The right mindset for raising venture money
Updated: May 26, 2021
One of the most-read posts in 2020 on this blog was '5 Pitch Mistakes. How to Fix Them'. Today we talk about the second step when talking to investors: 'How to get into the right mindset for investor meetings...'
The accelerated digital adoption in 2020 not only drove tech IPOs to all-time highs, but also the volume of new early-stage startups. Entrepreneurs all over Europe did not lean back, but seized the opportunity to get out there and launch their own businesses.
If Covid taught the world anything, it is that the Total Addressable Market (TAM) of tech companies has just gotten bigger. The world as a whole just got hit by a massive digitization wave. As a result, Internet companies have not only expanded their global customer reach, but their internal processes are also being digitized. For example, most startups now hire from a global talent pool. Venture funding, on the other hand, also became truly global, with an increasing number of venture firms broadening their geographical footprint.
Is it easier now to raise early-stage capital?
The answer is 'No'. Yes, more and more capital is going into the European startup and VC ecosystems. The IPO 'gold rush' and tech stock growth (despite the red figures recently) in the past 12 months have only added to this. And this is great! Combining this with the decreasing costs of building tech products, the natural conclusion is that it should be easier than ever to raise the necessary early-stage money to get tech products off the ground. But, let's have a look at the data.
While VC funding has increased over the past quarters, the capital isn’t going into more companies. On the contrary, it looks like more of it is going into a smaller number of companies. On top, the first-time amount (first VC investments into companies) has remained stable over the last three years. So, follow-on capital has been the driving factor here. As Rob puts it a bit cynically, more capital doesn’t seem to lead to more people taking risks in early-stage companies, but leads to a greater number of lemmings piling in on fewer, similar things, often following the current trends of the day. If you think about it, this isn’t that surprising. Driving great returns (not to mention consistently) in venture investing is hard. More capital also means many new investors and firms that need to drive quick returns for their funds. This new capital will struggle to find the right place to get these quick returns. Of course, the path of least resistance is to pile into companies that seem to be taking off or are consistent with the current hot trend, resulting in fewer, larger deals at higher prices.
What does this mean for founders? The perception that cash is free and easy to get these days is simply an illusion for most companies. It might have gotten even harder for some if you consider that the number of new startups has increased over the last months (I don't have public data on this, but it certainly has in my case). The good thing is that the very best VCs try to be different, and they are out there. They are surprisingly un-trendy and contrarian. They are probably not talking about crypto, instant delivery, or whatever other areas that are getting all the attention right now. Instead, they are proactively looking and ready to learn from bold new startups 'at the edges of the market'. Getting this attention from a VC that might be/come a true believer means giving them attention, and building a relationship beyond a couple of initial pitch sessions. It’s like any partnership you want to build. There are no one-way streets, unfortunately.
Striking when the iron is hot...
As an early-stage investor, it is our job to know what we are looking for, and to decide quickly if we are excited about a company or not. With the number of early-stage companies and great founders increasing consistently in Europe over the past year, our job does not get easier. When fundraising, it is important for both sides to keep the momentum up. Striking when the iron is hot is so important...
That's precisely what I did last week. I am looking at a couple of exciting companies right now, and it takes more than just one or two calls to look under the hood. So, instead of scheduling second calls in a couple of days, I just decided to give some founders a cold call to have a more in-depth and unfiltered discussion about their strategy and vision. The founders' reaction was terrific, and the quality and content of our conversation were different and better than ever before.
This made me realize that many top-performing know something that many others do not: When meeting with VCs, they don’t just fixate on getting their money — They make sure to ask the right questions and learn from each other. Whether virtual or not, investors are trying to build a connection with you, so make sure your time feels less like you are rushing through a slide deck and more like a conversation. Don't be transactional, but leave plenty of room for questions. Know what insights you are looking for. These insights might be on your story, some KPIs, competition, and so on.
The right mindset for investor meetings.
You got the timing and pitch deck right, and have the first calls with investors scheduled. You are fired up. A mistake we, founders and investors, make all the time at that stage is the following: We think that the most valuable thing we can get out of investor meetings is a new investment... I don't believe that that is true. You are meeting a person that has a ton of knowledge and a deep network that can help you now, or in the future, whether you end up being investment partners or not.
The best way to approach these meetings is with a different mindset - the mindset is to maximize the return you get on the time you're spending with each other. Let's focus on the founders here. Your meeting target might be getting money, but the chances of you receiving it from that investor any given meaning is between 1% and 4%... So you are going in with a 96% probability you will not raise money from this person. If raising money is your only goal in these meetings, you waste 96% of your time...
Here's the strategy that I have seen working best. The mindset is that you are coming in as a collaborator. 'Pitch' meetings are poorly named. If you are talking to a good VC, they should be seen as strategy meetings. You are coming in as an equal looking for a discussion. The goal is to learn and network as fast as you can. These meetings are ultimately yet another opportunity for you to build your company. But you might do it with the information and insights you get from the investor, and not necessarily with the money you get. I like to use this ratio: Pitch for 30-50% max of your time, collaborate on the remaining 50-70%. Potential relationships with your investors will last 7+ years, and that collaboration, that conversation, should start in that very first meeting...
Hang in there. You will only get better, until you are unstoppable.
The VCs you talk to are likely to give you different pieces of advice because there is no one right answer. But over many meetings, you will cobble together the right direction. You’ll then be able to improve your business to the point that investing in your business becomes a no-brainer. Finally, make sure you keep the conversation going with investors as you develop the business, communicate every milestone. Strike when the iron is hot...
Last week, I was in Paris, and I will be back this week. Last Wednesday was one for the history books - seeing people at 9 am on the city's legendary terraces the day of their reopening was special. It felt like the city had been given a massive vitamin shot. Below a pic from Parc Monceau - 'Why meet in an office if you can go for a walk in a park instead'. One of the many good things that will survive this pandemic.
Life is awesome,
Other content I have found useful
- Our company K Health has been named #11 on this year's CNBC Disruptor 50 list. Go K!