The Ultimate Guide to Startup Fundraising
62 Minutes to Seal Your Funding Round: Pitch Decks to Perfect Investors
Part 1: Understanding Investors 101: The Pros and Cons of Angel Investors, VCs, Angel Groups, Syndicates and Venture Debt
Welcome to our Ultimate Guide to Startup Fundraising. Ready to raise some money?
The Ultimate Guide to Startup Fundraising
Part 1: Understanding Investors 101: The Pros and Cons of Angel Investors, VCs, Syndicates and Venture Debt
Part 2: The Memorable Elevator Pitch that VCs Can’t Ignore
Part 3: The Killer Startup Pitch Deck VCs Can’t Ignore!
Part 4: The 13 Biggest Fundraising Mistakes Startups Make
Part 5: Structure Your Fundraise to Close Your Round FasterIf you are ready, let’s get on with the program.
So you’re raising money for your startup. You have a product and a little traction, and now you need to grow.
Who do you talk to?
How do you get the round closed as quickly as possible without screwing your long-term prospects?
You don’t know what you don’t know. Let this article be your intro guide to fundraising. The right partners make all the difference.
“Diamonds Are Forever”
This is one of the most successful marketing campaigns of all time. De Beers (the evil diamond company from “Blood Diamond”) convinced women and the world that without a diamond, the marriage wouldn’t last — the man wasn’t serious.
You have to put your money where your mouth is, so to speak.
And startups are a bit like a marriage. You’re “stuck” together for life, and it can be awesome or awful — it depends on the partner. And since the average U.S. marriage before divorce is eight years, it equates very nicely to the startup-investor relationship.
I’m not cynical enough to say you should spend as much time dating investors as seeing a significant other before getting hitched, but keep this in mind.
Remember, business partnerships are like a marriage, and they aren’t always fun.
Sources of Funding
Other than bootstrapping your business, money from friends and family, and loans or grants, there are four main sources of fuel for your startup:
- VCs
- Angels
- Angel groups
- Syndicates
- Venture debt
This article will cover everything you need to know about these five options.
The Five Sources of Startup Capital
1. Venture capitalists
Let’s start with the obvious one: venture capital.
Venture capitalists manage large pools of money — think several million to several billion dollars in assets under management (AUM). VCs operate what are called funds, and they typically have approximately 10-year lifespans (plus options for an additional two years).
They fundraise, just like startups, but from bigger, wealthier players. Traditional LPs (limited partners — the people investing in VC firms) include pension funds, university endowments, family offices, and ultra-high net worth individuals (UHNWIs). In some regions, like the Nordics, the Middle East, and China, local governments invest in ventures as well to both drive ROI and boost the country’s economy.
2. Angel investors
Angels, unlike many VCs, start not as investors, but as operators in the industry. Whether as entrepreneurs or employees, angels are individuals that accrue significant wealth. They should have a minimum $1M net worth (excluding their primary residence) or greater than $200k per year in income for at least two years. They then reinvest their capital in upstarts. Some angels shoot for returns, and others just look to give back.
A wealth of angel investors is the mark of a healthy startup ecosystem. The more successful founders exiting and reinvesting into the next wave, the greater the density of talent, innovation, and successful outcomes.
3. Angel groups
As the name suggests, angels often form groups. There is power in numbers, and groups of angels can cut larger checks, get better terms, spread out due diligence, and leverage larger networks to help startups succeed.
Typically, angel groups charge anywhere from $100–$1000 per year in dues. These dues help run the network and manage events.
4. Syndicates
Ever since the JOBS Act in 2012, the world of investing has been very different. This bill created the ability to form special purpose vehicles (SPVs) to invest in companies. Syndicates use this structure to allow groups of up to 99 investors to invest in startups via a single SPV — meaning only one addition to the cap table.
This helps startups keep cap tables clean (a big must for later financing) and reduce legal work. The syndicate cuts a single large check (rather than lots of little ones from angels/angel group) and still provides a sizable investor base of folks with networks and skillsets that are often willing to get their hands dirty.
5. Venture Debt
Already have a business doing serious revenue? Don’t want to sell more of your equity just for cash? More and more startups are turning to venture debt (ie, venture financing) to raise debt rounds based on their traction and revenue. Then, like any other loan, you pay it off at the agreed terms and at the end, you are free — no one on the cap table, no dilution founders, startup employees or your original investors.
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Carry and Management Fees
One last concept to understand before diving deeper into the pros and cons is the incentivization structure. Knowing investors’ incentives helps startups level the playing field.
You’re probably thinking, “The only thing that matters is massive outcomes, right?”
Wrong.
Because VCs manage money for you, they typically earn the most. Generally, VCs employ a two and 20 model, meaning they get 2% management fees and 20% of carry.
Management fees are based on AUM (assets under management). For small firms with a $10M fund, that equates to $200k per year in fees — to run the fund, source companies, and support investments. Seems reasonable.
It gets more interesting the larger the fund gets. On a $100M fund, it’s $2M per year. For a $1B fund, it’s $20M per year.
That’s the reason VCs are almost always looking to raise larger funds. The bigger the fund, the better the management fees and the bigger their paycheck.
But we can’t forget about carry. Carry is defined as the difference between money in and money out.
Examples work better here. Let’s say a venture firm invests $1M at a $10M pre-money valuation. That means they buy 1/11th of the company (investment divided by pre-money valuation plus cash infusion).
Now, fast forward 10 years. The company is crushing it and is now valued at $1B. And let’s say Facebook buys them because Zuckerberg wants to kill the competition.
Well, that’s 100x return. If we assume the company never raised more money (just to simplify dilution, they probably raised more money), then 100 times $1M is $100M.
The difference between the initial investment and the result is $99M. The carry, typically 20%, is paid off of this.
So the VC firm earns an additional $19.8M in carry. That is the concept of carry.
Of our four groups, only VCs and syndicates usually charge investors carry — both generally at 20%.
And only VCs have management fees. Now that you know the basics, we’re ready to look at this from a startup perspective.
The Pros and Cons of Each Investor Class
For a detailed understanding, we should break down the important criteria startups have when fundraising. Then we can evaluate VCs, angels, syndicates, and angel networks to see how each stack up in terms of founder friendliness.
The 11 criteria to consider:
- Decision speed
- Investment size
- Price
- Control requirements
- Outside help
- Industry experience
- Ability to follow-on
- Bureaucracy
- Liquidation preferences
- Common problems
- Help with future fundraising
Note: All scores will be generalized across the investment sector. Individual groups, firms, syndicates, and angels are all different. We’ll work off of the average.
1.Decision speed
As a startup, you need money now. Although planning your raise in advance and having six months to prepare and close is ideal, you probably procrastinated. You probably need money, and you need it now.
Your burn rate is tough. There isn’t a ton of cash in the bank and even the ramen is running out. Who do you turn to?
Angels — The fastest investor is almost always the angel. Angels can cut checks after just coffee — it’s their money. They can do what they want with it.
