Elizabeth Yin

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.

4. Don’t attach a deck in the first-email

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 talk about how to follow up with a VC here.

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.

Give this a whirl.

Cover image by Rawpixel at Unsplash.

 

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?

Best,

Elizabeth

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.

Just keep at it.

2) Try different communication channels

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.

A reader named Turner Dean recently asked me whether it’s better to raise seed money on convertible notes or straight-up equity.  Since this is a hefty topic that we could discuss for days, in this post I’ll aim to cover just the pros and cons of each from a founder’s perspective; I will NOT cover:

• What is a convertible note, equity, or convertible security?
• What major terms you should look for, be aware of, and ask for?

There are a ton of other blogs out there that will cover these two topics in great detail.  My expectation is that you’ll check out some of those other resources first if you’re not familiar with any of this.  Just do a Google search.

In general, I’m a big fan of convertible notes and convertible securities for seed stage founders.  These are the big pros; they are:

• Cheap
• Quick — you can start bringing in money immediately
• Flexible — there’s no such thing as a round, so you can start and stop raising at any time

Cheap

Because convertible notes and convertible securities are basically standard — in fact, if you’re not using one from the internet, your lawyer (at least most lawyers in Silicon Valley) should be able to provide you with a free template that you can modify —  these should be basically free.   I think my total legal bill for getting my seed round done for LaunchBit was < $3000.  In contrast, if you do an equity round, you as the founder will often have to pay $20k-$50k in legal bills.  You may also be on the hook for your investors’ legal bills, though this is changing a lot these days.

Quick

Once you get a convertible note signed, you can ask your investor to wire you the money or send you a check.  You can start bringing money into your bank account right away and can start deploying it immediately.  In contrast, if you do an equity round, you have to complete the entire round and go through the full due diligence process before anyone wires you money.  This process can take a couple of months.  Frankly, in my opinion, if you’re a fast-growing startup that’s deploying capital into your growth process, you really can’t afford to wait months.

Flexibility

In an equity round, you’re raising a specific amount of money.  With a convertible note or a convertible security, while there may be an upper bound to a note, there’s no fixed amount that you need to raise.  You can always create new notes easily if you need to raise more money or raise an amount less than what you intended under your existing note.  Flexibility is good because you may want to change the nature of your round as you see what the uptake is.  If you have great uptake, you may end up wanting to raise more money on another tranche of notes at a higher cap.  If the uptake is bad, you may want to wrap up your round shy of your initial target round and go back out into the market to raise again later once you’ve made more progress.

In reality, it almost doesn’t make sense to do a priced round at such an early stage because you don’t know what the fundraising landscape will be a priori.  You may not know what you’ll be able to raise or what makes sense to raise before you start.

Cons

Jason Lemkin has referenced a lot of the cons of doing convertible notes and convertible securities in his blog post here.  Namely:

• Investors spend less time with you, feel less committed to the company, and won’t help you as much with your next round
• Your legal bill will be higher when you have to sort out all of your notes later when they convert to equity

Investors

A big reason investors feel less committed when they sign convertible notes is that they don’t know what their stake will be in the end.  Downstream investors can potentially rewrite a lot of the conversion terms later, screwing over earlier investors.  This happens more than you might imagine.  So, early stage investors tend to be more wary of convertible notes and convertible securities.  Some early stage investors, especially outside of Silicon Valley, still won’t do any deal that is on a convertible note or convertible security; if you’re not based in Silicon Valley, this is something to consider.  Despite this, I still think convertible notes and convertible securities are founder-friendly and worth doing as an investor.  The bigger lessons for us investors are probably on trying to steer founders away from piranha-like, downstream VCs.

Legal bill

Sorting out all of your convertible notes at what caps, etc., will become a bear when you raise your first equity round.  This is especially true if you follow the tranche strategy of which I’m a big proponent (more on this later).  You’ll pay for this later when you sort it out with your lawyer.  That being said, I still think it’s better to raise money in tranches on a convertible note or convertible security and defer your complicated conversion to equity later.  I see this a bit akin to technical debt.  As a startup, you often need to do what is best for you now in the quickest, scrappiest, and cheapest way possible, otherwise you just won’t make it.  We hold this to be true in product development, and it should also hold true when raising your seed round.  You just don’t have time or money to worry about making things clean now.  When you have more resources later, you will pay for it.  And that’s ok.  If you get there, big props to you.  Most companies never get to a true series A equity round and never have to worry about this deferred legal bill.

While there are a lot of pros and cons to raising on a convertible note or convertible security, if you are based in Silicon Valley, I think it makes a lot of sense to do so as a founder at the seed round.

One question that seed investors love to ask is whether you have a lead investor in your seed round.  I’ve written before about what every entrepreneur needs to clarify when answering this question.

Once you figure out why an investor is asking this question, tactically speaking, what do you do?  Let’s say that you find out that an investor is asking because he/she does not invest without a lead investor in place.  Let’s say the investor simply relies on other people to do due diligence and does not believe in party rounds.

Now what?  Do you try to find a lead?  Do you ignore an investor who will only invest if you have a lead?

At this point, you need to move on.  Any investor who tells you, “We are definitely in if you have a lead!”  or “We want to co-lead if you find another co-lead!” are not in your round.  It may sound like they are in, but they really are not.

Next, you should not hold up your round simply because you do not have a lead investor.  Lots of seed rounds are done with party rounds these days, and so it is not the end of the world if you do not have a lead investor.  A few of my friends’ companies had no lead investors in their seed rounds, and they are now valued at hundreds of millions of dollars.  Get a standard convertible note (or convertible security such as 500 Startups’ KISS A), and fill it out.  Then, start bringing checks in.  Remember, with a convertible note, you can quickly get e-signatures, and investors can start sending you money that you can put to work right away even if you have not yet reached your target raise.

But what happens if you’re raising money on your note, and a lead investor wants to come into your round?  This is a very good problem to have and is both common and solvable.  Typically, a lead investor will want to do a priced equity round, and so you can convert your convertible notes into this equity round.  Sometimes, though, I’ve seen lead investors respect the fact that a round is already happening and will just put a big chunk of money into a company on the same terms as the note (this really depends on how much leverage you have or investor interest you have). Regardless, the mechanics of this will work out, and in most cases, your existing smaller investors will actually be very excited that you have a lead investor (unless that lead is a big asshole), and will be accommodating to make the round work.

Now, there are pros and cons to having a lead investor:

Pros:

• If it’s the right person, he/she could be a great partner to get advice from and hold you accountable like a good coach
• They could potentially lead your next round

Cons:

• If it’s the wrong person, he/she could make your life hell
• If he/she doesn’t invest in the next round, it could be bad signaling

You’ll want to do your homework before agreeing to work with a lead investor.  However, once you get a term sheet from a potential lead investor, you have a lot of leverage.  You can use this as a forcing function to see if some other firm that typically leads would also be interesting in giving you a term sheet.  This can help you increase your valuation, and/or you could potentially get a co-lead to mitigate signaling issues if one firm does not join your next round.

The bottom line is, don’t hold up progress on your round because you get too fixated on having a lead – I see this happen all too often with founders.

Cover photo by rawpixel on Unsplash