Figuring out exactly what early stage VC’s are looking for should be obvious right? Like every other investor they are looking for a good return on their investment. Only problem with startups is just that they don’t have the usual data needed to assess wether or not this is the case. Since there is a whole jungle of startups out there, only the ones communicating clearly why they are a good investment will end up getting funded.
“So how do investors evaluate whether or not you and your startup might be a good investment?”
They could undoubtedly be looking at many different things like: Complementary skills within the founder team. A certain business model. A certain amount of traction. A blue ocean market. An idea that seems more crazy than usual or simply that “X” factor. Instead of wondering let’s find out by asking the investors themselves.
In this blogpost I ask the questions and 6 top VC’s answer. The participants are:
Let’s start with the basics by figuring out if there are specific areas that investors are currently looking for. Are there trends, waves or in other way spaces that are hotter than the rest? Lets find out by asking:
1. What spaces or business models are you especially interested in and why?
Lasse starts the conversation: “We invest quite broad based on where we find strong entrepreneurs – however are currently seeing very interesting startups being building within SaaS, Marketplaces and Games.
SaaS is interesting as you are able to create great value while having a somewhat stable cash flow. If the companies build a strong product, have good sales execution and ensures low churn – then it is ‘easy’ to build a good revenue base. Exits are the biggest problem with SaaS companies as it is often only possible to exit through an IPO for the #1 player.
“Planday is an example of a SaaS company we have invested in that has done fantastic.”
Adrian adds: “I agree SaaS is an old hat now, but still great because recurring monthly revenues are awesome. Businesses requiring massive volumes of users (i.e. very low price points) turn me off given how fickle consumers are. Hitting that jackpot is so unlikely. So we tend to bias towards enterprise businesses or B2B2C.“
Simon continues: “We are also currently backing a lot of SaaS businesses, but focus on fintech and B2C digital businesses too. These are ecommerce, online marketplaces and consumer convenience. We like businesses that are helping large companies to cut through the complication in ad-tech and digital media.
David nods: “Anything Enterprise SaaS as I see so many fields where little change has happened over the last decades. Old software regimes retain primacy and smart people will change this.
Likewise, and often in conjunction, business models with strong network effects (i.e. demand-side economies of scale) and low / decreasing marginal costs. These are often SaaS platforms or mobile networks that allow for global, exponential and sustainable scalability. We also invest in fintech on all accounts, from private finance to new forms of intermediation.
Lasse gets back at it: “The other two spaces I mentioned earlier were Marketplaces and Games. Marketplaces tend to be the big venture bets. Opportunity to build very large and valuable companies – but at a high risk as it takes a lot of money to build local market places. Autobutler and Vivino are examples of market places we have invested in recently in Denmark which are both investing heavily to become #1.
“Games are somewhat the unicorn right now in VC investments.”
After large successful gaming companies have been built in the Nordics (King, Supercell, Rovio, etc.) everyone is looking for the next. Investing in Games however is like investing in pharma companies – high potential payoff but also high probability of a zero payoff (also a general description of venture investments).
Adrian adds: “To give you a general idea. We like to focus on unsexy businesses that don’t get a ton of attention (….enterprise) and thus don’t get bid up to ridiculous prices.”
Harry wraps it up: “I like entrepreneurs who are doing something in an area they’re passionate about – something that’s hard and that few other people are tackling. It isn’t about the latest “hot” space.”
2. Do you invest at a certain stage?
Simon starts out: “Yes – the space post seed but pre large growth capital (so Series A and pre-Series A). There is a lot of seed finance available in the UK, and a growing base of European growth capital providers adding to the established list of US funds, but the space in between – where a startup finds product-market fit and becomes ready to scale – remains under-served in the capital markets and we think there’s a lot of opportunity here.”
Harry, Lasse and Max agrees: “We do mainly Series A, but if it is interesting enough we also do the occasional seed or pre-Series A.”
David explains: “Earlybird covers Seed, Series A and Venture Growth stages, guaranteeing full financing for high-growth companies”
Adrian comments: “We are very reactive to our deal flow – we take each business as it comes and if we like it we pursue it, without putting it through any industry filters. Our principal filter is: are you generating revenues. They can be very early revenues (from as little as £5k/month), but we like to see that you have been able to sell something to someone sensible out there.
3. Since team is everything, what is the top three things that indicates a great team and how do you assess if a team has those skills?
Lasse starts out: “The first and most important thing we look for in entrepreneurs – are drive and energy. Within minutes after meeting someone you feel whether they have the ‘X-factor’ which is difficult to describe, but is really centered around drive and energy.
“Often the best entrepreneurs are also the ones that might seem a bit crazy – but not too much!”
Furthermore we look for teams that either has the right balance of skills within business, sales and tech or for entrepreneurs who we are confident can attract the right candidates. For early startups the right balance is most important, while for later the ability to recruit becomes more important.”
Max agrees: “Exactly, you need a team that shows the ability to attract, manage and retain great people.”
Adrian elaborates: “I believe you need a strong CEO who can hire great people and assessing this can be done simply by checking whether they have hired exceptional people around them. It needs to be someone who is a visionary and able to make important decisions well and fast. This can probably be assessed by interviewing subordinates.
Simon adds: It doesn’t need to be a filled-out team as long as they are open about their strengths and gaps and open to bringing in suitable talent to fill those gaps.
Adrian comments: “I completely agree that you need great people who have clear, non-overlapping roles and trust each other to do those roles without having to have a committee every time an important decision is made. It’s also VIP to invest in a “tight” CEO who isn’t going to over-spend because you almost always get close to running out of money.