Syndicates — After angels, syndicates come in second. Syndicate leads can quickly decide on deals and share them with their investors. Typically, syndicates will run two to four weeks, but hot deals close fast. But as a founder, as long you know the allocation will be met, an extra two weeks isn’t a huge deal.
VCs — Venture firms are often slow and bureaucratic, but they can move quickly when motivated to do so. For hot startups and fast-moving deals, VCs can push investments through and, pending due diligence, be done nearly as fast as syndicates. Typically, though, they are a bit slower due to processes in place.
Angel Groups — Angel networks are definitely the worst here. While there are some fast-moving ones, many groups only have pitch events every few months or every quarter, meaning entrepreneurs often need to wait. And even if angel groups are a go, convincing enough members to cut checks can slow the process down further.
2.Investment size
While speed is great, you need runway even more. A $25k–$50k check might buy you a few months, but if you get $500k–$1M you’re suddenly set until your Series A. The check size impacts how many investors you need onboard, crowding on the cap table, and the number of meetings you need to schedule to complete your close.
VCs — Venture firms usually cut the biggest checks. They typically have ownership percentage targets they need to make the economics of their fund work. Most VCs want every investment to be able to return the fund. So if that is 50 investments per fund, they need companies that can go 50x. All VCs will vary on check size, but most early-stage firms cut at least $250k checks, with many going north of a few million.
Syndicates and Angel Groups — This one is a toss-up. It depends on the size of the syndicate and angel groups. Some syndicates on AngelList like Gil Penchina’s Flight Ventures have close to $10M in backing. They can cut big checks, but it doesn’t always work that way, though. The same is true for angel groups. Here, the minimum investment size plays a huge role. Many syndicates (ours included) let investors invest just $1k to get in on a deal. This empowers investors to participate, but due to the 99 investors clause, this can prevent massive check sizes. Typical max for a syndicate or angel group will be approximately $1M–$2M, with the average closer to $200k–$300k.
Lone Angels — Unless you’re dealing with UHNWIs, most angels cut relatively small checks — $5k–$100k. It’s possible to get more from a single angel, but it’s pretty rare. With angel investors, don’t forget the legal work required to process checks and update cap tables. Often small investments under $5k–$10k don’t make a ton of sense, especially after the initial Friends and Family round.
3.Price and valuation
Dilution is potentially a big problem for founders. When negotiating, remember a small piece of a big pie is better than a personal pan pizza. Startups are all about outsized returns. For example, 1% of
Uber would still be worth $700M today (unless they crater — I think Uber may be in big trouble).
In terms of valuation, though, startups can get screwed. So let’s look at how each class of investor handles valuations.
Lone Angels — Angels are often the least price sensitive. Many are involved not for economic reasons, but to give back, or even for their ego. They want to be able to say, “Yeah, I invested in XYZ startup!” Because of this, startups can often get higher valuations when negotiating with individual angels as opposed to other groups. The investors have less negotiating power and generally less insight into the industry and comparables.
Note: Don’t take advantage of angels. Raising at too high of valuations can hurt downstream financing opportunities. No one wants to have a down round.
Angel Groups — Angel networks are more sophisticated than your average angel and are often able to lead a round. They will be more realistic about valuations than lone angels as they place a larger focus on returns for their members. And as they cut larger checks, they can negotiate for better terms.
Syndicates — Syndicates, even more so than angel groups, have pricing power. Because syndicates invest faster, typically with similar or even larger check sizes, they hold more power than angel groups. Syndicates are very focused on returns, especially upside, as the carry is the incentive that syndicate leads really benefit from.
VCs — Venture capitalists usually are the most valuation sensitive (although some recent firms, like Andreessen Horowitz, frequently overpay to get in on the best deals). VCs need to provide returns to their investors to increase AUM and subsequent management fees. In the past, VC was dirtier and much less founder-friendly. Today, though, the valuations are not that dissimilar from a syndicate.
4.Control requirements
Most founders hate giving up control. Between potential conflicts on direction and being forced into unfavorable terms, it makes sense. And if you look at some of the most successful tech companies of today, many like Zuckerberg and Bezos have maintained their control over their companies. This allows the founders (and not investors or board members) to steer the ship and drive returns.
Note: This is not to say governance is bad. Board members can be incredibly helpful, especially for accountability and future focus.
Lone Angels — Most early angels will not take a board seat or have much in terms of control. They will offer guidance when needed (and occasionally when not needed). But all-in-all, they leave the running of the startup to the founders.
Angel Groups and Syndicates — Both angel networks and syndicates require more terms and control than individual angels, but still typically very little. Some may require board seats and most will push for pro-rata, information rights, and updates. But it’s still much less of a confrontational relationship. Angels groups and syndicates usually get out of the way and leverage networks and experience wherever possible to help.
VCs — Surprise, surprise. Venture capitalists are the pickiest when it comes to terms. They have fiduciary responsibilities to their LPs and partners, and they’ll do whatever it takes to drive outcomes. Most VCs, especially from Series A onwards, will require boards and possibly even board seats. This can work out great. It can also result in founders getting ousted. And pretty much any VC will demand pro-rata, information rights, and other clauses to protect their investment.
5.Outside help
Investors always talk about adding value to founders and being founder-friendly. Sometimes this is the case, but sometimes it isn’t.
VCs — At least on paper, VC firms have the most resources to help founders. With management fees, many firms hire advisors, and technical specialists work with founders on their business. It can be a very hands-on investment and the best VCs go to work for their founders. They leverage their network and help with hiring and intros, including future fundraising opportunities. That isn’t always the case, though.
Angel Group — I ranked angel networks slightly ahead of syndicates as their members are typically more engaged. Members invest in fewer deals and are often locally present to work with and help founders. This creates strong regional support networks that can be vital to growth.
Syndicates — Syndicates, like angel groups, have large member bases and skillsets. The best syndicates deploy their members’ networks and skills for the greater good of the portfolio. Unfortunately, many investors don’t meet their investees. The relationship can still be quite good, tapping networks and helping with growth, but it has room for improvement.
Lone Angels — Last and certainly least is the individual investor. They will likely tap their network, help where they can, and be able to meet for coffee — but two heads are better than one. There is only so much a solo practitioner can do for startups.
6.Industry experience
Much like outside help, industry experience is essentially the same. The one difference being that syndicates and angel groups would score the same.
7.Ability to follow-on
You’re probably going to need more money. Investors that follow-on fuel growth and make fundraising much easier.
VCs — Venture capital portfolios are usually predicated on follow-on investments. Funds typically reserve 50%–75% of the fund for follow-on investments (although this varies by firm).
The reason is simple. In a world of power-law returns, doubling down on your winners drives the biggest ROI. And because VCs have the biggest chip stack, they can keep doubling down.
Syndicates — Because syndicates are composed of a large pool of investors, there’s a lot of capital at play. Syndicates will typically at least exercise pro-rata to maintain their equity position. And since every investor only contributes a small percentage of the round, it’s relatively easy to raise some follow-on funding.
Angel Groups — Angel networks are less likely to follow-on than syndicates. Between the time commitment of pitch events and reduced focus on ROI, many groups will pass on pro-rata.
