Want to build a startup & raise some money? Part II

Hello again everyone!

This is the second part of my startup 'series'. Check out the first one here. I've also done somewhat of an Q&A/introductory post here on interning at a VC firm.

In this post, I'll be describing the process for raising money for a startup from a VC firm. I'll try to walk you through prepping your pitch/executive summary, preparing to meet with VCs, and anything else I can really think of from here. Please chime in with your own experiences and/or questions in the comments below.

As I outlined in my previous post, in terms of the funding scenario, you'll usually go as follows:

  • Self-funded
  • Family and Friends
  • Incubator/Accelerator
  • Seed Stage institution
  • Series A/B/C/D/E/F etc-
  • More series rounds or debt or IPO or sell.

These rounds are all very different and each institution is looking for something different, so it really depends on the stage that your business is at as to which round makes the most sense for you & for your investors. Almost all institutions would like to see that you've invested more than just time in your project. You should've put some form of your own capital in it, and it's a pretty big red flag if no personal money has been invested in your own business - it certainly raises questions on our end of the deal.

How early can you raise?
I got an interesting PM recently that asked about when should you raise funding & if it's possible to raise funding pre-launch/pre-development. It's definitely possible to raise funding pre-launch. I work at a seed stage firm and we invest pre-launch (we don't prefer one way or the other - a nice sweet spot is a good beta roll out with nice traction). Incubators & accelerators will also accept people pre-launch (some even have their launch on demo day/something like TechCrunch Disrupt etc-).

However, you will generally need some sort of product to show before you'll get funding. As in, it should be developed to the best of your ability and generally further along than just a wireframe. Ideas on a piece of paper don't cut it - that's too early (in my experience & opinion) for institutional funding to come into play. If you're at the idea stage, head to a hackathon and see if you can put a prototype together in a weekend - this happens a lot and often you'll meet great other cofounders or be able to test demand for the product (and they're lots of fun!).

Background on Raising
Once you've gotten to the stage where you have a product (or at least part of a product, basic functionality is there & you have goals to increase the user base as well as add more functionality), you can start preparing to pitch!

Preparation is key. Everyone wants to be funded. My firm alone gets ~2k decks a year. That's 6 decks a day for 4-5 people to review. We can't (and don't) look at all of them. All of the errors you'll read about in the IBD forum here? Yeah, you can be dinged for those as well. If you don't know our name/what firm we're at/or if you CC/BCC us on emails with other VC firms, we notice. Make sure you get the basics down! I'm not asking for perfection, but if you're sending us a deck - it helps to know who we are and the types of companies we invest in.

Now, the path to actually getting your deck in front of someone varies depending on what you choose to do. Incubators/Accelerators aren't always mutually exclusive with seed funding, but they are some of the time (depending on the program). As a seed fund, we'd prefer to be in first and help promote and build up the company with you, so if you come out of Y Combinator all hyped and all over TechCrunch, it'll usually be too expensive/built up for us to invest in (not always true, but often it's too late). I work at a very early fund, so a later seed fund would still invest (or a larger fund that does Seed into various later stage rounds).

Incubators/Accelerators
[In full disclosure, I haven't gone through and don't know everything about this process, but I know some basics!]
If you go the accelerator/incubator route, you can generally be just at your basic product/wireframe type of area, it just has to be good! The barriers to entry for these systems is generally pretty low and referrals aren't as important as it's a fairly common application. However, they always help - so if you can get your product in front of someone's eyes who can help you, you'll generally be more likely to get in!

When you're deciding on an incubator/accelerator, be sure to look at graduates and where they've gone on to. Whether it's the VCs they've then raised funding for or companies they've ended up working with, they will give you an idea of the networking opportunities that the program can offer you. The types of programs all vary (some are cash based, some move you places, some take you on trips etc- etc-) so make sure that you're comfortable with the outline of the program before you commit (you don't want to be the founder that quit XYZ accelerator).

VC Funds
VC funds are generally a whole different kettle of fish. The single biggest chance you'll have of getting funded by a VC firm is a referral. Referrals mean everything. Where I work, referrals have accounted for almost 70% of who we've ended up funding. The odds are really stacked against you if you don't go out and network and meet the community and get introduced to you. Just like banking, it's much easier (not easy, but easier) if you know people and if people will vouch for your product & who you are.

Which leads me to my second point, when you're raising funds early on, you may not have a stellar product finished or anything like that (as I said above). The most important thing that we look for is the team. Even if it's just you and a cofounder. Or just you and someone else working temporarily. The team is the most important part. If the product fails, a great team can still succeed and pivot or find alternatives or do something else. A team that doesn't mesh together may not end up anywhere at all. Drama within startups is real - it happens more often than most people think, so it's really important that the people we are investing in have a level head and are passionate, hardworking entrepreneurs.

It's also important that the VC is a good fit for you. Most often, this person will be taking a board seat. It's really important that you get along, but also that the firm offers more than just money. A check doesn't cut it anymore - they should be willing to help you with whatever possible, whether it's intros to potential clients or partners, PR/media help, or just other services like recruiting or design. It's a two way relationship and whoever you partner with should also be working for and with you!

So, you've found a firm you want to work with and gotten an email or referral for them? Awesome. Let's start planning.

