How to close angel investors

Last week I spoke at the LAUNCH Festival Sydney in Australia. Huge thanks to the entire LAUNCH team for bringing me down and for their fantastic event / hospitality; it was an awesome experience and I had a great time!


Photo courtesy of someone on Twitter – apologies, I didn’t write down who took this — thank you! (Email me and will credit you)

Most of my posts are about raising money from Silicon Valley VCs. But, the world is filled with all kinds of investors. And most businesses are not backable by most Silicon Valley VCs because:

  • They are not software-enabled ideas
  • They are not deemed to be in a large enough market for a VC to invest
  • The founders don’t want to build a “Go big or go home” business
  • Etc…

But these are not bad things. There are going to be plenty of big winners in say e-commerce / direct-to-consumer products that VCs will not back. Or in real estate. Or all kinds of other things. And it isn’t a bad thing if a founder wants to build a business that gets to say $10m per year and sells for $40m. That’s a fantastic outcome for founders. But, most VCs will not back any of these things.

So who do you pitch for money?

The good news is that the world is filled with money. It may not seem like it, but it really is. Your job as an entrepreneur is to find it and unlock it. So, I wanted to share some new material I created for the LAUNCH event on how to find angel and close investors. Here are my slides:

The overall takeaway from these slides is:

  • There are lots of rich people worldwide — they don’t even have to be super rich. There are lots of angels who can write you a $1k-$10k check.
  • Angels may not know they are angels. It’s your job to plant the seed in their heads that you are open to an investment from them!
  • Angels are motivated by many different things; figure out how to tie your story to something that they want; getting an investment – much like sales – is about solving for their needs not yours
  • It’s a numbers game — pitch many many people and don’t give up

Go out and pitch your eye doctor!

Thoughts on our 10 year wedding anniversary

Today is my 10 year wedding anniversary! Happy anniversary to my better half who goes by online alias John Jacob Jingleheimer Schmidt (JJJS)!


Photo credit: Earl Solis 

Something I’m thinking about today is that I feel so lucky. Namely, I’m glad that someone is willing to deal with me! Being together with an entrepreneur is really really difficult as many of you know. We started dating when I was 23 years old, and like for so many people, at 23, you just don’t quite know where you’re going in life. Years later, my career has taken both of us on a path of so many meanderings, ups and downs, and geographical relocations, and I’m so grateful that JJJS has been through it all with me. A few thoughts and anecdotes to share about all this:

10 years ago

When we got married 10 years ago, I had left my cushy job at Google just months before to become an entrepreneur. I had no idea what I was doing. And, I didn’t know how to make money. At that time, he was starting his post-doc.

On just a post-doc salary, we scrimped and saved like crazy. To make extra money, I did really bizarre side gigs. For example, one of those side gigs was a research study, where some lady from Xerox Parc followed me around for several days. She followed me to the grocery store — and even around in our apartment — literally everywhere and listened in on all conversations and took lots of notes! Other side gigs that I undertook included critiquing resumes for aspiring MBA students in Taiwan and categorizing whiskeys. Looking back, financially speaking, it was an incredibly stressful start, because I was making no money from my startup and the supplemental gigs came in weird ways. (This was before the rise of the gig economy.)

Career sacrifices

Lesser talked about amongst dual income households, in general, are all the sacrifices that are made in order for both people to work — specifically when you have children. When I was 23 with big aspirations, I didn’t think about rearing my future children. Questions like “Who is going to take care of them when I’m traveling?” Or “Who is going to do drop off and pick up?” never crossed my mind. A few years ago, when we had our first child, all of those questions suddenly came up. By complete luck, I picked the right partner, and all of those logistics have worked themselves out, because JJJS has made so many sacrifices to make our household functional. But this is not something that I had thought about at all when we first met.

When I was going through the acquisition process with my startup a few years ago, my baby was just a few months old. As so many of you know, being a parent to a very young child is incredibly draining — babies don’t sleep through the night and they constantly need to feed. So while I was traveling all around the country for meetings about my company, JJJS was holding down the fort at home, slogging through traffic to do all the drop offs and pickups at daycare, not sleeping and being the 24-7 solo parent. At that time, so many people commended me — “Wow, that is badass — YOU are running around doing all these business meetings and pumping in between meetings?  That’s amazing!” But, it’s often the spouse who has to hold down the fort outside of the company who is the unsung hero — for anyone who has ever had young children, wrangling your child is often even more challenging than running a company! (no joke…)

The article that I often refer to and think of that really hits close to home is this one by Andrew Moravcsik where he talks about the necessity of becoming a primary parent once his wife Anne Marie Slaughter’s career became really demanding.

JJJS has made a ton of sacrifices in his own career for mine even though he has big aspirations himself. For example, he left a unicorn synthetic biology startup with great culture and where he was employee #2 to trek across the country so that I could advance my own startup. He is the rock in our family who has taken on much more stable jobs throughout the years to pay the bills, while I’ve largely gone about taking on a lot of risk in building my startup(s) and now nascent VC practice. I know that so much of my own career is only possible because of all his support and sacrifices.

So here we are — 10 years in. Although I could not have predicted what life would look like when we got married, I’m incredibly grateful to JJJS for this journey we’ve been on. I love you, JJJS!