Lone Angels — Individuals investors only have so much cash. And most either do not think through follow-on funding strategies or reserve capital. As such, it can be hard for founders to get early investors to contribute more or float a bridge round.
8.Bureaucracy
Raise your hand if you like politics and drama…
Lone Angels — Solo investors definitely win this category. They have no accountability and can cut checks over coffee. Plus, there are no politics over who gets funding or carry.
Syndicates — Although not as nimble as lone angels, syndicates are pretty straightforward. A syndicate lead finds deals and offers them up to the group. In these instances, the lead’s reputation often plays a big role in how many members invest. The lead also has to encourage their investor base to join, without underselling the risks. This can be tricky, as syndicates only earn carry — meaning that reputation aside, they’re encouraged to do as many deals as possible.
Angel Groups — Between the processes of angel networks, dynamics between members, potential rules/guidelines on investment criteria, location, and etc., angel groups are a bit more complex than syndicates. Often, this complexity corresponds to slower investment decisions — not ideal for founders.
VCs — Most venture firms are great, but there are certainly politics at play between GPs (general partners — i.e. managers of the firm). These vary from firm to firm, from how voting occurs to differences in incentives. An obvious example: if part of a GP’s carry/incentives comes from deals they source themselves, clearly there’s a conflict of interest. That GP is always more likely to vote to fund their own deal flow…
Similar issues can occur with partners having veto power and/or control of a firm. When raising from VCs, expect a minimum of three meetings (and understand how decisions get made). Typically founders won’t get a ‘yes’ before pitching at a full partner meeting.
9.Liquidation preferences
You would think that all parties are aligned here — just build a big business and the rest falls into place. Unfortunately, it isn’t that easy.
There are many classes of stock and terms affecting outcomes. The most important to consider are Preferred and Common classes of stock. In a nutshell, preferred means I get my money out first and usually win (or lose the least) even in bad outcomes.
Note: Founders and early employees have common shares, whereas some investors demand preferred shares (to protect against downside risk).
That can mean founders sell the business and still end up with nothing. For a more detailed explanation on liquidation preferences and share classes, see this post.
Lone Angels — Individual investors are often the least savvy and/or cutthroat when it comes to liquidation preferences and terms.
Syndicates and Angel Groups — Both of these investor networks have more experience and battle scars from past investments. This puts both groups in a good position to both understand risks and leverage capital to receive more favorable terms, and often Preferred Shares. These will be less “preferred” than future Series A Preferred, Series B Preferred, and etc. shares, but they still provide a measure of protection for investors in event that things go south.
VCs — Venture capitalists are the toughest on terms and liquidation preferences. Most will fight the hardest to secure their investments, often with additional icing on the cake in the form of multiples (2x multiple: invest $1M and receive $2M) or participation rights (double dipping — receiving money back, plus an equity percentage of leftover capital). As a rule, avoid participation rights, especially pre-Series A. These terms can cripple startups’ ability to raise and leave founders out to dry.
Note: This isn’t legal advice. Talk to a startup attorney, protect yourself.
10.Common problems
VCs are the only real troublemaker in the group. Angels almost universally write off investments, assuming every check will go to zero.
Unfortunately, as VCs have LPs, many venture firms play hardball. Venture funding is fuel — you either take off or get burned.
Things to look out for:
- Full ratchet anti-dilution — This stipulates that investors will retain their equity position while founders/team will suffer all dilution. It creates a horrible situation where founders lose equity and motivation to continue.
- Board seat control — When VCs or external parties control the board, founders find themselves at the mercy of the board/investors. This can cause problems, from firing the CEO to acting in the investors (and not the founders’/company’s) interest.
- Unsustainable growth focus — VCs need investments to be able to return the fund. This can force startups to try and grow at unsustainable rates and ultimately handicap the businesses.
- Liquidity requirements — Most VCs operate 10-year funds, with an additional two years of optionality.
- Too much capital raised — Yes, you read that right. Startups can raise too much money, greatly reducing liquidity options. The more you raise, the more you need to be able to sell or IPO for, or the investors lose.
11.Help with future fundraising
VCs — As full-time professional investors with resources and network of the entire firm behind them, VCs are incredible for future fundraising. Between follow-on checks and warm intros to later-stage firms, a VC’s business is built on connections.
Syndicates and Angel groups — While VCs are typically closer with other VCs, syndicates and angel networks have lots of members, each with their own broad network. And for angels that do this for a living, they focus on building the same connections to later-stage funding.
Lone Angel — You don’t know who you don’t know.
The Results
So, who comes out on top? Adding up the points, here’s how they stack up. The fewer points, the better.
- Lone Investor and Syndicate (tie): 23 points
- VC: 24 points
- Angel group: 25 points
If this seems counterintuitive, it’s because it is. There’s no one best way to define an ideal investor. Each group brings something important to the table.
Arguably, individual investors will be the earliest and VCs will come in last. From a funding perspective (arguably the most important variable), angel groups, syndicates, and VCs are all on par in the earlier rounds (pre-Series A). After that, VC money is a must if you need to continue raising.
Of the two most comparable investor classes, syndicates and angel groups, our analysis would lead us to believe that syndicates are a slightly better funding partner. I would tend to agree. As a syndicate lead myself, I see syndicates as the future of investing. SPVs won’t kill venture, but syndicates will continue to take an increasingly large chunk of early-stage investments.
And as angel groups generally have little-to-no upside but come with increased complexity for investing, one would assume more and more angel networks will go the syndicate route.
Closing Thoughts
Hopefully, this breakdown gave you a better understanding of the venture landscape. Knowing the players, how they work, and what to look out for is critical to startup success.
So, look through our list. Which of the 11 are most important? Certain criteria like decision time, investment size, and control requirements are often make-or-break for founders. The same is true for investors.
Pick apart your priorities, and plan your fundraising accordingly.
Note: Having good investors in different classes of venture is recommended — don’t put all your eggs in one basket.
Part 2: The Memorable Elevator Pitch that VCs Can’t Ignore
These words terrify entrepreneurs: You get one chance to make a first impression.
And fear of failure often ruins that. Overconfidence is equally harmful though.
One way or another, most start-ups screw this up. It isn’t easy. It isn’t hard either though.
Short, sweet, and to the point. That is what you should aim for.
“I help start-ups grow, scale, and find funding.”
… That is OK. It gets the point across. But it isn’t quite specific enough. You need to do better.
Who Is Your Target Customer?
Identify them. There are no mass-market products or problems. Trying to please everyone pleases no one.
You need an initial base of target customers or you won’t succeed.
For me, I advise and invest in early stage tech start-ups. But every company is kind of a start-up. Heck, Gmail was in beta mode for years.
So when does a start-up stop being a start-up and start being a company? Is Airbnb a start-up? Google? Uber?
You need to be specific. You need to be something for someone, or you are just nothing for everyone.
Find your niche and fill it. Become a badass in that space. Then and only then can your company think of expanding to serve a larger market.
