Fundraising is one of Silicon Valley's best-kept secrets. It's notoriously difficult to raise venture capital, and even more challenging if you don't have contacts in the ecosystem who've successfully raised before that you can tap for advice.
When I fundraised for the first time, I chatted with more than a hundred extremely kind founders who answered my cold messages, offering me helpful advice. Below I share some of the advice I found helpful and mistakes I made during my fundraising journey:
Beware Of Scouts And Conflicts Of Interest
When fundraising for the first time, I met a seemingly nice successful founder with a really impressive background. He previously sold his startup for a lot of money, had a Harvard MBA, formerly worked at Google, etc. The man reached out to me and said he was a huge fan of what I was building, and wanted to meet for coffee. We met, and he asked me a lot of questions about my startup, my pitch, and the dream investors I wanted to work with.
As I started fundraising, I learned that this former founder reached out to some of the dream investors I mentioned to him and pitched my startup without my permission. These investors said they weren't interested and passed on the deal. I never got the opportunity to chat with them myself.
This former founder was trying to curry favor with these investors by surfacing what he thought was a great deal to them, but he never asked me for permission and all of those investors he reached out to passed--closing those doors for me. No one can pitch your startup as well as you can, and make sure you avoid folks like this former founder who may try to go out and pitch on your behalf to ingratiate themselves with investors in hopes of scout or job positions at venture firms.
Accepting Introductions From Non-committed Investors
Never take introductions from investors that have not "committed" to your round. Some folks in the industry define "committed" as getting a handshake deal from an investor where they verbally agree to invest. I define an investor being "committed" as an investor that has signed the necessary paperwork and has wired funds to your company bank account.
In the past, I've had multiple handshake deals with investors where they verbally commit to investing, and then they don't follow through with signing the paperwork and wiring the investment. I've also had investors sign the paperwork and never wire the money. Some of those folks made introductions for me to other investors, and all of those introductions never panned out, likely because these investors found out that the investor that introduced me backed out.
If an investor introduces you to another, and they back out, that is an extremely bad signal. Both of those investors are likely to discuss why the investor backed out after committing verbally to invest. As a founder, you also don't want to ask investors who haven't committed at all to make an introduction for you to another investor. The same conversation will occur where the investor you were introduced to asks the other why they haven't invested, and that's a bad signal.
To avoid awkward and bad situations like those described above, you should only accept introduction offers, or ask for introductions, once an investor has fully committed to your round by signing and wiring.
Don't Skip Due Diligence On Investors
If your company is successful, you'll likely be working with early investors you bring onboard for more than a decade--much longer than the length of an average marriage in the United States. Bringing onboard a bad partner can potentially be devastating for your company down the road. Conducting due diligence on angels and venture firms that write large checks is critical.
I recommend using the angel or venture capitalist's website, Crunchbase, Pitchbook, and news sites like TechCrunch to find companies in their portfolio that the investor would define as a "failure." A "failed" founder is one whose company had an outcome that was not what their investor wanted--the company dissolved, sold for a small amount of money, or had a recent down round. Research companies in the investor's portfolio in the news, and find which meet any of those criteria and reach out to those founders.
When reaching out to those founders, keep the message short and ask if they have a quick five minutes of time to chat about their experience working with the investor you're considering working with, include your phone number, and say you can chat any time that's most convenient for them. When they call you, promise to keep the conversation completely confidential and brief, thank them profusely for taking the time, and offer to help them in any way. Ask them:
- What was your experience like working with the investor or firm?
- Did you raise money from them again for your next company, or would you fundraise from them again if you started another company? If they are willing to share, why or why not?
- When times were tough for your startup, what was this investor like?
- Would you recommend other founders work with them?