How do VCs make money?

I’ve written a little bit before about how venture capitalists (VCs) make money (see this post).

But I’ve never quite spelled it out, and in this post I’ll do just that. I think it’s useful to understand this — certainly for anyone who is an aspiring future VC — but even for entrepreneurs, because it helps to understand the mindset of people you’re pitching.  

What is a Venture Capitalist (VC)?

At a high level, the concept of a VC is relatively straightforward — a VC is basically a middle (wo)man.  On one side, a VC will raise money from rich people called Limited Partners (LPs). These can be individuals, families, corporations, and other funds who invest in funds, etc. VCs then take that money and on the other side, invest in startups. The hope is that some subset of those startups will grow tremendously, and then through some sort of liquidity event — it could be an acquisition or an IPO or even a way to sell shares to someone else in a secondary sale, the VC will receive back a lot more cash than initially invested.  That cash then gets returned back to the initial investors and the VC makes some money in between. 

Typical VC structure

A very common lifespan of a VC fund in the US is 10 years.  In other countries, this varies quite a bit — in China, for example, VC funds have been set up to be closer to a 5 year time horizon.  

The term is largely based on how long it will take to get liquidity on deals. Investors who invest in such a fund are committed to locking up their capital for 10 years. Now throughout the 10 years, it’s possible that investors may receive capital back from exits that happened before 10 years, but the bulk of the great exits will happen closer to the 10 year mark. For reference, Dropbox went IPO after 15 years, and so if you were an early stage investor, you would’ve made a lot of money, but that may not have happened for many years.

Side note: it is possible with the new Long Term Stock Exchange (LTSE) coming to fruition, we may see early stage VCs shorten their time horizons to getting liquidity.  The bar to have a successful IPO on the NYSE and the NASDAQ has been raised considerably since the 90s, so companies have been staying private for much longer. If you look back at Amazon’s IPO in the 1990s, their valuation was pegged just over $400m. These days, Uber went public at over $80B valuation!  If we enable more liquidity events at earlier stages, it’s possible we may see changes in fund lifespans.

In the US, a typical VC firm economics structure follows a 2% / 20% rule.  The 2% rate represents management fees. And the 20% represents something called carry.

What are management fees?

Management fees are basically the operating budget for a VC firm on an annual basis.  So in a 2% model, if you have a $10M fund, you have a $200,000 budget every year for the course of your fund.

If you have a $100m fund, with a 2% structure, you’d have an annual operating budget of $2 million each year. So as you can see, there is a stark difference in budget between a microfund and a large Sand Hill VC. And when people talk about VCs having nice salaries, they are referring to partners and employees who work at the latter type of firm — firms with a lot of money under management. Microfunds are very much like bootstrapped startups.

Let’s dive into the economics of a $10m fund. The $200,000 budget needs to cover just about everything.  Certainly, it includes salaries, but it also needs to include other things like marketing expenses, health insurance and travel. If you have an office, that must fit under this budget too. And so if your typical microfund has two partners, they are definitely earning well under $100,000 per year, and more likely closer to $50,000 given that all expenses must fit under this $200,000 number.  For us at Hustle Fund, in our 3 person partnership, we have publicly stated that we currently each make close to $50k per year and feel lucky to be able to bootstrap for a while.

What is carry?

The 20% represents the profit sharing of a VC fund. The way profits are distributed look something like this:

Say a $10m fund returns $20m. The initial $10m is first returned to the Limited Partners (LPs).  Then the $10m profit is returned such that the fund managers receive 20% of this profit, or $2M (the yellow shape) in this example.  That $2m is then distributed to the employees / partners of the fund based on however they’ve all mutually agreed to do so. (At Hustle Fund, all 3 partners have equal carry).   And, the LPs receive the rest – $8M in this example, and so the LPs receive a total of $18m in this example (the blue shape).

Even though the fund returned 2x at a gross level, after all is distributed, LPs see a net multiple of 1.8x, because of the carry.  

Screen Shot 2019-06-06 at 3.08.36 PM.png

The power law of startups

Ok, now let’s look at the investing side. The interesting thing about the investing side is that startup outcomes are distributed very much in line with the power law. Namely, most startups will fail and will go to zero — i.e. you will lose your money entirely.  Some will maybe return 2x or more. And if you have an excellent portfolio, you will capture a 100x-1000x returning company once in a while.

In order to succeed at investing in startups, you absolutely need at least one of these outliers in order to be successful. I hear all these non-investors or new investors talk about trying to find 3x multiples in startups. If you are investing at the early stages, you need to be aiming for much higher than that…  

I put together this spreadsheet of startup outcomes that everyone can copy, so you can all play with the numbers.

Screen Shot 2019-06-07 at 2.16.15 PM.png

Let’s look at the tab labeled “1 – 100x return”. If we assume the trite saying that 9/10 startups fail, and let’s say we have one big winner that delivers 100x returns, you can see that we can return an overall nice fund — 8x gross multiple, 6.6x net multiple to LPs.  From this, you can see that it doesn’t matter that we have really low survivability in the portfolio. All that matters is that your one big winner was quite big.

