There is an old management saying, "measure twice, cut once" which refers to the benefit of doing some planning. It's the antithesis of "ready, fire, aim" which seems to be so prevalent in today's society. The benefits you will receive from doing even some basic planning before you hit the fundraising trail are enormous.
This post has some basic advice on how to plan your raise before you hit the road. Many points will seem obvious, but since I observe many fundraising processes as a VC I can tell you that most people get even the basics wrong.
1. Create a list.
It sounds obvious but the starting point for any fund-raising planning is to create a list of prospects. I know this is CRM 101 but I assure you most startups (and VCs) don't do this or don't do it well. Given the limited nature of how many people you'll approach (i.e., not that many) I actually just do these in Google Sheets. You can use this just internally for you and the people on your team helping you in the raise, or if you have existing investors or advisors you can open it up to share with them. I literally have a Google Sheet for nearly every portfolio company who is in the process of raising a round.
You will find what information you want to track, but a starting recommendation that the columns would be a version of:
- Investor (person)
- Who knows them?
- Typical check size
- Next Steps
2. Stack-rank opportunities.
Once you have your spreadsheet you really want to split the rows into a stack-ranked priority list. You can keep this simple as: A, B, C, and Passed. As you work deals they might move up or down in the priority list but when you start you should have no more than 8-10 "priority A's" (more is unrealistic) and no more than 8-10 "priority B's." This might get slightly longer the more you're in market, but really you should never really have more than 15-20 potential investors you're actively working on, or none will get the time/attention/focus they need. "C's" can be your "catch all" for others with whom you're speaking, and if you have a really long list I sometimes do "D's," which are long shots.
"A's" should be the people who would not only make a perfect investor for you, but also those that have the highest probability of your closing them. It is not your "wish list," so if you really want Sequoia (for example) as an investor but you know that you're not really likely a good fit for them, then they shouldn't be on your A list. Essentially, A is a combination of "most likely to close" and "most desired to close."
Let's say the C list is probably your "safety schools" -- not bad options but just not your first or second choice.
I'd probably also add a list for "follow-on checks" for the smaller funds that might be good with adding a small amount to your funding but only once you've found a lead. You may be able to include them, you may not--but best to have a few on your list.
3. Qualify, qualify, qualify.
The first thing you need to do when you sort your potential firms into "segments" (A, B, C, D, Follow-On) is to know who would be a good fit for you.
One first-pass qualification is "stage." If you're raising a seed round (say $1.5 million) and the firm you're talking to manages $1.2 billion -- it's probably not going to be a good fit. Conversely, if you're raising $20 million in a C round then you probably shouldn't be targeting an $80 million fund because they aren't likely a good fit.
The second-pass qualification is "industry focus." If you're a SaaS company and the firm is a "consumer" firm (or vice versa) then don't waste your time. If you're building an education startup and you don't see any logos of education companies on the firm's website you are likely targeting the wrong firm.
The third-pass is "geography." If you're talking with a firm that mostly only invests in the San Francisco Bay Area and you're in Minnesota, you're probably wasting your time for a seed or A round, unless you find somebody at that firm who is from Minneapolis and comes home 2-3 times a year already.
The next pass is the "competitive pass" -- "have they invested in somebody that is very similar to my business?" If they have, it's unlikely they'll make a second bet. If they've backed Lyft and you have a company that you believe can compete with Lyft, it's exceedingly unlikely they'll back you. If you sell glasses and they've investing in Warby Parker, you're wasting your time.
The final pass is "have they invested in any companies in my space before?" I wouldn't rule somebody out because I'm a computer vision startup and I don't see that on their website, but if they've done five computer vision companies I should prioritize them.
As an investor, I can tell you that when I meet an entrepreneur who knows very little about our fund or me as an individual, it's a huge turn-off. It's not about my ego; it's more that if an entrepreneur can't bother to spend a few minutes even reading our website then I know they aren't pursuing us as a firm with intent, and I know that when they do business more broadly they'll likely "wing it" on important things when five minutes' prep would at least have covered the basics.
4. Know the firm, but also know the partnership.
So by now you have 50 names on a spreadsheet with 8-10 A's, 8-10 B's, 10-20 C's and 10 D's. That is the firm qualification. Next up, you need to now find which partners in which firms have led deals that look like yours. There is no sense in meeting Jonny at Firm X who is the consumer guy just because you know him when Elizabeth is the one who funds AI deals. People make this mistake all the time.
You also need to know "who can get deals done?"
Investment professionals tend to fall into the following categories:
- Not an investment partner. Can be worth meeting but then you still need to get access to a decision maker. So you are meeting a gate keeper. At some firms this is necessary at others it isn't.
- Partner on the way out. This is a partner who is either so rich and successful that he/she doesn't do many deals anymore (let's say a "golfing partner") or it can be a partner who hasn't been successful and is being transitioned out.
- Super busy partner. This can be somebody on 15 boards or maybe the managing partner. They still can get deals done but they're probably more selective given time constraints. The good news is that they can clearly get deals done! The bad news is that they probably aren't dying to do too many more.