Executive Summary & Pitch Deck & Some Tips

  • Nearly 100% of the time, if a VC hears of you or if you're being referred to a VC via email, they will ask for your ONE page executive summary or your pitch deck. It is important that these are as perfect as you can get them. Go into full IBD banker mode, make sure formatting is fine & no spelling mistakes & everything else. A nice touch in decks (at least, I find it to be!) is to include the name of the firm who is reviewing your deck. It shows that you are really interested and not just spamming 150 emails with the same thing.
  • In both of these, clearly state what it is you're looking for. Whether it's how much you're raising or what networking a VC team can give you. Don't beat around the bush - it serves little purpose and even if you say what you want in the original deck doesn't mean you can't negotiate later on.
  • Be as concise as possible. I want to know what your product does within a sentence or two. Not 2 paragraphs of buzzwords about your 'machine learning paradigm shifting big data into the cloud via increased efficient optimization of parallel processing'. Get to the point!
  • Tease me! I should leave wanting to know more about it. Tease me with some numbers if you have them. I want to see increased traction and know why it's happened. Discuss your successes and be open about any failures - humility is a good thing at the early level!
  • Ideally, your deck should be as good looking as possible. Obviously, not everyone is a designer, but there are plenty of resources out there about pitch decks and how to form them. Plenty of tools are around to make them prettier as well (Keynote > Powerpoint, in my opinion). Also, preferably a PDF - this is more my personal opinion, but it makes it easier to open in different locations and the less chance for error the better.
  • Check for errors! Multiple times. Print it out and check. It's not an auto-ding, but it can be annoying [obviously more understandable if you work in a cross-country area than if you're in the States].
  • Bonus points for using on of the VC's portfolio company's products! Whether it's for the presentation or in some other scenario, be sure to check and see if you can incorporate it - it's all extra bonus points and you never know, it could make a difference.
  • Be resourceful and persistent, but don't be naggy or annoying. Understand that it could take a while for a VC to get back to you. It could take weeks. It's important to remind the VC (just shoot an email asking if they've had a chance to take a look), but not spam them with email asking if they can meet. Also. Please do not just show up to an office unannounced and try and force your way in (this has happened), it's not pleasant for anyone involved. It's a balance between you courting them and then them courting you. Like awkward middle school dating.
  • Be as flexible as possible. Rescheduling happens - particularly with the amount of meetings that partners take. It's not a slight against you or your company, so sometimes you'll just have to grit your teeth and take it! If it happens a lot, then maybe you're not a fit in terms of personality, so you've actually dodged something!

Preparing For The First Meeting
So, you got a meeting with a VC? Awesome! Congratulations. If you've gotten this far, then the onus will now be squarely on the founders. It's an interview now. Again, back to the IBD work ethic of not quitting and preparing hard in the paint for this meeting. Research. Research. Research some more. You should know everything about your market. About the VC firm. About your product. About your weaknesses. About your strengths. Everything related to the meeting!

This is also a chance to perfect your deck. Add in any new information; updated metrics; prettier images; anything really that you can add to improve it. Be sure to have updated financials and make sure that your models are based off of something! Also. Be sure to be able to answer what the size of the market is, and try and come up with various valuations for that. It's always helpful when you can say that you had a few different ways that you calculated it and that you have throughout of multiples areas that your business can grow to!

Be sure to come up with a list of questions you have for the partners, whether it's on past investments or on their investment style or just their backgrounds! Similarly to a job interview, you should have questions for them. Show interest in their firm. List off some investments that they've done that made you curious about them and ask about the investments if you have time to.

This preparation is extremely important and can make or break the pitch. Practice, practice, practice! It's all you can do and you don't want to be kicking yourself after the meeting because you couldn't talk about a competitor in the sector.

To Be Continued...
I had actually intended for this to be a two part thing, but evidently I use lots of words, so it'll be a three parter! The next part will be on the actual meeting and what to do post meeting (whether it's an offer or rejection!).

As always, PM or comment with additional questions you want me to address. Also. Anyone else who has some advice or disagrees with some of what I wrote, please comment to help others as well!

 

Great write-up appreciate all the information. Wondering what your thoughts are on the rise in crowd funded angel investing e.g. AngelList? It seems like they will be displacing some of the smaller VC funds, especially once non-accredited investors can participate.

The error of confirmation: we confirm our knowledge and scorn our ignorance.
 

Great information and very useful, keep up the good work.

You're walking around blind without a cane, pal. A fool and his money are lucky enough to get together in the first place. Gordon Gekko
 
Best Response
petaLTV:

Good information - thanks! I too would be curious to hear your thoughts on Equity Crowdfunding?

I think Crowd Funding is pretty great, to be honest. If anything - from a VC point of view, it takes a bit of risk off the table (since the market validates the idea/other investors do as well), but still leaves plenty of upside. I don't think it replaces the VC world in any shape - they're complimentary not contradictory, in my opinion. VCs are there for more than just money ,but relationships and business cultivation. Crowdfunding is there as a means the cheaper capital or to validate a product/business (thinking of Kickstarter here).

Overall, I think it's a win-win for the business and the VC community. It'll be interesting to see what the SEC ends up doing vis-a-vis the true crowd funding from non-accredited investors. That's when it'll be pretty interesting to see how much it takes off & what the effect is both on the person making the investments & on the startup's side. Though - I'd imagine the SEC will implement some fairly stringent regulation, which could make it inefficient for startups to use (as it could be ripe for fraud if the SEC just allows any 'startup' to take an average joe's money.)

 

Et libero modi aut qui dicta corrupti aut. Accusantium dignissimos animi eos porro. Sed ut qui officia sequi quis. Quia voluptas itaque reiciendis velit perspiciatis quis et velit. Repudiandae molestiae ratione commodi error.

Voluptates maxime accusantium id. Nobis sit aut minus veritatis ipsa dignissimos alias repellat.

Iusto assumenda et sunt dolores voluptatem. Exercitationem ab numquam et magnam quia eaque mollitia.

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (199) $159
  • Intern/Summer Analyst (144) $101

Leaderboard