Dilution impacts your returns as an early stage investor

Now, let’s add the impact of dilution back into this equation.  Typically, a cap table will get diluted down by 10-30% each round, with an average being around 20%.  Assuming that we are the earliest stage investors, this means that if a founder does 3 rounds of funding after ours, we will be diluted down by about 50%!  So I modeled out the 100x winner as 50x in the next tab. You can see we are still returning good returns but if you aren’t aiming for 100x gross difference between your entry point and exit point in your investments, things start to get a bit dicey.  

Can you improve survivability?

There’s a lot of debate amongst VCs about whether the 9/10 survivability that everyone touts is actually accurate. Can you help your companies survive longer so that you have more winners?  


I personally think the answer is yes, but I think you still need at least one big winner to make the portfolio work out well. If we look at the tab labeled “5 – 3x returns”.  You can see that even if we do phenomenally well with picking startups who have high survivability, if they are not returning much, our multiple on our fund is just barely over 1x and the net to LPs is basically that they get their money back.  Wait, what is going on? There are a lot of 3x returners!

Screen Shot 2019-06-07 at 2.17.21 PM.png

The primary reason for this is the management fees.  Even though this VC fund isn’t making money off management fees — heck their budget is only $200k per year, on a $10m fund, $2m in total is used for management fees. In other words, this money isn’t being invested.  So only $8m is invested, and so you have to overcome this initial hurdle to get to 1x. A lesser reason is once you cross the 1x hurdle, carry digs into some of the profits. (Side note: most VCs recycle small exits in order to invest more than 80% of their fund, but getting money back to recycle is not guaranteed and for the purpose of simplification, I removed that scenario.)

To be clear, this isn’t a situation that the managers of the fund want either.  They are taking a puny salary of like $50k per year. And their profits are only $400k after 10 years of work that gets divided across the partnership — this is really dinky.

So you can play with the numbers on this spreadsheet, but you’ll find that even if you can increase survivability, you still need to be aiming for big winners.  

How do you get a big winner?

Now, what does it mean to get a 100x returner? This means that if we invest at say $3m post money valuation, and the company sells for $300m, the difference in entry point and exit point is 100x. (Accounting for 3 rounds of dilution, this will be closer to a 50x returner).  

Think about it — $300m is a big exit. It’s more than life-changing for most entrepreneurs. And many entrepreneurs might be tempted to sell even sooner.  Heck $30m for most people is life changing. Remember, as a VC, we are the middle (wo)man, so we need that exit to be large for us to make a lot of money. But the entrepreneur doesn’t need a large exit to make good money. So there’s a bit of a disconnect there.  

Large multiples occur when there’s a large spread between entry point valuation and exit valuation. VCs all have different strategies to achieve this. Some like to go in at low valuations and then sell for sub billion dollar exits.  And this works, because there are many more exits that are sub $1B. And then there are VCs who have the exact opposite strategy. Entry point doesn’t matter, but they are gunning for an exit at a multi-billion dollar valuation. For example, Uber’s IPO was approximately at $80B valuation. If you got in at $5m valuation, then that’s on the order of a 10,000x multiple after accounting for dilution. So with that kind of exit, who cares if you got in at the $5m valuation or the $10m valuation or even higher — it’s all a wash at that scale.

But regardless of the strategy, all VCs aim to have large multiples.

You can also see that VCs can do VERY well if they end up getting a few 100x winners.  Play with the spreadsheet — even with just one more 100x winner on the first spreadsheet, you can see that the net fund outcome to LPs goes up to 13x. So, a $100k investment into a fund turns into a million dollar outcome.  On the flip side, more 3x outcomes on the last spreadsheet with near perfect survivability in a portfolio isn’t that awesome.


Based on all of this, this explains why VCs:

  • May be valuation sensitive (depending on the strategy)
  • Are only looking for super large outcomes and don’t care about good businesses
  • Often pattern match — if they believe that “certain types of founders” can get funding easily, then they may have an easier time growing super large companies (I don’t believe in this personally, but this explains this behavior)
  • Are looking for fast growth — winners must get to a billion dollar level within just a few years since a VC fund term is 10 years
  • Fight over pro-rata — dilution can be rough so maintaining ownership in companies that are clearly strong winners is helpful to returns
  • Don’t care about massive failures and would much prefer even just 1 “go big or go home” outcome to one that will be successful at a $50m outcome level.

I think following the money is always a good way to understand why people behave the way that they do. Hopefully these spreadsheets help to understand how VCs make their money. 

To SAFE or Not to SAFE?

VCs debate quite a bit about whether they like The YC SAFE or not. (Spoiler: Most do not…) We’ve done a lot of investments on SAFEs as well as on notes and in equity rounds, so I thought I’d outline pretty openly the pros and the cons of raising money on a SAFE.

First off, what is a SAFE?  