Last but not least you need someone who has integrity, is honest and able to form relationships easily with his or her Board.
Simon adds: Yes, you need a team that has integrity and trustworthiness and that you feel would be a good long-term partner across both positive and negative situations.
Besides what’s already mentioned I also believe you need a team that has a good understanding of the key metrics that will drive the success of their business, and ability to articulate this clearly. Last but not least they need a healthy respect for the customer and the quality of the customer experience.”
Harry comments: “I look for people with a clear vision of where their industry is headed and the role they’ll play in it. People with a history of taking on really hard problems and delivering surprising results. People with infectious enthusiasm and energy. To assess this in a one-hour meeting is never easy and open to all sorts of biases – but for me the key question is, “would I give up the best years of my life to go and work for this team on this project?” – if the answer’s yes, that’s pretty telling”
David elaborates: “Lets have a look at the macro perspective or what I call intellectual scope.
Intellectual scope denotes the grander vision of the team and its ability to form a compelling narrative for a product that ultimately results in the creation of something remarkable, sustainable and big.
“Many teams, in spite of being bright and brilliant, lack this ability and focus on niches”
They often oversee or misinterpret the overall position of their product in a larger industrial evolution or are just executioners. The ideal team has a global and broad perception, and rightly positions the product within that. An intellectual ability to create a global and internationalizable product (and the accompanying vision) is key for me – local or regional solutions won’t cut it.”
Lasse continues: “So to assess whether or not a team has what it takes we look at experience and track record. However this is not as important as ‘X factor’ or the right skill combination. We would rather invest in very good DNA with limited experience, than more questionable DNA with a lot of startups experience.”
Adrian wraps it up: “All the things that have been mentioned are so easy to look for in theory but so much harder in practice. Entrepreneurs can come across as one thing in pitch meetings and pre-investment meetings and turn out to be something quite different once you really get into the business post-investment. It’s very hard to read people based on a small number of meetings over a few months, no matter how good you think your judgment of people is.
So, part of the answer is to meet a team early (i.e. before you would ordinarily invest) and if you really like them try to spend as much time as you can with them over the months that they are building up to a startup into which you can invest. Pretty impractical in our very very busy lives, but the best thing to do. However, there is a question to answer here.”
4. What did the best startups you have invested in have in common?
Lasse explains: “They were attacking a large market.
“The founders of Spotify did not have a working product when we invested”
- however, we saw two great entrepreneurs that were attacking a huge market dominated by incompetents – the music industry.”
Harry puts it simply: “They were great teams who executed unbelievably fast and kept learning and shooting for the stars.”
David continues: “A gigantic market to change as Lasse mentioned. The most successful of our startups has had a technical, driven and visionary team with a global perspective beyond the first level use case of their product.
Simon adds: Besides what have been mentioned then a strong Board with highly relevant experience around the table and a startup that has raised the right amount of capital at each round.
Max concludes: The best startups had passion, persistence and ambitions.
5. What is the number one thing during conversation/due diligence that might make you pull out of a deal?
Adrian starts: “Dishonesty and exaggeration are a showstopper. If you are stupid enough to be dishonest with an investor who is going to do a lot of due diligence into your business, then you are too stupid to be invested in. If you exaggerate to an investor who has a lot of experience doing due diligence in your industry then you’re (a) stupid and (b) unlikely to be honest in Board Meetings when things aren’t going well.”
Max comments: “Yes, a classic red flag is any indication of a lack of integrity or honesty, including misrepresentation, fraudulent or unethical behaviour.”
Lasse explains: “We always do background checks on founders to see if they are ‘clean’ – if not – that is a deal-breaker. Another one is founders that are not prepared to build a large company but would like to exit early.”
Harry agrees: Exactly – someone who says they just want to sell out in 3 years time for £20 million.
Simon adds: “If the key metrics of the business or the size of the market don’t stack up once you get behind the headlines. Or if it became clear that the founders were not people we wanted to work with, but fortunately thats a very rare case.
6. What type of startups that might end up getting funded elsewhere don’t you typically invest in and why?
Simon opens: “We typically don’t invest in pre-revenue businesses, even if we’re super impressed. It’s always tempting to stray outside your investment strategy when you’re excited about something, but there are lots of opportunities where we do invest (early stage and Series A) and only so many deals our team can do at once, so it’s important to stay focused. We do our best to stay in touch with good startups as they develop and hopefully we can work together at the right stage.”
Lasse continues: “Some funds can live with a smaller upside potential than we can – meaning that local hero’s winner might end up get funding from seed investors or angels as it could yield a return of 3-5x, but likely not +20x that we are looking for.
“We can invest in European winners as we did with Izettle, but they need to be able to claim a large enough market.”
David specifies: “Typical cases are e-commerce startups. We would not invest for reasons like: the lack of technical DNA, the difficulties of differentiation and defensibility, the diseconomies of scale in classic e commerce models or the relatively low capital efficiency. Others, however, do invest as they weigh factors like proven business models, risk aversion or the trend towards online retail much higher. “
Harry adds: “Every investor, hopefully, has a slightly different perspective of a company. We invest in the ones we’re really excited about and that we think can build really big industry-changing companies. We don’t invest in the ones we’re less excited about. That’s it, really.
Max wraps it up: “We don’t like serial entrepreneurs who raise massive institutional seed rounds pre product development.”
Hopefully this interview gave you a good overview of what investors are focusing on these days. To add to the conversation let me conclude with what I personally look for as a relatively inexperienced angel investor.
The first thing I look for is how committed the founders are to taking their idea all the way. Building a startup is a very bumpy ride and I have seen many teams put down the fight and go start the next thing or just go back to their normal jobs. To assess the team, I always ask early startups to reallocate and join an incubator. If they are willing to do this they have passed the first test.