How you help is important too
Con artists overpromise. Entrepreneurs do the same. In essence, we are all salesmen.
But to sell, you can’t smell like bullshit. Bold claims had better be backed up by something ’cause these days, investors won’t fall for anything.
An idea and fancy pitch deck won’t get you funded. This isn’t the ’90s. A catchy idea needs a clear business model and a strong team to back it up.
How do I help start-ups? How do you help your customers? That is the question every start-up must answer in its pitch. The devil is really in the details.
You could take ten minutes to explain your company, or you could take ten seconds. Attention spans being what they are, you need to hammer home fast. You have ten seconds to grab my attention, 30 seconds to wow me … What is your plan?
Elevator Pitch Examples
- Slack — We help businesses and organizations communicate with a simple chat interface.
- Uber — We help individuals get from A to Z with a simple ride-sharing app.
- Amazon — We help people buy and sell things online.
- Facebook — We help individuals stay connected and share experiences online.
It can be that simple. We help X achieve Y.
That is the formula to start any pitch. It grabs your attention and instantly explains your business. It isn’t overly detailed, but it covers the basics, who and how.
Your pitch should change depending on your audience.
What About Why?
Why you are building this business is often key. Why determines whether investors and employees get on board.
And, FYI, to make a lot of money isn’t a good reason. It does not drive emotions, only dollars. And why is what drives you.
Passionate entrepreneurs solving personal or large-scale problems are more driven and motivated to win. They deal with the highs and lows of entrepreneurship and keep fighting. Folks looking for the quick cash don’t.
As an investor and advisor, I avoid the latter. The money matters. It matters a lot. But without a bigger driver, your business will almost surely stall. And burnout can be a big problem.
Your company should be a mission
What is your vision of the world? What are you working to create?
This captivates people. It pulls them into your brand. And investors look for that fire.
For me it is freedom. Corporations and governments have failed. A desk job would kill me.
And I believe entrepreneurs change the world. Not countries. Not corporations. Those dinosaurs care only for self-preservation, everyone else be damned. Innovation isn’t exactly their forte.
I work with founders looking to change the world and make a ton of money in the process. Start-ups are exponential. Helping a founder creates a company and a mission, employs people, creates wealth, and distributes prosperity in ways nothing else can.
That is my mission. That is what drives me as an investor, advisor, and writer.
What drives you?
OK, OK, but What About the Money?
Small opportunities aren’t exciting. Money is the ultimate drug. Use it aggressively. But also be careful.
Unrealistic market sizes and comparables can cripple your pitch. You need to be on point here. Be specific. Explain your reasoning.
Here is what I mean.
Frequently, founders pitch a market. The professionally managed global real estate market is about $7 trillion. The total real estate market estimates top $217 trillion, however.
That is a big difference.
If you are building an app to help professional real estate companies manage their portfolios, your maximum possible TAM is about $7 trillion (technically much lower unless you look to own the real estate assets themselves).
But $217 trillion sounds a lot sexier.
Don’t do it. Investors will call you on it. They can see you’re full of crap. Either you are lying or too dumb to understand the market potential. Either way, you are uninvestable.
“Let me cut you off there. Thanks for your time. We will follow up via email if we are interested.”
Game over. A small slip, and your pitch is kaputt.
Why Now?
Investors are sharks. They are looking for opportunities and unfair advantages.
What makes your start-up different? Why will you succeed where others failed? Why is now the perfect time?
These are the critical questions that your pitch must answer.
It is a bit much for 30 seconds. That is okay though. If someone is interested enough, they will keep listening.
So why now? Why is this a now-or-never opportunity?
Scarcity sells. This is a limited time offer. People are afraid of missing out.
You are a salesman, so sell.
Are markets changing? Has a new technology opened up an industry? Is a change in legislation creating an opportunity?
It is now or never. It has to be. So do not miss out on the next Uber, Facebook, Google, etc.
Pitch Perfect
See what I did there?
Do not do that in your pitch. Being cutesy and dropping buzzwords is a surefire sign you are out of your league.
So, bringing it all together. What are the keys to a successful elevator pitch?
- Who?
- Why?
- How?
- How big?
- Why now?
That is it. You do not need anything else.
“Airbnb helps homeowners rent out rooms to travelers online, disrupting the $427 billion hotel industry without needing to own a single property.”
One sentence can do wonders.
Inform. Engage. Excite. These are the keys to a good pitch. And the Airbnb example took me all of five minutes.
What is it for your start-up? Answer those five questions, add a few minutes perfecting the fit, and you will end up with a killer pitch, assuming your idea is good.
For founders: Have you gotten feedback from customers on your product or idea? If not, there is no point crafting a perfect pitch. Go talk to users. Get it right. Then and only then can you go find funding.
Part 3: The Killer Startup Pitch Deck VCs Can’t Ignore!
So, your startup needs to raise money… Now what? If you’ve researched the differences between VCs and angel investors, accelerators, corporates, and angel networks, you know where to go.
The big question, how to attract attention? How to cut through the noise of the tens if not hundreds of decks investors get every week…
Hint: a warm intro helps. But you know that. You’ve reached out to portfolio companies, got recommendations/referrals and are ready to send your sexiest pitch through. But how do you ensure investors take you seriously and take the meeting?
That is ALL a pitch deck is for, getting the meeting. No meeting, no funding. And for VC firms, you’ll probably need to “win” several meetings to be able to pitch the partners. That’s the game, but it’s “free-ish” money, and you signed up for it…
This post is a follow up to The Memorable Elevator Pitch VCs Can’t Ignore and is for founders actively reaching out to investors.
Reaching out to investors
Truth is, no one wants to see your business plan. A business model canvas isn’t going to cut it either. For serious investors (especially the ones you want for your startup — more on choosing the right investor here), you’ve got maybe four slides to grab their attention.
But before that, the email. Let’s assume you’re firing cold, you don’t know the investors you’re pitching and don’t have a warm intro. That is okay. Not everyone went to Stanford, right? If you can’t find someone to make the introduction, reach out and be REALLY freaking convincing. Tell VCs exactly what they want to hear (again, more on that here).
So, let’s assume you got them to open the deck… But before that, how are you formatting it? Keep it simple stupid (KISS). If you send a Keynote presentation or fancy password-protected link and it doesn’t work IMMEDIATELY, they’re not reading further.
DELETE.
Stick with Powerpoint, PDF (probably easiest/best) or worse case, a Google Spreadsheet. Some founders like DocuSign and other trackable presentation platforms, and while the analytics are helpful, they can turn off some investors. No one likes to be spied on… And again, any drop off hurts your chances of closing your round.
The pitch deck itself
Like we were saying, you have 2–4 slides to grab my attention. Use them wisely.
And overall, keep your deck (minus the Appendix) to around 12–15 slides. Any more, it gets overwhelming and weakened, any less, you’re probably not explaining everything.
Pro tip: Your presentation deck doesn’t need to be the same as your email one. Assume you’ll leave things out of a “live pitch” deck that you’d include when emailing investors. You won’t be there to explain things in an email…
But first, before building your pitch deck: what is your elevator pitch? How are you hammering home your WHO, WHAT, WHY, HOW BIG and WHY NOW needed to pique interest? How quickly are you conveying that value prop?