A SAFE is a convertible security that was developed and evangelized by YCombinator.  (500 Startups also has a convertible security called the KISS).  The convertible security concept, in itself, is an interesting innovation.  In essence, the convertible security is a placeholder for equity without the cost of both time and money doing an equity deal.  For a more detailed primer on convertible securities and the differences between those and convertible notes and equity, read my post here. (A lot of people, especially investors, confuse convertible notes and convertible securities but they are actually quite different! One is debt and the other is a placeholder for equity)

PROs for using a SAFE:

  • Your legal costs will be zero or low because it’s a template
  • There is no minimum threshold to raise before a deal goes through; investors simply sign and wire
  • Investors receive equity when an equity round happens; if a company goes through a liquidity event before an equity conversion happens, you’ll convert to equity and receive your proportional share
  • The new SAFE is a post-money SAFE, which is a BIG deal

The last bullet deserves a conversation in itself.

The post-money SAFE is easier math to calculate than the old pre-money SAFE

Previously, there was a lot of confusion before about how much equity an investor really owned.  The old SAFE was a pre-money SAFE — meaning your equity ownership was affected by how much money was raised on other SAFEs.  When companies raised lots of money at different caps on the pre-money SAFE, the math got to be pretty confusing for many people — both founders and investors.  No one really understood how much equity they owned. I also saw a lot of math mistakes in various deals that we were in that converted these SAFEs to equity. Investors were upset because they thought they owned a certain percentage of a company but then actually didn’t.  Founders didn’t understand how much of their company they had company they had sold.  This is why there are so many articles about how SAFEs are not SAFE.  The biggest pushback against the SAFE is in response to the old pre-money SAFE not the new post-money SAFE — namely, that no one knows how much equity they own.

With the new post-money SAFE, it’s quite easy for everyone to figure out how much equity has been sold.


Photo credit: Giphy

How to compute your ownership with the new post-money SAFE

Let’s say that we invest $30k on a post-money SAFE with a $3m.  We own $30k (how much we invested) / $3m (the post-money valuation) = 1% of the company.  That’s it.  When we convert this SAFE in the first equity round, we will own 1% of the company.  It doesn’t matter who else is investing and at what price or anything.

This is a lot easier for people — both investors and founders — to understand.

Now let’s say the company raises another tranche of money on a post-money SAFE with $5m cap.  Let’s say we put in $50k now.  We own with this tranche: $50k / $5m = 1% of the company.

Now when both of these SAFEs convert, they will convert at the same time.  So we now own 1% + 1% = 2% of the company upon conversion.

One update and caveat (6/7/2019): Thank you to Seth Bannon of — “The new post-money SAFEs get diluted by any options pool created for the equity round (the old SAFEs did not) so an investor’s actual ownership will likely be ~10% less than this example.”

Continuing on with the other PROs…

SAFEs enable small investments

For smaller investors (such as ourselves), there’s a cost to doing a deal (mostly legal).  So, with a SAFE, this makes our costs virtually nothing.  This means that with a SAFE, as a founder, you can bring in small investment checks here and there a lot more easily, and you don’t even need a lead.

The reality is that most companies will not be able to raise a seed round with an institutional lead, but there are many more startups that will go on to do incredibly well and should be able to be backed.  I like that SAFEs democratize the startup ecosystem and make funding more accessible beyond the 100 or so seed funds that write large checks. 

What are the CONs?

These are the biggest CONs that I hear about the SAFE:

  • People don’t know how much of a company they own (addressed above)
  • Investors modify the SAFE
  • QSBS tax exemption doesn’t apply to SAFEs
  • SAFE holders don’t receive dividends

Another pushback that I often hear about the SAFE is that a lot of investors try to modify it to create weird new SAFEs.  I encourage investors to please please please not do that.  Templatizing docs, in general, is a good thing — it reduces time and legal fees to do a deal, and if you want modifications, please use a side letter.  The SAFE is meant to remain a lawyer-free template.  Templates keep the expenses down for smaller investors who cannot afford high legal fees.  Reviewing a side letter is a lot easier / faster / cheaper than reviewing a modified SAFE.

From our experience, the biggest downside as a very early investor is that QSBS tax exemption doesn’t apply to SAFEs. This is a much longer blog post, but the QSBS tax exemption was enacted in the US to encourage early stage investment.  If you hold private company stock for more than 5 years and there are other criteria met by that startup, any gains from a sale of that stock after the 5 years is tax exempt. This is amazing!  However, if you are a SAFE holder for 2 years and then you convert to equity and then the company sells 4 years later, you do not reap those benefits even though you made the investment 6 years ago.

One last corner case of being a SAFE holder is that even though you will convert to equity, if a company doesn’t raise more money nor has a liquidity event and then starts printing money and issuing dividends to shareholders, you as a SAFE holder do not get those dividends. This is a possible situation (though rare) – have never come across it myself personally.

SAFEs avoid dilution

There’s one last interesting tidbit about SAFEs – I couldn’t decide whether this is a pro or a con. I’m seeing money raised on SAFEs at the pre-seed, seed, and post-seed levels.  Let’s go back to that prior example where we invested in a company twice at two different caps on a SAFE.

Now let’s say that we invested those same amounts on two separate equity rounds at the exact same prices.  The interesting thing is that when we invest in two separate equity rounds, our first check got diluted down…  But when we invested both checks on SAFEs, we did not get diluted down, because both SAFEs converted simultaneously into the first equity round.

As we see multiple tranches of seed happen more and more, investors who write checks on a SAFE will avoid some dilution than if they were to invest in the equivalent equity rounds.