2. Go getters
I believe execution is everything and you need take initiative and to get out there. So many teams iterate the product a thousand times instead of just putting stuff out there and try to hack their way into traction. Real hustlers can get customers on day one.
3. Industry experience
I prefer backing founders that have been in the industry for a couple of year and who have seen how ugly business can really be. They won’t be as naïve as founders fresh out of school who believe everything can be derived from theory.
Thats all there is to it. Now go get that big fat check!
Way too often entrepreneurs rank potential investors by only one factor; expected willingness to invest. A willingness to invest is essential but there are other factors to consider before taking someone’s money, and here are six:
1. Entrepreneurial experience. I believe the most important thing to look for in an investor is whether or not that person has been an entrepreneur themselves. It will make a huge difference in how you will communicate and move forward.
“Having been in the same shoes simply means that they understand your problems and challenges much better.”
This is especially true when things are not going as predicted. A former entrepreneur is used to the bumpy ride of being involved in a startup, but an investor who is an ex manager of a big corporation might expect it to be business as usual and start putting pressure on you straight away.
In my first two startups 1calendar and Iconfinder I tried this myself. Our investors SeedCapital and VF Ventures were mostly non-entrepreneurs who had barely tried to raise capital for a startup themselves or had any startup experience at all. They either came from investment banking, old tech companies, or had been mid-level managers in an unrelated industry. Best case was maybe a semi-successful entrepreneur who then turned investment manager due to lack of better alternatives.
They would treat your startup like a kindergarten. They would try to micromanage you, block a sale of your company, or spend hours discussing completely irrelevant topics and require more reporting.
“This are the type of guys that give investors a bad reputation.“
Investors that have been entrepreneurs themselves will in general come with better advice, have a better network, be more patient and have more focus on the important stuff. More importantly they won’t waste as much of your time, so check if the investor has had their own successful startup before anything else.
How to spot -> Simply check their LinkedIn and see what startups they have been part of and what the outcome was. If you are not sure if one of the companies they were part of were a startup, then assume that it wasn’t. If it’s not clear that they have raised a lot of money or exited a startup then assume that they haven’t.
2. Are passionate about startups. Many founders are under the wrong impression that all investors are super enthusiastic and eager to learn about your startup and be part of its mission to inevitable success. Frankly that’s quite far from the truth.
First and foremost they are investors because they are trying to make money and they might just treat your startup as another stock in their portfolio. Some investors don’t care about what you are building or who you are – they are mostly interested in finding out if you have an undervalued asset that they should acquire.
This type of undesirable behaviour can be seen through the typical corporate boss turned angel investor type. Personally I met an angel group in Los Angeles called Tech Sharks and I have to admit that the name was pretty apt for them.
“These guys were literally investor mobsters trying to rob you off your startup.”
Coincidentally, a friend overheard a conversation between two of the angels after I pitched to their group and the things they said were truly upsetting. It wasn’t about how they thought my business could become big, but rather how they could pressure me into selling a big piece of the company for a cheap price and how they would go about manipulating me into believing they had my best interests at heart.
Again, these are the type of guys that give investors a bad reputation. So make sure your investors are in the game because they enjoy working with startups and not just out of greed. The keyword here is passion.
How to spot -> Do they have a strong presence in the startup ecosystem, do they blog about startup trends and do they participate in startup events? These are some of the indicators you can look at even before meeting them.
3. Has a great reputation. The saying “You’re only as good as who you surround yourself with” really applies here. If you have investors with a great reputation you will be perceived as being a better startup and getting new investor on-board for the next round will be much easier. For a first time entrepreneur the reputational hierarchy within VC’s and angel investors can be really hard to spot, but trust me it’s there. AngelList have a little list here for anyone who is curious.
“Investors are a bunch of lemmings all looking at what the others, especially the top dogs, are doing.”
With top dogs I mean the most successful funds like Accel, Sequoia, Kleiner Perkins and the most successful angels like Kevin Rose, Ron Conway, Naval Ravikant etc. So having a top-notch investor can make a huge difference. Reputation can sometimes be overrated but generally better reputation comes for a reason – these guys know what they are doing which is surprisingly often not the case. They also know a lot more investors and hence can help you get through to the people you need to raise your round of funding.
If the investor you are looking to take money from doesn’t have a big name yet – maybe because he or she just started out – do your own thorough due diligence and make sure who you are dealing with. Talk to founders of startups that the person invested in and basically check everything you can to find about their background.
How to spot -> Do they have a lot of praises and followers on places like AngelList? Are they from a brand name VC or have worked for one? Are they super investors who have done a ton of investments? Are they speakers at conferences or does it seem like people flock around them at startup events?
4. Lets the entrepreneur run the business. It’s great to get advice and utilize the network of your investors, but that’s about as far as it goes when it comes to getting their help. In many cases investors will be relatively passive and only engage if you ask them to, but there are definitely examples of the opposite.
The worst-case scenario for an entrepreneur is having an investor who is trying to micromanage the startup. In some cases the investor will ask for a ton of nonsense reporting and board meetings every 4-6 weeks making you prepare extensive presentations and material.
In other cases the investor doesn’t have time himself and instead get someone else to step in and tell you what to do. In the case of VC’s they might force you have weekly meetings with their associates, who will then report back on what’s going on. They will be monitoring every step you take and try to tell you what to do as if they knew better.
In the worst cases, investors have kicked out the founders or ask them to step down so they can have someone else take his or her place. This new CEO is probably someone they already know and who they think has better management skills or who they can easier control. As they saying goes:
“Trust is good, control is better.”