Speed and simplicity is everything, plus upside (because VCs make their money on carry — more on that here)
Now, let’s build your perfect deck.
Slides to include:
- The Company
- The Problem/Hook
- Competition
- The Solution
- The Demo/Use Cases
- The Value Proposition
- Traction/Revenue
- The Business Model
- Future Growth/Plans
- The TAM/Market Size
- The Team
- The Ask/Use of Funds
- Contact Information (Reiterate Traction)
Get my free 15 Step Growth Guide to Acquire and Retain Customers here — no opt in needed!
The Company
The first slide is almost always a company/logo/tagline slide. It’s a quick “This is who we are and what we do” to grab the investor’s attention. If it looks nice and is memorable, it’s hard to mess up.
Airbnb does this well (albeit ugly, but that was a decade ago…)
The Problem/Hook
This is probably THE MOST important slide in your deck. Plenty of startups build cool shit, but only the ones that solve REAL problems make REAL money doing it. The world doesn’t need another photosharing app, but if your app helps photographers protect their photography in a world filled with $100B of stock image piracy, that’s a big deal. So, sell that here.
Who cares about what you’re doing and why? Who is your target customer? There are NO mass-market products or problems…
And remember, investors aren’t electricians or bakery owners, you NEED the VC to feel the pain your customers experience before trying your product. Only then can they relate and realize the enormity of the opportunity, and the necessity of your solution.
If you’re were on fire, I could sell you a pitcher of water for ANY price.
There are many reasons female entrepreneurs are so underfunded (~3% of venture dollars), but an obvious one is investor empathy. If you’re pitching me the perfect period relief pill and I’ve never had to deal with the monthly cramps or crappy feelings… You get the picture.
The Competition
Including competitors slide isn’t a clear cut yes or no. Some people say you need it, others don’t. I’m in the camp that believes creating one forces founders to consider just how different their product or service is from the competition, and how they stack up in the market.
And failing to at least note the competition can look like an oversight, even if it feels like you’re creating a category.
Use the competitors slide to subtly sell yourself. What differentiates you and makes you better than all the brands out there? What would customers choose you over the market leader?
Slack does this incredibly well, positioning “competitors” as partners and showing how Slack can unify these disparate services into a better functioning system.
The Solution/Use Cases
How do you save your customers the headache/heartache etc… of the ENORMOUS problem they’re stuck dealing with? Don’t just tell me, show me. I want an explanation and I want images.
Demo your product, make it tangible. If I don’t know HOW you solve the problem, it’s hard to wrap my head around your business, and you won’t get the meeting.
And unfortunately, given the B2C boom we’ve seen in recent years, the product is everything. If your app or offer isn’t polished, that can really hold you back, so be sure to sell the vision too. Kickstarters don’t only show the prototypes but include photorealistic renderings to make it as lifelike as possible. Do that, if you can (but make it obvious it’s touched up). The only thing worse than a subpar movie is the one your friend couldn’t stop talking up for two weeks which was Netflix material at best…
NOTE: The demos will generally be made up of several slides. That is fine. Use the space on the margins and text highlights to showcase additional important details, and remember ALWAYS BE SELLING.
The Value Proposition
Some pitch decks put this before (or combined with) the solution and use case slides, others preferred to hammer it home. But when it comes to the Value Prop, it never hurts to overemphasis. People pay for value, so what makes your product worthwhile for consumers and investors alike?
This is pretty much your elevator pitch…
Here are a few examples:
- Slack helps businesses and organizations communicate with a simple chat interface.
- Uber helps individuals get from A to Z with a simple ride-sharing app and lets car owners monetize their free time.
- Amazon helps people buy and sell things online.
The best examples combine text and images to get the point across.
Need help with this? I help companies build the perfect pitch deck.
Traction/Revenue
“Show me the money!”
This slide should be pretty straightforward. A few things to watch out for:
Twitter followers are not traction
Press mentions are not traction
Product completion/features is not traction…
All too often, founders confuse metrics with traction. Traction relates to your KPIs (key performance indicators).
How much money are you making? How many customers/users do you have? How often are they using your product? How’s growth?
These are the kind of things you should show.
Have information on the cost of acquisition (CAC), lifetime value (LTV), churn… these are important as well.
And for goodness sake, track Net Promoter Score: From 1–10, how likely someone is to refer your product/service to a friend? As a follow-up question, ask them what is the #1 reason for their answer. That will tell you (and potential investors) a lot about the quality of your product/service/business and give you insights on key selling points going forward.
The Business Model
How do you make money? And how quickly can you explain it to me? As a rule of thumb, the more complicated the business model, the less likely it is to succeed. And most successful businesses have only ONE business model, at least in the startup stage. Solve one problem really well for a ton of people. Once you do that, you can think about expanding.
But like the Sharktank guy who wants to start a subscription box business, a food truck and distribute to big box stores simultaneously, the more you divide your attention (and team and resources), the more likely you are to fail. And in the high-stakes, high-failure world of startups, that means no deal.
So, ONE business model, at least for now. Lead with your BEST/first one if you plan on adding more in the future. And break down the numbers, possibly with simple projections.
Project/Planned Growth
This slide serves two purposes: 1) showing investors you’ve considered the future projections with reasonable expectations [numbers you can actually hit] and 2) showing how you plan to get there.
Hockey stick growth doesn’t happen overnight or without work. If Facebook ads or affiliate marketing is your strategy, showcase that, and explain why (for more on organic methods of mass user acquisition, see this post). Here is also a place to highlight any tests you’ve done concerning acquisition channels/optimization etc…
And where do you plan to expand in the future? Is it a new product line? New sales channels? What about franchising, moving into Europe or adding additional feature sets…?
Investors want to know you have a plan. Of course, things change and you deviate/pivot as the market dictates, but at least show you’re thinking things through and have the chops to adapt, should the need arise.
The TAM/Market Size
Ah, TAM, or total addressable market. This is always a hotly contested topic. How big is the upside? That’s what investors want to know. They aren’t interested in $10M markets or outcomes, they need B’s.
And money is the ultimate drug (for good and for bad…)
Be careful though. Unrealistic market sizes and comparables can cripple your pitch. You NEED to be on point here. Be specific. Explain your reasoning.
Many founders pitch a market without being impartial. They oversell reality. The professionally managed global real estate market is about $7 trillion dollars. The total real estate market, however, is $217 trillion.
That is a big freaking difference.
If you are helping real estate companies manage their portfolios, your max TAM is about $7 trillion (technically much lower unless you look to own the real estate assets themselves).
But doesn’t $217 trillion sound a whole lot sexier?
Don’t do it. Investors will know you are either lying or too stupid to size the market. Either way, you are uninvestable…
There two ways to think about market sizing: 1) top-down, or 2) bottom-up. Different investors have their own preferences. Explore both models when calculating your TAM.