And for founders, this characteristic of the post-money SAFE is a double-edged sword.  On one hand, the post-money SAFE is great because it’s easier to figure out how much of the company a founder has sold.  On the other hand, ultimately, its founders who take more dilution on this new SAFE than on the equivalent equity rounds.  However, I think if everyone is aware of how this conversion happens, then this characteristic should just get priced into the initial cap of the SAFE.

Final thoughts

All-in-all, on the net, we, as a small fund, like the SAFE, because being able to do small deals as a small fund or an angel enables more startups to get funded. I can understand why larger funds would prefer to do large equity rounds – the reality is that often it’s the smaller investors who bubble up those deals before the large funds end up funding some of them.  And empowering smaller investors is a good thing for the ecosystem, because more startups can then have a shot at the big stage.

Featured photo courtesy of Pexels


The #1 thing most people do wrong when they fundraise

“So why do you like fundraising so much now?” 

It was a dreary day, and I was catching up over coffee with a friend of mine whom I hadn’t seen in a couple of years. And we were talking about startups and fundraising.  This friend has known me since when I had my company LaunchBit, and she knew just how much I hated fundraising back in the day.  In fact, when I was running LaunchBit, the fundraising process was super tough for me.   In fact, it took a huge toll on my health.

Back in 2011…

“We can’t find anything wrong.” said the physician.

There I was at Massachusetts General Hospital. I had been referred to a specialist to check out a problem I was having.  My problem was tough to explain – I kept feeling like someone was constantly poking me all the time with a pin. Just everywhere all over my body.  The prickly feeling didn’t stop anytime during the day – even when I was trying to sleep. It had started a few weeks before and it just would not go away.

After seeing a number of physicians who could not figure out what was wrong, Massachusetts General Hospital was the final stop.  MGH was a world premier hospital with a billion and one specialists and researchers including in fields such as the nervous system.  All these doctors appointments were a bit of a distraction for me, because I was in the middle of raising a seed round for LaunchBit. But this issue was becoming so bad that I couldn’t even sleep.  


Fundraising had been a stressful process, and I had felt so much pressure to raise a $1m round.  And, after raising almost $400,000, I decided to just stop. I wasn’t getting any more momentum on the round, and my health problems were really starting to bother me. Immediately after halting my fundraising activities, surprise surprise, all of my ailments stopped and magically disappeared. There was never any scientific explanation or diagnosis for what had happened.  The only explanation that I have for myself is that I was just so stressed that weird things were happening to me because fundraising was taking a toll on my health. Fundraising was definitely not fun to me back then.

Back to the meeting with my friend. “So why do you like fundraising so much now?” she asked.  

“Hmm…that’s a good question. Because I now understand how to do it.  And, because I’m good at it – hah!” I responded half laughing.

It was even hard for me to believe that I could get good at fundraising.

In the past 7 years, I’ve learned so much about fundraising – partly from my own fundraising experiences LaunchBit, but much more so through helping hundreds of founders I’ve backed over the years with their raises and in raising Fund 1 for Hustle Fund.

7 years ago, I didn’t understand how to fundraise. I think when we hear the word “pitch”, it almost seems to imply that we are talking at someone. But fundraising could not be further from that.

My biggest learning around fundraising is that fundraising is actually a series of dialogues – not pitches – and success is contingent upon need finding and finding the right investor match.  

The reason I think fundraising is so fun now is that I’ve learned that fundraising is more of a customer development exercise out of the Lean Startup playbook than anything else.  And that’s fun.

A noob fundraiser will go into a first meeting, open up his/her deck, and start going through the slides.  In doing so, you don’t really know how your story is landing.  You’re not having a conversation.  But, an experienced fundraiser knows that the goal in going into your first fundraising meeting is to ask lots of questions and walk away understanding what next steps make sense. You should understand your potential investor’s pain points. Is there something you can solve for a potential investor by having him/her invest in your company? Do you have a solution for those pain points?

There are many reasons to invest

For example, let’s say we’re selling pet food – hippo pet food – and let’s say that I were raising money for this company.

There are a number of reasons why someone might like to invest in this company. It could be that an investor wants:


  1. To make a lot of money and believes that hippo pet food is an amazing market
  2. To invest in a basket of e-commerce companies
  3. To invest, because he/she believes in me personally
  4. To invest in more female entrepreneurs
  5. To invest, because he/she has a pet hippo and really loves the product
  6. To invest, because he/she believes that I have a strong network and wants to get tapped into it
  7. To invest in a bucket of Xooglers’ (ex-Googlers) companies

The list goes on and on. As you can, there are many reasons why an investor might like to invest in this business.  And my job is to ask lots of questions in a first meeting to learn what an investors’ interests and challenges are.  And can I figure out which of these reasons, perhaps, might be one that resonates with a potential investor.


I think we fixate too much on what VCs are looking for, but it’s important to note that the world is filled with many would be investors, including individuals, corporates, and family offices.