The amount of influence an investor will try to inflict on a startup is fairly equivalent to either how good or how bad things are going. To put it in other words: The more average your startup is doing the less you should expect to hear from your investors. If you are doing worse than expected they will react out of fear and try to cut their financial losses. If you are doing better than expected they will react out of opportunity and try to optimize for a bigger gain.
This behaviour isn’t completely logical since the logical thing would be to apply resources where they have the biggest effect by following a simple input/output principle. This applies to any of the investors portfolio companies and not just the ones doing good or bad. From a founders perspective this is just a thing to keep in mind if you wonder why your investors suddenly start asking you for more reporting when things are going as planned.
How to spot -> One way is simply to look at the amount of investments the VC or angel you are dealing with have made. If they are doing a ton (like 500startups in SF or Passion Capital in the UK) they simply don’t have time to micromanage anything and will leave you to do your job in most cases. Otherwise, you will have to ask around and do your own due diligence, but it will be well worth the time spent.
5. Knows your specific industry. “We invest in startups that can disrupt industries and target companies in web and mobile technology, life science and cleantech”. If it says some like that on the webpage of the VC you are going to pitch you might just reconsider and spend your time on something else.
“Having a diverse portfolio is great for investors, but often a disadvantage for the entrepreneurs.”
Even though the VC’s have different partners for different investment areas they won’t be as targeted as a fund that just invest in one thing and where all the partners come from similar backgrounds and experience. Some would perhaps argue that you should chose an investor that has an even more narrow focus like financial technology, mobile, design, or whatever space your startup is in.
When it comes to angels this is even more significant. VC’s typically come with a background from startups, investment banking, consultancy or sometimes the general tech industry. Angels can come from literally anywhere as long as they have made enough cash to consider investing in startups.
A good angel could be the founder of a company you are looking to do business with or someone well known and respected in the industry you operate in. The angel should also be someone who understands the dynamics of the industry you are working in. A tech startups is not just a tech startup. Disrupting the banking sector takes a lot more time and cash than launching a daily deal website and there is huge differences between a b2c dating app and a b2b invoicing platform.
How to spot -> Whether an investor understands your space requires a lot more than just looking at their LinkedIn, so there is no easy way around it this time. You simply have to do your own due diligence and have a thorough talk with them. Ask them critical questions and see how well they actually understand what you are pitching. You will surely be surprised about how little they might know simply because technology changes so fast.
6. Doesn’t lead you on. Investors are a bit like stock traders trying to gather insider information about a company before investing. This means that they will try to lead you on and gather as much data about your startup before committing their money. They will say they are interested when really all they are doing is watching from the sidelines and waiting for someone else to pick it up before committing.
“They are just trying to buy themselves a free ticket to the party and not being straightforward about their intentions.“
This is especially true for inexperienced angels who are just out there trying to get a feel of the market and how stuff works. These type of guys should be completely avoided because all they will do is waste your time. Even some lower rank VC’s will keep asking you for meetings and more data without ever having other intentions than maybe invest in one of your competitors.
How to spot -> If you hear stuff like: “I will invest, but not lead”, “I think you guys are almost ready to raise”, “Who else is in the round?” or “If x person commits I’m also in” then you should know that the chances of them investing is probably less than 5%. Don’t waste your time with them unless they are serious and can give you a deadline for when they can invest or what’s missing before they can.
Pitching investors is an art form that takes almost endless practice to get really good at. Here is a list of 7 things that will help you improve your pitch and hopefully get that cheque:
1. Use storytelling. Have you ever tried pitching holiday plans to your friends? Instead of telling them straight away about your idea for a destination, you make all the research first so you have enough ammunition for a good story and hence make it easier for yourself to pitch as a great experience.
You check transportation, accommodation, things to see, places to visit, restaurants to try etc. By creating an appealing story on what the holiday will be like you make your friends imagine the adventure before it happens. Hopefully this will get them all excited about being part of the journey and they will end up going.
“You might not have realised it, but what you are doing here is a perfect example of storytelling.”
Pitching your startup to investors is very similar. It´s all about creating excitement. You don’t want to bore them with long lists of potential product features. Instead you want to create a feeling of where this adventure will be heading. Your ship is soon about to sail across the Atlantic and now is the time to pay for the ticket.
You want to have a consistent and believable story. These are questions that should be answered as part of the story:
Why is your startup going to disrupt the industry?
Why is this going to be the next big thing?
Why is your team so freaking awesome?
Why are you the right person to build this?
Why is the timing right?
Why is your approach unique?
Why is the investor going to make a ton of money?
When you are done explaining about your startup they should be as excited as if they were just about to board a space shuttle.
2. You are the startup. By now you have probably heard that the team is more important than the idea itself. If you are pitching for the first round of funding and you don’t have much traction yet, then your idea is actually just another datapoint that represents your skills or overall intelligence.
Like your university diploma or the outcome of your latest startup, your current idea for a startup tells the investor something about you, but not much more than that. While your diploma might reveal you are really hard working and your latest startup that you are reasonably good at executing, your current idea might signal to investors that you have industry knowledge in a specific field.
To make it simple: Just because your idea seems really smart it doesn’t mean your new business is going to succeed. It just makes it more likely you are actually as smart as you are trying to convey.
“Ideas quickly change, so pitch yourself instead.”
Why you are really smart, why do you know a lot about this space or why will you be able to overcome any obstacle on your road? That’s the stuff that will make investors think you are worth throwing their money at.
