. He/she can be a pain when you need to do your next round. Depending on the rights that you negotiate, he/she can even block the sale of your company or subsequent fundraising rounds. Or if you’re using a convertible note to raise money, he/she could potentially call the note down the road and demand his/her money back plus interest.
So, make sure that your prospective investor doesn’t hurt you. Ask for references — you should speak with existing portfolio founders if it looks like the prospective investor is really serious about signing your deal. You do not need to do this until the conversations get serious – i.e. the investor says he/she wants in your deal.
If you are the first startup he/she has ever invested in, you need to be extra cautious. It doesn’t mean you should decline the investment per se, but you’ll want to make sure that he/she fully understands all the bad things that can happen when investing in startups.
4. Be careful about control
As a follow-on to point #3, you should be careful about how much control your prospective investor has. Will the investor have a board seat? Major investor or information rights? What type of shares and what percentage of your company will he/she have?
If you are bringing in angel investors, this is probably not a conversation you need to have or will have. That being said, there are plenty of places in the world, outside of Silicon Valley, where small investors (including angels) demand a lot of control.
Most of those Techcrunch fundraising stories you read about famous investors listed often exclude the no-name investors who also provided significant money in the round. But hey can be just as important, if not more so.
Tactical fundraising by Elizabeth Yin 