In general, most VCs are trying to maximize their dollar return in the shortest amount of time possible.  (This is reason #1) But, for an angel investor, there are many other reasons to invest, and some of those reasons may be #2 or #3 or #5 etc…

Fundraising is about doing customer development

It is your job as an entrepreneur to figure out what a potential investor is interested in in a first meeting. Can you help that person or that company achieve its goal. If the investor is trying to invest in more e-commerce companies, you’ll want to tailor your story to that thesis, and if the investor is trying to invest in more women, you may want to play up that angle.

Your job in the first meeting with a potential investor is to ask a lot of questions – ala customer development style – to understand how you might be able to tie your story to their problems and interests.  And so your pitch should not be stagnant, and although you may have created a deck before the meeting, it’s important to tie your talking points together as a solution to the problems you learn about in that meeting.

The first meeting with an investor is really about truly understanding their needs and triaging whether you think your company might be a good fit for that investor.  Your job is not to try to convince a potential investor to invest. Your job is just to triage. It is much easier for you to close an investor who is already bought into your story than it is to try to sell an investor who is not bought in. And it’s ok if someone is not a good fit.  In fact, I would just address that head on — “It sounds like this might not be a good match — you’re generally a series A investor and you’re looking for a lot more traction.  Why don’t I put you on my newsletter, and perhaps there may be a fit down the road?” Addressing things clearly and directly is the best way to communicate with investors, and it’s ok if there’s no match.

There are billions of investors

I’ve observed over the years that when founders create their list of investors they want to pitch to, they often draw from common directories.  Such as Crunchbase.  Or AngelList.  Or various Excel spreadsheets that are passed around.  It’s often the same set of hundreds of funds and about 100 angels.  These lists are a great place to start for sure.  But what I’ve found is that these lists also narrow people’s thinking.  Why do founders just pitch these people?  Why not the billions of other people in the world?  There are so many rich people or even people who are not rich but may have conviction to write a small check.  By limiting ourselves to these lists, we create unnecessary pressure on ourselves.  You end up in a weird mindset — if I cannot convince these people to invest, I’m hosed.  Right?  A bit of an exaggeration, but has anyone else had that mindset before?  I certainly have.

But this is the wrong way to think about things.  The right way to think about fundraising is with a growth mindset.  There are billions of people in the world – many of whom are rich – any of these people could potentially invest. This takes the pressure off right away.  The game changes from “How can I convince this small group of people to invest in my company” to “How do I triage people quickly and get to meet with a lot of people quickly?”

Once you have that mindset, then it’s just a matter of finding potential investors to have a conversation with, figuring out quickly whether they are a good fit, and if they’re not,  move on quickly. Instead of wasting time trying to convince someone to invest, you want to actually spend as little time with people who are not a good match to focus your energy on getting new meetings. Your job is not to try to pitch at people or convince. Your job is just to have a conversation and do need finding, triage accordingly, and then rinse and repeat.  (See my post on finding potential investors.) That is what fundraising is all about when done right.

For people who are not a good fit, you definitely want to cultivate those relationships.  Put all of these people on a monthly newsletter with your clear progress.  Much like in B2B sales, if a lead is not a warm lead, you should use automation to keep those people engaged but don’t spend a lot of time with them until they are actually interested.

When I was fundraising for my startup many years ago, I took the totally wrong approach. And you can see that by limiting yourself to some silly list that you have and putting pressure on yourself, fundraising can be a bear.  But if you can change your mindset and approach, it’s actually pretty fun.

Feature Image credit: Pexels

15 Annoying Things that VCs say or ask (and how to think about them)

Today’s blog post is all about the annoying things that VCs commonly say or ask.  I did a call out on Twitter this week and these are the VCisms that the crowds have bubbled up as the most annoying things out of a VC’s mouth.

1) What if Google Builds It?  (@pravesh)

This one was cited a LOT by many people on Twitter in various forms! There were variations — e.g. substitute Google with Amazon or Facebook or any other big company.

Admittedly it’s a valid question — what if the 800 lb gorilla in your space does copy you? What is your edge? How will you win?

Here are a couple of answers that may help:

A. Large companies are so large, they aren’t able to prioritize or even care about your “small” opportunity relative to their huge company. In the case of Google specifically, it has actually been shown that building a Google product competitor can actually be a great opportunity.  Many people would much prefer to pay for products so that they can get customer support when something goes wrong — a free Google product will never a customer’s calls or emails.

Companies like Mixpanel, Optimizely, Superhuman, and many more have built big businesses by going head-to-head with a free Google product by charging customers and providing a better experience.

So it’s actually validation of your market if Google is interested in your space.

B. Big companies, by definition, are no longer nimble.  You, in contrast, are able to run circles around them.  Can you prove that you’re nimble by shipping quickly?  Can you show that customers love you more than Google?  These are concrete things that you can point to in your conversations with VCs.

2) We don’t invest in hardware (only to find out that they led a round for hardware) (@peterjcolbert)

This is an interesting one, because you see VCs deviate from their thesis sometimes.  (Every VC does it – we’ve done it too.).  VCs will often say they don’t invest in hardware.  Or ad revenue based models.  Or e-commerce.  Or in some geography.  And then you see a portfolio company on their website that is clearly in one of these categories.

You should just ask a VC about it directly.  