3. Reveal your soft spots. Telling an investor that you aren’t going to have any competition or that you have no real challenges moving forward is probably the worst thing you can do. If you don’t get any competition then your space is probably not worth being in and if you aren’t going to have many challenges, then this can’t be a very interesting problem to solve.
Instead do like Eminem did in the final scene of his movie 8mile. Take all the investors usual arguments and shoot them down before they have a chance to present them. Reveal all your competitors but explain why you are better, faster or simply way ahead. Mention the big challenges ahead, but explain how you intelligently and easily have solved the ones that have come up so far.
Make slides in your presentation deck that leads to questions that you want the investors to ask. When they do ask them make sure you have a good answer ready. That will make it seem like you have intuitive answers for their difficult questions.
4. Over promise and over deliver. All startups use BS and POMA when they pitch and I don’t think that’s ever going to change (If you don’t know or can’t guess what the letters stand for then please Google it). If you are pitching conservatively while everyone else is making their presentation super optimistic then you are probably going to seem unambitious in the eyes of the investors.
You want to pump your numbers, but at the same time you don’t want to lie about your traction. The solution to this is called “over promise and over deliver”. You might not have all the numbers yet even though you are pitching them as if you did, but you will make sure you will be able to get them if you get the investment.
“Pitch the ambition prematurely but have a plan for getting there quickly afterwards.”
5. Turn the tables. You are probably expecting that the investor is going to drill you for questions on why he or she should invest and why you are going to succeed. While this is likely to be the case, don’t let yourself into believing that this is going to be a one-way relationship. Like in any good partnership you want to have balance, so go ahead and drill your investor as well. Ask questions like:
Have you done other investments in this space?
Are you active in the startups you invest in?
What is the most successful startups in your portfolio?
If we raise another round would you be able to commit more funds?
Could you refer us to some of the startups that you have invested in?
Do you know other investors that would be interested in investing if you commit?
Making the investor the one who has to qualify to you just makes you seem more exclusive and like you wouldn’t take money from anybody.
6. ABC. The classic phrase “Always Be Closing” also applies to selling equity in your startup. Since investors favourite hobby is watching from the side lines and either wasting your time or waiting to the last moment to commit their money you got to treat them like any other sale. You got to create some sense of urgency which means having a deadline for them to invest or agreeing on what the next steps are before they are willing to commit.
Ask questions like: How long time did it take from first meeting until you invested in the last startup you invested in? Do you need any other information from us? Could you commit before the end of the month?
“If they are not responding then simply cut them loose by asking them if you can count on them.”
7. Start at the bottom. Pitching takes a lot of practice and the content of your deck is hopefully going to improve along with the input you get from pitching investors. Since you don’t want to burn your best leads you should start pitching the investors whose money you want the least.
That way your performance is as good as it gets when you go and pitch the big dogs and hopefully one of those will allow you to make them rich.
I have raised more than $8M for 3 different startups and I still find it hard figuring out when and if to raise money.
Are you building the right thing? Are you and your startup at the right stage? Is your team competent enough? Try this flowchart and find the answer.
If you are indeed ready to raise money then check out my blogpost “Finding investors – by hacking AngelList” for more advice and tips on how to do so.
How do you find investors? It’s probably the question that founders ask me the most and with a good reason too – investors can be really hard to find. The question that quickly follows is naturally how to successfully contact them once they have been pointed out.
I usually say that dealing with investors is a lot like dating – you have to build a relationship over several months before there is enough trust for the magic to happen. It is like looking for a potential girl or boyfriend – you can find them in many different places, but the likelihood of closing a deal greatly enhances when it’s somehow through your network.
“So how do you quickly find investors and get a network that can help you get through to them in an efficient way?”
Well, using a combination of my AngelList Hack and LinkedIn should take you most of the way. In this post I try to describe the process in some simple steps and with some guiding comments along the way. Getting successfully introduced to investors doesn’t have to be that hard, so here we go:
Step 1 is making sure that you are actually ready to fundraise. More often than not I see founders eagerly starting to fundraise without even knowing how much they are looking to raise or have a decent investor deck. I won’t go into depths with fundraising requirements here, instead this will be fully covered in another post.
Step 2 is realizing that quantity matters. The more investors you line up the better chances are that someone will like what you are doing and write you that check. You need to treat your fundraising like you treat your sales and create an effective sales funnel. Since nothing beats excel when it comes to creating a simple funnel, that’s exactly what the AngelList Hack will do for you – create a spreadsheet with investors from any given location.
You might ask yourself: “Why don’t I just use AngelList for that?” Because AngelList is a great directory for looking up investors, but doesn’t really do well as a hit list. On AngelList many investors have tagged themselves under more than one location, which makes it difficult to figure out where they are actually located. At this point I need to emphasize on the importance of being able to have a face-to-face meeting with investors, and thus the need to know their whereabouts.
Step 3 is getting your sales funnel. Go ahead and use the AngelList Hack to create a hit list for whatever city you are trying to raise money in – eg. “London”. Once you have chosen a city and connected with LinkedIn the excel sheet will be ready for download. For Los Angeles it looks like this:
You will see 3 different tabs in the spreadsheet:
- Investors in given “City” – means that the investor has the City as his location on Linkedin (hottest lead since you can take real face to face meetings).
- Investors not in given “City”- means that they have tagged themselves in that city on AngelList, but it is not their location on LinkedIn (may not live in your City, but is most likely active in it).
- Investors with unknown location – means that they have tagged themselves in that city on AngelList, but that they haven’t stated their LinkedIn details ao their location can’t be confirmed (They might still be living in that City, so try and find out).