Top-down TAMs are often akin to saying “There are 1.3 billion people in China. If I could just create a product that each of them bought for a dollar, I’d be a billionaire…”
And while this sounds absurd and we inherently know it is a bad idea, there are situations where top-down market sizing works.
A less ridiculous example:
Amazon charges FBA sellers ~15% for every transaction and accounts for about half of all US eCommerce (and increasing… Amazon is engulfing eCommerce). If eCommerce were to increase from 15% to 30% of all US retail ($6T in 2018, Source), Amazon would process $1.8T in transactions, earning $270B/yr in transactional/FBA fees alone.
And that is revenue, not TAM. Their TAM, assuming 30% of all retail would be $1.8T as they’re also creating their own Amazon Basics line to commoditize EVERYTHING.
Bottom-up TAMs are generally smaller and more realistic. They start, not by taking massive markets and assuming penetration percentages, but by looking at sales locations/channels and comparables, and working from there.
Consider selling snack bars at Starbucks. There are 6,031 Starbucks in the USA. And let’s assume each has 10 premade and 10 handmade snack options. Now, if they’re selling an average of 100 units per day (a made-up number), adding an additional product means you’d account for 1/21, or ~4.5% of their product line — about 4.5 bars per day per store (all things being equal). That’s 27,139 bars per day, which, at a $3.99 pricepoint equates to $108,000/day or $39.5M per year.
Now, if you expanded internationally, or into other coffee shops, 7-Elevens, etc… your TAM would go much larger… That’s an example of a bottom-up approach, and most VCs prefer it because it yields more reasonable numbers.
For your business, calculate the TAM using both methodologies and explain both the reasonable and the really big, and how you plan to get there.
Get my free 15 Step Growth Guide to Acquire and Retain Customers here — no opt in needed!
The Team
What makes YOU the ones to succeed where so many failed. Facebook wasn’t the first social network, Google wasn’t the first search engine… you’ve heard it all before.
The path to success is paved in skeletons and crushed dreams.
As a founder, you need to prove to investors that WON’T be you.
What makes you different/unique/unstoppable?
This can be a lot of things: from an all-star cast of Apple alums to repeat founders building on their last big success, from scrappy immigrants solving affordable housing to recovering diabetics fighting obesity…
What makes YOU the person to solve this? Highlight the founder-market fit and don’t be afraid to brag and sell yourself. You’re the product, the ONLY difference between success and failure.
Ideas are worthless, execution is everything.
Don’t have credibility yet, that’s okay. Do your best and if/when you do get the meeting, highlight that, attack it head-on.
“I know I’m not the most experienced founder, don’t have an exit under my belt, but I’m willing to work my freaking ass off to make this a success and here’s why…”
The Ask/Use of Funds
The MOST important part of any sales call is the ask. If you don’t have a call to action, it was just a nice time, but inevitably sizzles out. If you don’t ask for her number, you’re never seeing her again…
And the same is true in venture capital. VCs have specific targets for ownership and check the size. They NEED to be able to filter deals fast and know exactly what you’re looking for. So, tell them…
It can also be beneficial to explain what you want to use the money for. How is this cash the rocket fuel your startup needs to scale, to derisk, to reach the next milestone? And what is the next milestone, what type of traction metrics do you need to attract follow on funding?
This is SUPER important for VCs to raise their next funds (and they’re raising every 2–4 years).
So, what are your goals and how quickly can you hit them?
The END
The last slide is the one that gets left open (both during presentations and on an investor’s PC). Why will they remember you, and what do you want to hammer home?
The best pitch decks place traction information here, or some type of hook to get/keep investors interested. If you want them to hit reply, or to forward it to their partners, you need to give them a reason.
You only have one chance to make a last impression, and it’s your last impression that dictates whether or not they’re still interested… Much like that goodnight kiss after an incredible evening:
Leave them wanting more…
Closing thoughts
Crafting a pitch deck is hard but incredibly important. You’re asking someone to give you a boatload of money to build your business with little to no recourse. Scheduling a meeting is a big commitment. Investors are inundated with founders seeking funding. They HAVE to protect themselves and their time or they’d be constantly listening to subpar pitches.
So, hopefully, the points above help you refine your deck and land the meeting. If you need more help on your deck or a founder/CEO coach to help grow/scale your business, I’d love to chat.
Building a business is hard, raising money sucks and entrepreneurship is a freaking rollercoaster… But if it was easy, everyone would do it, and it wouldn’t be worthwhile. Entrepreneurship is worth your while, so is building something that meaningfully changes the world.
Now, take the advice, fine-tune your pitch and put your best foot forward. Good luck!
Show me the money…
Part 4: The Biggest Fundraising Mistakes Startups Make
Fundraising is one of the most important aspects of any venture-scale startup. Building something meaningful that takes the world by storm requires serious time and effort — and for that, capital. Because even if you’re willing to hustle, developers and founders can’t live off Ramen and equity forever.
And while not every startup can (or should) consider external/venture funding (for more on whether or not your business needs to raise money, see this post), the vast majority of companies looking to transform the world could profit tremendously from a bit of outside capital — at least if they go about it in the right way.
The problem is, fundraising is sexy. How many TechCrunch articles have you seen lauding XYZ’s latest $100M round. Now compare that with stories about the scrappy, bootstrapped startups….
Sure the allure of funding — both from a PR and a personal ego perspective (because we all want to be “better” than our contemporaries) as well as its ability to be rocket fuel for your business — can be massive, funding can also cause massive problems and major headaches for founders.
Because fundraising is hard.
Because not all investors are created equal.
Because you don’t have the first idea how to raise money… or when…? or from whom?
If you are a first time founder, even the thought of fundraising can be totally overwhelming. Who would seriously give you hundreds of thousands (if not millions of dollars) for “imaginary” equity in your business…? How can you convince them it’s worth it? Here’s a pitch deck guide to help 🙂
The stakes have truly never been higher.
The good news is, most founders make more or less the same mistakes. And since you are here reading this article, you might just be able to avoid the biggest blunders.
Which just might save your startup. So let’s get started.
The 13 Terrible Fundraising Mistakes Startups Make
1. Fundraising too soon
Every startup starts with an idea — a problem, a back of the envelope calculation, maybe even a half-functional prototype. Something makes you think you might just be an entrepreneur and might just want to build this “idea” into a business. Maybe you’re even going to “change the world…” Or invented the greatest thing since sliced bread.
Whatever it is, there is one critical thing to keep in mind:
Ideas are worthless. Execution is everything.
Think about that for a second. Pause, soak it up. It’s critically important to realize your idea means nothing. Your plan to sell recyclable shoes, create an all-natural sugar alternative, automate tax accounting or create the next Uber for ocean freight isn’t a business. It isn’t even unique. In fact, almost every single idea you ever have has been thought by someone else at some point in time.
And yet here you are, wishing if only there was a…
Because no one else before you managed to make that idea a reality. Instead, it remained what it always was — a flitting thought in someone’s head, worth absolutely nothing. Because ideas without action are meaningless.
So, let me ask you again: why would any investor in their right mind pay to own part of nothing? Think about that. Would you pay someone for a great idea for a business?