The reason for this is usually along one of these lines:

A. They used to invest in that category but are now over-indexed. Or they invested in that category previously as an angel or with a past fund. I.e. they used to make those investments but no longer do.

This is important to understand, because if the reason the firm is passing is that they are waiting for some liquidity on existing positions in your space, there could potentially still be an opening for an investment later.  This is rare, BUT possible – this has happened once to a company that I’ve backed before.

B. They are experimenting outside their thesis. E.g. They may not usually invest in South America, but they may make 1 investment to learn about the market. They may not invest in hardware, but may invest in 2 companies to learn about the space.

Unfortunately, if this is the case, you can try to hard to convince a VC to do more experimentation in that category, but because VCs have mandates — i.e. they have an agreement with their investors that they would focus on investing in certain categories / theses, they will likely not want to deviate *too* much from their thesis.  VCs are judged by their investors on whether they end up investing based on the strategy that they claimed they would.

C. They had a special relationship with the founder.

There is nothing you can do about this.  People back their friends all the time regardless of what they are building.

I think it’s easy to walk away fuming mad thinking that a firm is filled with hypocrites, but it’s worth just bringing up with a VC: “Hey you mentioned that you don’t do hardware, but I noticed on your website that you’ve invested in X.  Am curious how that fits your thesis?” You may not like the response and it may not change anything, but on rare occasion it may open a door for you.

3) I don’t think this can be a venture scale business. (@kirbywinfield)

I’m of two minds on this one.

A. There are a lot of companies who seek out venture funding who are actually NOT a good fit for VC investors.  Entrepreneurs should be aware of the return profile that VCs are looking for.  Loosely speaking, VCs are looking for a minimum of 100x return in the course of 5 years or so.  This comes out to achieving roughly $100m runrate within the next 5 years.  Is this what you want to do?

B. However, on the flip side, what ideas will be able to achieve $100m runrate in 5 years is tough to say. VCs often have preconceived notions above what can get to this level and what cannot — and they are often wrong. Companies that tend to get overlooked are in categories such as e-commerce, for example.  Are you selling a widget that will likely max out at $5m in sales per year?  Or are you the next Stitch Fix?

My advice here would be to first understand for yourself if you want to be growing a business that goes to $100m in annual revenue in 5 years (and the work / hiring that will be required to do so). And if so, what do you think that path looks like if everything goes well?  How will you get to $2m runrate this year and then more than double your sales each year thereafter?

And if the answer is that you don’t want to run this type of business, there are other avenues of funding.  Angel funding, crowdfunding, revenue-based financing are all good channels that are now rapidly growing.

4) But how will you manage being a mom AND running a startup? (@hustlefundvc)

Ugh.  Are we in the 21st century?  Move on from any VC who asks this.  It’s not worth it.

5) We’d be interested when we see a bit more traction. (@msuster

Ah, the classic ask for more traction.  Basically, the VC doesn’t have conviction right now, but maybe, just maybe, more traction would give him/her the conviction to do your deal.  The reality is that most investors can’t articulate what level of traction they would want to see in order to invest.  Obviously, if you earn $100m in the next 2 months, everyone will be onboard, but what if you get to $100k / mo runrate in the next year — is that interesting?  Well…it depends.  And unless you are an asshole or a fraudster, VCs always want to preserve optionality to see you in a year and check on your business.

So, although this is a frustrating response, the right way to play this is to triage investors quickly.  Put this VC in a “not interested” bucket. Continue to send him/your monthly investor updates, but you’re better off trying to find someone who has conviction today than trying to convince someone to get conviction — even with traction.  You just need to meet a lot of investors and triage a lot of investors quickly in order to find the right investors to bring into your company.

6) Maybe you should raise more and grow quicker. (@justinpushas)

This is just a stupid comment.  If a VC really believes in your business, he/she will commit to your round, and will either help you fill your larger round or write a bigger check.  But, investors who say things like this without any action are either just oblivious or not helpful, and should just move on from these investors. As we all know, founders who struggle to raise $250k are also going to have a tough time raising $2.5m.

That being said, I would recommend that every founder develop multiple fundraising plans.  This will allow you to pitch a different amount of money to bigger or smaller investors with different milestones and goals that you would achieve with different investment sizes. And then if you do receive this question, you can point to a larger fundraising plan and mention that you have thought about a larger plan and are open to raising more money but are also not limited in growth if you cannot raise that amount now.

7) Come back when you have a lead (@stefanopep3)

The herd of sheep comment!  A variation on this is, “I’m committed once you have a lead.” This is a positive way for a VC to say no for now, but if you have enough fundraising traction, then he/she wants to get his/her foot in the door.

It’s important to clarify what a VC means by this, though.  Does this mean he/she is interested: 

  • When you have most of your round committed?
  • Once terms have been set?
  • If another investor is taking a board seat and is providing “serious responsibility ” for the investment.  (i.e. no party rounds)?

This is important to clarify, because VCs mean different things when they ask about a lead VC. 

If it’s the former — come back when most of the round is committed — you can build your round in many different ways.  You can bring together a party round of smaller investors without a lead on a convertible note or SAFE.  It’s actually quite common these days for a smaller fund to set terms on a note or a SAFE and bring together a round that way.  