Below is the information we have imported and rearranged from AngelList (besides email and note):
- Name - Name of investor
- Type – VC, Seedfund, Angel, etc. – some might be both
- Bio – Where they are working or what are they are doing
- Website – An easy way to see what company they are working for – if it is a link to LinkedIn then they are likely an angel and aren’t part of a firm.
- AngelList – the AngelList url if you need more info
- LinkedIn – The fastest way to find out how to get in touch
- Email (blank) – AngelList doesn’t provide this, but what we will try to get
- Note (blank) – Use this to make your own notes or what type of companies they invest in / what the next action is eg. “sent deck 12/05”.
Step 4 is organizing your spreadsheet. First of all the column width needs to be adjusted so you can get a better view of the information. If you need to share it then go ahead and upload it to Google Spreadsheet and start collaborating. If you need a great sales funnel tool then try Streak that works inside gmail.
Step 5 is prioritizing who to contact first. Unless you are trying to fundraise in a very small city (in which case I would suggest you try someplace bigger) the spreadsheet will likely contain a lot of investors, so prioritizing is needed. The investors have initially been ranked on their amount of followers on AngelList, but that’s only an indicator. Here is how you go about sorting who to go for first (in order of importance):
- Stage of investments
- Your connection to the investor
- Area of investments
- Amount of recent investments
- Type of investor
The stage of investments is the most important factor when sorting investors. A late stage VC will very rarely invest in you “powerpoint” startup. Conversely, a small angel (like myself) will rarely invest when your startup is at a valuation of more than $5M. Since this information is already provided in the spreadsheet you should quickly be able to narrow down the investors that are eligible to invest at the stage where your startup is at. Sometimes its not completely clear or they have stated both VC and Angel, so then you will have to jump to their AngelList profile or LinkedIn to double check.
Your connection to the investor is important, because that will help you get in contact with him or her. Is it a first hand, second hand or even more distant connection? A bit of research into their LinkedIn connections and portfolio companies is whats’s needed here. Check if you have any common connections on LinkedIn or if the investor has invested in other startups you know of – you might be able to find this information by checking their AngelList portfolio.
Find the best connection to the investor and ask that person for an introduction. When you have found a relevant investor then a good tip is to check the “People Also Viewed” section on his or her LinkedIn profile. You will likely find similar investors that could also qualify for investing in you startup.
Area of investments is important, especially because some investors have areas they simply don’t invest in and others could have an investment “thesis” that they stick to (1).
If it is an angel, then you can check his area of investment by doing a bit of research on his portfolio or check his blog to see if he states any areas of interest there. If it is a VC, then they typically state what startups they target on their website.
“Personally I prefer investors that only do investment in the area I’m in – web and mobile – cause that makes my chances much better.”
Especially if this is your first funding round you want to make sure that they are into whatever it is you are doing. Even details like what type of business model might make a difference to them, eg. if you are doing b2b or b2c.
Amount of recent investments is also important, because it gives you a good indication of how active they are as an investor. If their last investment was more than a year ago chances are that they are not investing in any new startups at the moment. If it is a VC then you can check when they raised their last fund. If they just raised, chances are they are hungry for new investments and want to get their portfolio started.
Type of investor means who they are as a person. Like with any other relationship you want to have a connection and the stronger that connections is, the better. We tend to like people we see ourselves in or as the saying goes “one should stick to one’s own class”. If the person likes you then chances are bigger that they will think you are cooler, smarter or more consistent than people they don’t get along with as well.
To give you a personal example: I’m an out of the box type of person who doesn’t ask for permission first. I like to focus on the big picture and I have a degree in economics. If I pitch a VC that was a super nerdy hardware guy back in the 90’s and who likes people that pays attention to details and who tend to micromanage everything, then chances are he will think I’m a crazy guy that will spend his investment recklessly. On the other hand, if he is a guy who made it big because he didn’t take no for an answer and believes that making deals and partnerships is more important than yet another product feature, then he might think I am one of the few that has what it takes.
“Connecting on a personal level with an investor is one of the most underestimated factors when raising money -or closing any kind of deal in general.”
Step 6 is getting through to the investor. If you researched your investors thoroughly when prioritising them, then you probably have already found someone that you would be able to get an intro to. Here are a few ways to get through to an investor and I’ll start with the easiest and go from there:
1) Look him up on LinkedIn -> check if you have any connection in common that would be able to do an intro -> shoot them an inmail or email and ask politely if they could introduce you and your startup. Draft what you would like them to write to the investor -> people are lazy, so that greatly increases the chances of them actually doing it.
2) Find a company that the investor has invested in through his portfolio on AngelList -> look the company up on linkedIn -> see if you are directly or indirectly connected to any of the people working there -> if yes, then ask the most senior for an introduction. This works even if you don’t know them that well, cause more often than not founders like to help other founders.
3) If you don’t have any shared connections on LinkedIn then you can try to get hold of a “super connector” and ask if they can help with an intro or know someone who can. A super connector could be another investor that you are in contact with, a founder that have raised several rounds of funding, a person that is running an incubator etc. This person might not be directly connected to the investor, but most likely know someone who is.
4) If you don’t know anyone who can get you through to the investor, then try and research the person a little further (check his blog, tweets etc.) and see if he is attending a conference, is going to give a speech somewhere or if there is some other event where you could run into him or her and have a chat.
5) When you run out of ideas on how to get through to an investor then the last resort is to send them a direct message on LinkedIn and explain why this makes so much sense for them to have a look at. It always helps to give them some sugar by saying you really want to utilize their huge knowledge in this space etc.