Not if you’ve ever built your own business. Because then you’d know how hard it is. You’d know that the “killer idea” is only the first in a series of millions of painful steps that goes into creating a business of any value or meaning.
Because you don’t have traction.
Because you haven’t proven anything.
Because ±80–90% of businesses fail — and you don’t even have a product yet, let alone a business.
You need to be “ready” for funding when you go to investors. You need leverage to negotiate, and the earlier you are in the company’s development, the more you are going to have to give up.
So, when is the ideal time to look for funding? Good question. It comes down to a variety of factors like what’s the status of your product, project and team, is this your first rodeo, what kind of track record do you have and how big is the overall opportunity/market you are tackling?
As a rule of thumb, first time founders should consider fundraising only after they’ve built a decent prototype or MVP. Once there is something tangible and you’ve put some “skin in the game,” investors are much more likely to take you seriously and offer fair(er) terms.
That said, generally the longer you can delay raising money (assuming you don’t need the money — either because you’re profitable or can self-fund the business), the better. Would you rather give up 30% when a month of coding and hustling later, it’d have only cost you 10%?
2. Starting fundraising too late
Ironically, the second biggest mistake founders make (especially after completing their first friends & family or pre-seed round) is taking too long to start fundraising.
You’ve started to build your business, are beginning to see traction and are racing ahead at a relentless pace, working all hours of the day and night. Things are moving, maybe you’ve even hired a few people — you’re going a million miles a minute.
Why stop and waste your time to focus on fundraising? A pitch deck, a few quick emails and you’ll have a couple of term sheets in no time, right?
WRONG.
Almost irregardless of how things are going, fundraising is always a brutal slog. Everything takes longer than you’d think. Even if you have traction, even if you’re building something world-changing.
Because you’re asking investors to part with money.
And they’re getting hundreds of pitch decks a week.
Truthfully, it is hard enough to stand out and get a meeting, let alone a term sheet.
Unfortunately, it is often a numbers game — because breaking through the noise is never guaranteed. Even Uber, Airbnb and Facebook were passed up by the majority of VCs.
Which means even if you’re a hot startup, your chances of getting a meeting might be only ten or twenty percent. And then, there’s getting a second meeting. And then, a terms sheet.
It’s all about tons of cold outreach and leveraging connections. And it takes time, a lot of time. To perfect your pitch deck (here’s a template btw), to find the perfect investors and then to actually go through the whole process. Add due diligence and putting together the full round, and in general, I recommend startups budget a solid 6 months for fundraising. That means, if you’ve got 9 months of runway, you better start planning your next raise pretty soon.
Because if you’re too late, you’ll either run out of money, have to cut headcount, or be forced to compromise on investors/terms… none of which bodes well for your business.
3. Not raising enough money
Right along with starting your fundraise too late is failing to raise enough to reach the next milestone. Eighteen months of runway is a good rule of thumb. It gives you enough dry powder to go “heads-down” for a solid year before having to think about fundraising again.
Because the only thing harder than building a game changing business, is doing it while having to stop for fundraising every 3–6 months.
So, wouldn’t it make sense just to take more money then?
WRONG.
4. Raising too much money
On the flip side of raising too little is raising too much and you might be surprised to know it is even more common and often more devastating than underfunding your company.
Because the worst thing that can happen to any founder is to be so diluted as to basically become an “employee” in your own business. Not only is it incredibly demotivating not to have upside, it also cripples your company’s chance to raise in the future because no investor wants an unmotivated founder with no skin in the game.
In general, every round is about 20% dilution and I’d almost never recommend doing more than 30%, unless it’s a merger, acquisition or the last funding you’ll ever need. Otherwise, you’re just setting yourself up for trouble.
Especially if your valuation is too ambitious.
5. Optimizing for valuation
Valuation’s aren’t only for determining ownership/dilution and keeping score on Crunchbase 🙂 They are supposed to be a measure of your company’s progress and future potential.
But what happens when you fail to live up to those lofty goals? What happens when you’re so successful as a child Hollywood star (Daniel Radcliffe) or first time author (JK Rowling) that anything you do afterward couldn’t possibly live up to your previous accomplishments or expectations?
The same paradox applies to startup valuations. Many a startup have been hamstrung, if not downright destroyed, by overly ambitious valuations.
Because when Blue Apron’s Series D was $135M at a $2B valuation (which assumed certain lofty milestones), who wants to invest in their less-than-stellar public stock with a market cap of just $179M (8.95% off its high!),
And when your existing investors (who have information rights and know what’s going on with the company) decide not to follow on (because otherwise they’d need to mark down their investment, and thus, their ROI and carry — for more on investor economic dynamics, see this post), what does that say to other prospective investors.
We call that negative signaling, kind of like a chef that won’t eat his own cooking.
6. Not optimizing for smart money investors
There is money, and then there is smart money. You know that already. Some investors have great track records, teams and networks that open doors or even portfolio companies who’d be perfect customers for your product. Or maybe it’s tactical advice, help with marketing, a background in legal or HR…
Whatever it is, some investors bring serious value to the table while the majority are nothing more than a piggy bank.
And trust me, I know how tempting it can be as a startup founder who has raised an initial friends and family round to take more easy money. All you want is to get back to building your business and hitting your milestones.
But having the wrong investors can backfire — like when you need follow-on funding or a bridge round and Uncle Bob’s out of cash and the no-name VC you raised from goes belly up, won’t follow-on or doesn’t have those great Series A connections they boasted about.
(For more on the subject, here’s more on the pros & cons of various classes of investor.)
7. Taking money from the wrong investors
Worse even than “dumb money” are investors or LPs with a negative image. Think the Saudis, the Chinese government or anyone with underground connections (Mafia etc…). While money is great, taking money from unsavory folks can literally cripple your business.
Because who you work with says a lot about the values of your company.
And this same caution applies with less “sinister” sources as well, like corporate venture funds.
Imagine building a plant-based meat business with a slaughterhouse as a major investor, a sustainable fashion brand funded by Big Oil or an encryption company backed by the Kremlin… Your customers need to trust your credibility. That means walking the walk.
Time horizons can be problematic as well. If you’re building a business with plans to change the world and eventually go public, a high-frequency hedge fund might not be your best bet. If your timeframe isn’t aligned with your investors’ goals, they can make your life a living hell.
The good news is, most VC funds operate on a 10-year fund cycle (with an additional two years of optionality). That means they’re expecting a liquidity event (acquisition or IPO) within a maximum of 12 years (so they can distribute to their LPs). Contrast that with Wall Street funds expecting an ROI every single minute/second and you’ll see where things could go south real fast.
GENERAL NOTE: Every VC fund claims they’re “founder-friendly” and will be incredibly helpful in growing your business. Don’t trust them. If you want the real story of who to trust and who to work with, ask around and see what their portfolio companies have to say — off the record, of course. Happy to help here if you’re struggling.