And if a VC is just looking to evaluate terms, then you can create your own terms on a note or a SAFE and present those to the VC. 

And lastly, if the VC is looking for a true “lead VC” to invest the majority of the round and take a board seat, etc, then this is a completely different ask from the prior two.

8) Let me know how I can help!  Founder asks for help. *crickets* (@quan)

When I started my VC career, I asked this question to a few entrepreneurs I met with.  I genuinely wanted to be helpful.  Then I quickly realized that there was literally nothing I could help with.  Hah.  Every founder just wanted investment dollars, and if I weren’t investing, I couldn’t even do introductions to other investors, because it would be a bad signal.

9) Nothing. They ghost you. (@ameetshah)


10) Contact us if you like but we prefer warm introductions. (@cwlucas)

I find this ironic — VCs prefer warm introductions, and YET, there are a lot of VC analysts who send outbound emails to startups completely cold asking to chat!

My recommendation here is to try to get a warm referral to a VC.  Just in general, it’s always better to have a common connection to build rapport with.  That being said, a lot of the newer VCs (esp microVCs) are ok with cold emails.  (For reference, 20% of our deals come in completely cold, and we see no difference in performance between the cohort of companies that came in cold vs warm)

My prediction in the next 5 years is that the VC world will move to largely accepting *good* cold emails.  Most cold emails are terrible and will likely be ignored, but you do have a shot if you can send a strong cold email.

11) (Live product, thousands of users) “Yes but what *traction* do you have?” 

(Gets in to YC) “Your valuation is so HIGH now!” (@kristentyrrell)

This is the typical Goldilocks and the 3 Bears problem.  At first, you’re “too early” — you don’t have enough traction.  And then, once you get there or another investor participates in your round and drives the valuation up, then you become “too late” — the valuation is too high.

As frustrating as this is, this is just a matter of luck / timing and fit.  As pre-seed investors, I am susceptible to this as well in some sense.  We invest really early (from a valuation perspective), so, by definition, we are not looking for traction.  This means that we make our decisions entirely based on gut instinct of the opportunity.  So, if we don’t have conviction in the business idea, we will pass. And once a founder proves with traction that we were wrong, we still won’t be able to invest, because the valuation will be too high.  That’s frustrating but I’d say frustrating for VCs who miss out too — as you may have seen from the Uber IPO, lots of VCs lost out on a lot of money, because they didn’t have conviction in the idea.

There’s a lot of gut instinct in this business, and to be honest, to be great at it, you only need to be right about 20-30% of the time.  It’s like baseball – you strike out most of the time.  If you were to work at any other job — imagine if you were say a surgeon — if you were right only 20-30% of the time, you would be fired and everyone would be dead.

Now, this doesn’t apply to multi-stage investors. If they miss out on your seed round, you can still re-approach them at the series A or the series B.

12) Why hasn’t this been done before? (@jacobshiach)

This is a seemingly ridiculous question, and it may also seem that a lazy VC may not want to do his/her own homework.  But, this question is meant to test how you think through trends and changes in your ecosystem.  If you believe that markets are efficient, your opportunity should not exist.  Why?  Because if it’s an obvious opportunity, it means that everyone would have done it already.

So what is your key insight or secret that enables you to know about this opportunity that others do not.  Is it your domain knowledge?  Is it that the opportunity is in between two sectors that most people are not familiar with?  Is it a behavioral trend that is happening to a certain demographic that you are a part of but most entrepreneurs are not?  Whatever it is, every startup needs to have a good answer for this.  Heck, even funds get asked this question — why aren’t other funds doing your strategy?  And I’d say, as annoying as it is, it’s a legit question.

13) How can this be a billion dollar company? (@rkorny)

You might wonder why VCs are so obsessed with billion dollar businesses.  This is because the economics of running a fund are so tough.  Basically, you have a bunch of portfolio companies that will completely fail.  So whatever 1-2 winners you have, will need to make up for that failure plus much more to return multiples for the fund.  (Read more here:

This means that VCs are looking for 100x+ multiple at a minimum on a successful company, and if they are coming into your round at the seed stage — say at $10m post money valuation, 100x on that is roughly a $1b exit not accounting for dilution.  So this comes back to the question from above — do you want to be raising money from VCs?  Is this the type of business you want to be running?

14) What’s the moat? (for a seed stage company) (@chloealpert)

This is super annoying for a seed stage company, because obviously there is no moat.

Thinking longer term, however, simplistically, there’s only one way to have a moat — and that is, your customers love you so much, they will never want to leave you and keep coming back.  There could be a lot of ways to build this — e.g. you have a better user experience / product, you have more data to make your solution better / more accurate, you have greater network effects and therefore have a better product, etc.  Depending on your idea, the way that you achieve this outcome will differ a lot.

VCs want to understand at scale, how you will achieve this.  This is especially key for companies that have commodity products — such as finance.  You don’t want to be competing on price or better deals, etc.  How will you build that better / smarter product?  How will you build that retention in business model?  VCs want to understand how you think about this 5 years from now more than what things look like today.

15) We’re going to pass but will be cheering for you from the sidelines. (@comaddox)

This is just a ridiculous phrase and pet peeve of mine.  What is this?  Bring It On?