Step 7 is creating the biggest possible sales funnel of investors. The AngelList Hack is a good starting point, but you can do a lot more yourself. Ask other founders if they know someone. Go to all kinds of startup events and try to meet as many people as possible. Go to coworking spaces and try to socialize with people and get their contacts. Always remember to ask an investor for additional investors contacts that could be interested once you have a dialog going. Consider doing further research on LinkedIn, AngelList and on the web in general. For comments, ideas or input to the AngelList Hack please leave a comment.
If you really want to boost your chances of raising money for your startup then I’m hosting a one week course on exactly that. It’s called:
“How to Raise $1M Like A Pro”
The course is held in beautiful Bali and you can read everything about it on GetawayIgnites newly launched site.
#1 – Join a startup first, then start your own. If you have never done a startup go join one first – then learn as much as you can! Cut your teeth in the startup world by working with great entrepreneurs that you can learn from. Once you work your tail off and learn all you can and expand your network, then go start your own.
#2 – Remember, your first startup will likely fail. Like any other career, you don’t start at the top. You might start at the top of your startup, but your startup itself will start in the bottom. At the bottom of the whole pool of startups that are out there. Others startups may have greater teams, more traction and much more funding. If the goal of your first startup is to become super rich or famous, you will likely fail. Set realistic expectations.
#3 – Start now. Do your first startup as early as possible and treat it like any other job. Get in the game as soon as possible. If you don’t like it and it’s not paying well then maybe you should quit and do another startup.
#4 – Go to where the action is. If you fundraise in a small pond with a few investors swimming around then chances are none of them are going to invest. Achieve much more by moving to the nearest startup hub (in Europe its pretty much London or Berlin) and do your fundraising there – that’s where the money is. If you don’t wanna move then just incorporate there and send the person who is fundraising there for the duration. You still have a “local” presence.
#5 – Make it fun. I realized early how much fundraising mattered and have always tried to make it as fun a process as possible. If you know that investors (like any person out there) can be real pricks then don’t be surprised when you meet one – just laugh and say “what a ****” and move on to the next. Fundraising is like any other sales – most people will say no, some will be rude, but the pay is good. Keep a good attitude and make the entire experience as fun as possible.
#6 – Know what motivates investors. Many entrepreneurs mistakenly think that investors are like minded folks with the same objectives as you who just happen to have a lot more 0’s on their cash balance. Investors couldn’t care less about your product features or why your idea is awesome. They care about return on investment rather than actually helping you achieve success. So play their game and show them you will make money for them, that’s what they want. Once you are done dealing with them go back to whatever you like doing about your startup.
#7 – Never give up. It’s a bit of a cliche, but the only reason I’m a better or more successful entrepreneur today than I was eight years ago is because of experience and persistence. Had I quit building startups and gotten a corporate job then most of that experience would have been completely useless. Because I kept going I could learn from my mistakes get a much better outset when starting my next venture.
I have raised capital 8 times for three different startups in three very different environments. The three companies all had very different business models and all were at different stages in the startup lifecycle. In addition the types of investors for each could not have been more different. During each fundraise I naturally brought to each situation different levels of personal experience. The sizes of the investment rounds ranged from less than $100K to more than $5M – the amount I’m currently fundraising for.
The very first time I successfully fundraised I got lucky and really didn’t have to do much myself (1). Back then I was working for a company that did exam courses for university students struggling to pass their subjects.
“My boss called me in for a meeting and simply offered me about $90K if I had an idea for a business.”
I got the money on some homemade terms, written on what could have been a piece of toilet paper. With his money we build the first version of what was to become a frontend for the ugly and confusing schedules you would get at university. We thought, that with the initial investment we got, we could easily reach profitability while expanding across the globe. It turned out that this was very far from the truth.
I was 22 at the time and didn’t know much about startups or building a company. So I guess maybe he offered me the money because I had built a working prototype for very little money that had already gotten some traction (2). Maybe because he thought that a 22 year old could actually have success in building his first company if he was eager enough. Or maybe he was afraid I was going to start a competing business that if he didn’t get my mind set on something else. Often people move more out of fear than opportunity and this is also true for investors (3). Besides the fear of losing money, an investors biggest fear is losing out on the next big thing. This was how the story of my first startup which became 1calendar.com began.
The second time was two years after we started 1calendar and from the Danish seed fund with the very original name “Seed Capital”. We had already burned through the initial cash from my boss and were running bootstrapped from a little advertising money. It took us about ten months to complete the seed round and looking back we did a bad deal. Our investors took control, they had options to buy more shares, and treated us as if we were kids who just started in kindergarten. It was a $350K for 20% equity and with an option to buy additional 20% for another $600K and a 25 or so page investment agreement with all kinds of investor rights that would ensure them control.
The third time was just a little over one year after we did the seed round for 1calendar. Usually a funding round should give you cash for about 18 month, but we had gone through the cash faster than expected for a number of reasons, but mainly because our investor pressured us to hit the gas pedal hard, increasing our burn rate.
Like many startups our business model was continually evolving. We had changed our model substantially and sales came in slower than expected. We hadn’t reached our milestones and were forced to do a down round (2). We had a new business angel with a company in the scheduling industry who participated and once again our shares were diluted heavily. When this deal became a reality I quickly realised that we probably weren’t going to make it really big anyway and started looking for other opportunities.
After resigning a few months passed before the company was out of money and only exit was to be bought out by the business angel. This for only a little money taking into accounts the time and effort we had put into building 1calendar from scratch. Live and learn.
The fourth time I raised funding was ten months after co-founding my second startup. Just after quitting 1calendar I made a deal with the founder of Iconfinder to join and help raise capital (4).
“My objective was to take what was then a “hobby project” to the next level.”
