AGILEVC My idle thoughts on tech startups

February 2, 2011

When it comes to raising capital for a startup, I think the eternal Yoda said it best… “Do or do not, there is no ‘try’.”

The overwhelming majority of startups that are successful in fundraising take a deliberate and concerted approach.  Prior to talking to any potential investors they do the following:

  1. Solicit input from existing investors (if any)
  2. Determine how much capital they’re raising
  3. Identify target investors that are likely to be a good fit
  4. Figure out the best intro or path to connect with investors identified in step #3
  5. Prepare slide deck or other materials and be ready to share it w/ investors
  6. Set a timeframe to conduct fundraising (e.g. we’re going to do as many 1st mtgs in next 8 wks as possible) &
  7. Synchronize parallel conversations as much as possible, rather than talking to potential investors one at a time or in batches

At the end of the day the substance (team, product, mkt opportunity, company progress) is what sells not the tactics.  But tactics can certainly have a big impact on how successfully a startup’s fundraising process goes.

I sometimes encounter entrepreneurs who are looking to “test the waters” with investors, or say they’re “fundraising” but don’t have a pitch ready, or who are seeking to raise capital but are uncertain how much they’re raising or what type of investors they’re looking for.  To the extent an entrepreneur has a long-standing friendly relationship with a VC or angel investor, seeking such informal feedback may be ok. But doing so when engaging with a potential investor for the first time is usually interpreted by the investor as a signal the entrepreneurs aren’t ready to raise outside capital. Close advisors are there exactly for that… advice.

Similarly potential investors exist for investment primarily, not simply to dispense advice.  Good, experienced investors (either VC or angel) will try to be helpful and provide feedback and advice to startups even when they aren’t a match for potential investment.  But that isn’t our raison d’etre. And entrepreneurs who are seeking capital are usually best served by being very clear about their objectives.  If you’re raising money, by all means say so to a potential investor if you want to get their attention.

Admittedly, some investors aren’t always clear with entrepreneurs about what they’re looking for unfortunately. Entrepreneurs may meet investors who say “keep me posted” in a pretty open-ended sort of way, essentially asking for an informal option to invest at a later date.  Unless a potential investor provides very clear guidance (e.g. “we like to invest in your sector but would want to see these [n concrete milestones] achieved), I’d suggest you consider them a very long shot even for a future investment and allocate your time accordingly.  And if you choose to update potential investors before you’re in formal fundraising mode, be very explicit (both with yourself and with them) that’s the case. Trying to update potential investors to see if they’d invest now is rarely a fruitful strategy.

So if you’re a startup contemplating raising capital, decide whether you are or aren’t raising capital and then come up with the plan of attack.  Be in fundraising mode full bore or don’t be fundraising.  All things being equal, you’ll probably have greater success and hopefully less wasted time & frustration than if you’re in “try” mode.