- New partner. The good news is that new partners are dying to do deals since they don't have board seats and are keen to get experience. The downside is you don't yet know if they have the political clout to get deals approved.
- Active partner. Every fund has partners who are on a few boards but not yet crazy busy and are more available than others. They likely joined the firm in the past 2-6 years, have learned the political ropes of how to get deals done but their "dance card isn't filled up yet." Or it could be a person who's been around 15 years but chose to have a slower pace more recently, so they aren't as busy as somebody on 15 boards.
So I know I'm asking you to know a hell of a lot about your potential investors, and you're thinking, "how the hell do I get all of this information?"
Well, the first pass is you just need to research. There are enough data sources that if you can't figure out the basics, then don't run a startup. But once you have a list, I'd walk a reduced version of it around to your startup entrepreneur friends, lawyers, friendly investors who aren't a fit for you, college buddies, etc. and ask for input. If you take 10-15 coffee meetings with friends who can comment, you'll learn a hell of a lot about who to approach. And throughout the process you should constantly be asking people: "Is that partner doing deals?" "Do you know if she invests in e-commerce businesses?" "Is he willing to fund companies in Boston?" etc.
All of this, of course, is Sales 101. In 2010 I didn't know a single thing about LPs (limited partners--the people who invest in VC funds). So I built a list, I walked it around, I asked other VCs for help commenting on my names, I asked who did deals like mine, and each time my friends gave me new names that weren't on my list. Over the years I've invested heavily in building real relationships with the people on my list and even though most have never invested in my firm each is a valuable relationship and can help me better understand the industry.
5. Research who the partner knows, for an introduction as well as for back-channeling.
So now you know the firms and the partners. You could easily guess their email addresses or ping them on Twitter -- don't. No matter how tempting it is.
If you read the "Lemons Ripen Early" post I did you'll know that a large part of what a VC or investor is evaluating in the earliest stages is you. Borrowing from that post:
Remember that fund raising is a sales process. The investor is a customer and they have money to spend but only for a limited number of companies. They are buying trust in you that you will build a large business that will be valuable. The first "Blink" evaluation they'll make is about YOU and only when they've subconsciously decided whether they find your smart, likable, credible, a good leader, inspirational, competitive and all of the other subconscious attributes they'll look for do they begin to truly think about whether your business idea has legs.
Whether you like it or not we all interpret the world through "filters" that help us determine value and quality. If you don't have an intuitive sense for this please read Cialdini's Influence or Kahneman's Thinking, Fast and Slow or watch Brain Games.
It's why when you hear that somebody went to Stanford, worked at Google, graduated summa cum laude, played professional tennis or whatever else determines a degree of achievement, competitiveness or success in your mind you start by "leaning in" when you meet that person. I am not saying you need to have gone to an Ivy League school to succeed -- I'm just pointing out that filters play a large role in people's perception of quality. Or how about -- you were a "YC company" -- that implies a level of "potential" that speaks for itself.
I say all this because the person who introduces you to a potential investor matters a lot. You need to spend a hell of a lot of time and effort figuring out your best intro. The highest quality is usually another entrepreneur but there are other sources of intros that can pay off.
When I started meeting LPs in 2010 I would walk my list around to my friends who were VCs and say, "I don't want you to introduce me to 10 names on this list. But are there two that you know well enough to make a high-quality introduction? If you don't feel comfortable -- don't worry! I can can get other intros. But if you'd feel comfortable advocating for me and there are one or two names in this list that you could help with I'd greatly appreciate it."
And so I got more than 100 intros, but it took huge time and effort. And it was worth its weight in gold. The people who introduced me, I'm guessing, knew that I would be hugely respectful and prepared when I turned up so that they wouldn't look bad. The "social proof" of a high-quality introduction is worth the time and effort. Back then I literally wouldn't travel for any meeting unless I got an introduction first.
I measured twice and cut once. I figured I was wasting my time unless the LP was leaning in on my first meeting.
6. Follow up. Be humble. Sit down.
The hardest thing is that after you've had a great first meeting with a VC (or LP) you expect it's all going to start happening! The meeting was great! I'm going to now get a whole bunch of data requests and activities!
Then people are disappointed that they don't hear back. Some people even get mad and say, "it's their damn job to follow up -- I can't believe how unprofessional they are!"
Well, that may be true. But it's a sad reality of the modern world that we're all crazy busy and despite the best will in the world often people don't get back--they get busy. If you're not able to find ways to keep a prospect engaged during your sales process, then you have no hope as an entrepreneur when you eventually need to run sales campaigns, sign business development deals, or one day sell your company in a large transaction. The key to all success in life is follow-through, and what separates out the truly successful people from the less successful people in funding is often follow-through and follow-up.
So while it might seem like it's unfair, the golden rule in sales is that when you're the seller you own follow-up. Always. So best to be humble. Not get mad. Understand the other person's shoes a bit. And find ways to drive the engagement yourself.