At this point I had learned that the only way to get a better deal was to create more demand from investors. Shares in a startup work a lot like shares on the open stock market – the main thing that drives the share price up and down is supply and demand. So we had to look for investors who had too little supply and at the same time create more demand for the type of startup we were building (5).
So to create more demand and do a bit of signalling (6) we participated in a Danish startup competition and I went to San Francisco to raise awareness and to get access to more investors. In the meantime I was keeping the potential Danish investors in the loop and simply tried to reach out to as many as possible.
As it turned out, most of the top tier VC’s in Silicon Valley didn’t think this was even close to something they would invest in. What I came to realise was that all these big VC’s had already made a lot of money and were not just looking to make more money, but rather looking for status in their community of VC’s. The kind of status they would get from being investor in the risky “next big thing” and not from making a “little” money from investing in Iconfinder. These guys are all about going big or going home, and we weren’t big enough.
While in Silicon Valley I also came to realise another sad truth. Investors are more concerned about whether other investors are interested than how your company is actually doing. Investors can be lazy and hate wasting time, so if someone else is interested then maybe they did the due diligence and they won’t have to. In other words, that first investor is really hard to get on boarded cause they have to actually believe in what you are trying to achieve.
So after being thrown out of a board room halfway through a presentation and after getting a few maybe’s and a ton of no’s, we ended up raising from a Danish fund called “Vækstfonden” or “VF Venture” in English.
“They came with the best offer: About $1.8M for the usual equity of 20-30%.”
Why did they come with such a generous offer compared to the guys in SV? Probably because they were a public fund that were using public money and that could double an investment with EU money. Probably because they had no other good deals on their hands and then had to invest in the one they could get (in other words, in a lack of supply). Probably because my old friend from high school was working there as an analyst and probably because the signalling and buzz we had tried to create worked to some extend. Probably because they weren’t anywhere up in the global investor hierarchy or was anything close to a brand name VC (7).
The fifth time I raised money was from the startup accelerator 500startups (8) since they had agreed to co-invest if we could find a VC that would lead the round (9). I had been speaking to 500startups before we closed the round with VF and used their offer to finally get VF to come with a term sheet. “500startups” is among the top three accelerators in the US and even though we didn’t get much traction or investment out of participating in their program, they were essential in signalling to investors that we had interest. That’s also why I always encourage first time entrepreneurs to join one of these programs and use their leverage as much as possible.
The sixth time I raised capital was less than 1 month after closing the deal with VF ventures and 500startups. This was for my third startup Birdback and you might be asking yourself: how its possible to get another startup funded this quickly?
Well, while fundraising for Iconfinder in SV I met a lot of entrepreneurs. Mostly for that simple reason that the easiest way to get introduced to investors was through founders of other startups that they had invested in.
One of these founders was Jon Carter who had started the company Mogl and had raised a ton of capital early on (10). He had a reasonable big exit to his name, so obviously you couldn’t use his funding success as an estimate for how his new venture would do, but nevertheless his concept seemed very scalable.
So from a combination of knowing the success rate of startups (11) and my frustrations with fundraising for Iconfinder in SV I choose to start my next company – Birdback. So after gathering a team, doing a couple of month of researching, getting accepted to Techstars (12), reallocating to London and building a prototype, we got a term sheet on the table from Passion Capital (13) as the first company of the Techstars London batch.
“This time there was no fooling around or investors sitting on their hands. We closed the deal shortly after with two additional angles participating.”
The seventh time I raised capital was 12 month after raising the round from Passion Capital. We had done a small pivot (14) since we started and had taken up a substantially bigger challenge. Bigger challenges requires additional funds, so we raised a round of $1.9M to build out our new proposition. The new investor who was an angel from the industry we were doing business in came in on our existing term sheet, but of course at a much higher price. The key here was to find someone who understood our space and hence would be able to appreciate what we were trying to do. Everyone could see the upside of what we were doing, but few could assess the risks associated. Since less risk equals better price, that’s what we ended up getting – a high valuation.
The eighth time will be the round I’m currently looking to raise. It’s an A round for Birdback, which will help us scale the business throughout Europe. To give a sense of the scale that startups work in, the amount of funding in this round is going to be bigger than all my previous rounds combined.
A quick sum up of my learnings and some fundraising pointers can be found in the post “7 tips for first time entrepreneurs”. This is the beginning of my blog and I hope my experiences with fundraising will enable you to avoid some of the mistakes I and many other first time entrepreneurs do when dealing with investors.
Footnotes are explained here.
Entrepreneurs face myriad challenges, from formulating a winning business model to getting the right talent on board. However, while building startups I came to realize that of all the challenges faced by technopreneurs fundraising can be the most daunting. Why? Because fundraising has a life of it’s own. Identifying and soliciting investors or other sources of capital is no easy task. Its totaly unrelated to most startup activities and for most creative entrepreneurs, not their forteit!
“I know what it’s like to work 16 hours a day for weeks on end, sleep at the office and eat Ramen noodles in order to make a dream reality.”
That’s why I created this blog: to help other entrepreneurs achieve their fundraising goals, hopefully with less stress and greater outcomes. I want to teach others what I have learned over the last few years raising over 5 MM USD. Countless books have been written on how to raise money for a startup. However most of the literature was written by out of touch Silicon Valley VC’s who don’t know what its like to be an entrepreneur today, or they did their last fundraising in the early 90’s. Also, most blogs focus solely on the USA startup scene, and not Europe. These authors often forget that not everyone raises money in Silicon Valley after dropping out of CS at Stanford.
I hope my experiences with fundraising will enable you to avoid some of the mistakes I and many other first time entrepreneurs do when dealing with investors. This is my first blogpost, but there are definitely many more to come!