8. Fundraising for a business that’s not venture scaleable
The economics of venture capital are very straightforward — VCs only care about outliers. One out of every ten or so investments should pay for the others many times over, and generally speaking, investors target companies with a 50 or 100x potential (to make up for all the flops).
If you’re going to take VC money, you need to know the expectations and the strings attached (more on that here). All of which means, most companies aren’t suitable for venture capital.
How many mom & pop coffee shops, web dev firms or hairstylists do you know that could realistically 100x their operations and output? Almost none. Because those businesses are not ultra scalable — they require manual labor (and often capital and/or space).
That’s why Uber and Airbnb were so innovative (although Airbnb is a better business in my opinion) — the world’s largest taxi and hotel companies that don’t own a single taxi or hotel. Instead, they facilitate everything with software (which can be scaled almost infinitely and updated constantly at almost no cost) and have almost no capital costs.
That said, sometimes VCs will still give you money, even if your business isn’t venture scale (or shouldn’t be). That’s what happened with Rent the Runway and Casper mattress, where investors pile money into businesses that simply don’t have the unit economics and cost structure to scale profitably.
Unfortunately, this is often the case with physical products or other business models that lack built-in flywheels (more on designing viral loops here/below) or winner-take-all dynamics.
So be careful.
Because if you take that investor money, your dreams of building a “4-hour workweek” or lifestyle business just went out the window.
9. Fundraising on bad terms (not just valuation)
The terms of a venture financing round are often even more important than the valuation itself. It doesn’t matter if you raised $20M at a $80M pre if you gave up “double-dip” preferred shares or too many board seats.
NOTE: Double-dip preferred refers to 2X preferred liquidation preferences. That means, if you sell your company, your investors get at least double their money back before you ever see a dime. See graph below from Toptal to see what this looks like in practice.
As you can see, if you ended up having to sell the business for $40M or less, you as the founder (whose blood, sweat and tears built the business) would get nothing.
And there are plenty of other term sheet pitfalls founders need to be wary of, which Toptal cover pretty well in a blog post here.
10. Overpromising or outright lying
There is a difference between Elizabeth Holmes fraudulent claims that Theranos could run full blood diagnostics from only a drop of blood and WeWork’s Adam Neumann, who’s hyped up claims and borderline insanity led WeWork to grow to a $47B private valuation (of course, led by SoftBank) before it came crashing to Earth.
And while neither are good, in the wake of the implosion from each, Holmes is now on trial for fraud and may well see jail time while Neumann got a $1.7B golden parachute pension — which is just horrific considering how he treated employees, who ended up with essentially nothing.
So, rule #1 when it comes to fundraising, DO NOT LIE. It can only come back to bite you, especially as any VC worth their salt will diligence your company before making the final investment. And nothing looks worse than inflated (or outright false) pitch deck stats that don’t hold up to scrutiny. Especially because word gets around.
But overpromising can be just as damaging. Seems counterintuitive? If anything, aren’t the best founders also the most visionary, i.e. the ones shooting for the stars? How can Tesla’s promised ship dates and autopilot functionality be anything other than overpromising?
Here’s the thing: a) you’re not Elon Musk and b) there is a difference between promising something and aiming for something. Every investor knows your targets are ambitious and there’s a very real chance you don’t hit them.
But you need to be at least in the ballpark. Otherwise, when it comes time to raise your next round, if you haven’t hit your milestones, you may well be looking at a bridge round or a downround — neither of which look great for the trajectory of your supposed “rocket ship.”
11. Not sending investors updates
What is the easy way to grow your business and acquire new customers… It’s a trick question. Why acquire new customers when it’s so much easier to upsell your existing ones? That’s why maintaining good rapport with your investor base is so critical.
Odds are, you’re going to need more money at some point… and most investors have more money. That’s why the fastest way of filling your next round is simply wowing your existing investors so much that they throw money at you rather than risk other investors coming in and taking a piece of the pie.
That’s where investor updates come in. The more consistently and openly you communicate with your investors, the better. They already know, like and trust you, all you need to do is prove you’re worth continuing to invest in. And most investors follow-on, at least their pro-rata — except when you’re clearly underperforming, inconsistent or hard to work with.
Investor updates allow you to ask for help, connections, etc… by simply updating your investors monthly (at the very least quarterly) with the latest happenings and traction in the business.
They’ll appreciate it and it will keep you honest and accountable as you constantly have to evaluate and summarize your progress, goals and future plans.
TAKE AWAY: Update your investors with a brief email once a month.
12. Not following up with investors
Most investors are just as busy as you are. That means, emails occasionally get missed and things fall through the cracks — so follow up with every investor if you haven’t heard from them in a while. You never know what might happen.
It’s also a good idea to follow up after your pitch, thank them for their time and ask if they have any additional questions.
But following up is pretty straightforward and this has been an incredibly long article already, so I’ll leave it at that.
13. Not practicing your pitch or having automatic answers to investor questions
After creating a killer pitch deck (here’s your guide to do just that in case yours could use some work), nothing is more important than practicing your pitch. Because it is not natural to ask for money. The truth is, everything about the process of fundraising is a bit foreign until you’ve done it a few times.
That’s why, even after you’ve practiced dozens of times in the mirror and with your mom, your kids, or your husband, it’s still a good idea to target lower tier investors first. This is your one shot after all and you wouldn’t want to blow it with your dream Series A firm by “going in cold.”
So, stack rank your prospective funds in order of potential: low, medium and high. Then, as you practice your pitch with the less promising prospects, you’ll learn how they react, what kind of questions they ask, where they get excited or confused and what kind of feedback do they give — all of which is gold when it comes to reworking your deck and prepping for your perfect pitch.
Because let’s face it, no one’s perfect the first time.
PRO TIP: Make a list of all the possible objections an investor could have that would prevent them from investing in your company and make sure you have great, off-the-cuff answers ready. Nothing impresses investors more than a founder that’s prepared and done their homework. (Happy to help here if you need a pitch partner).
PRO TIP 2: Know a thing or two about the investor and firm you’re pitching before making your pitch. Sometimes, knowing they personally scouted eBay, founded Pinterest or were early at Google can make the difference between clicking and coming up flat.
Closing Thoughts on Fundraising Mistakes
Fundraising is not fun, but it doesn’t have to be horrible either. It’s a process, a sales process of finding prospects and selling them on the future potential of your business. That’s it. Don’t get overly excited or nervous. Come prepared, avoid the pitfalls listed above and you’re already ahead of the majority of startups anyway.
Just do your thing and sell your vision and keep hustling. If you start your fundraising process early enough and stick with it, you’ll maximize your chances of success.
But after thinking about fundraising for the past 3000+ words, there’s one even more important thing to keep in mind.
Ideas are worthless. Execution is everything.
Because if your product is incredible and your traction is exploding, fundraising will take care of itself.
Part 5: How to Structure Your Fundraise to Close Your Round Faster
This article (and the fundraising guide it is a part of) is for those looking to do it bigger and better, looking to fundraise (not just quickly, but efficiently) to get the fuel they need to power through development and growth and build something meaningful.
So, let’s close your round faster.
Because fundraising doesn’t HAVE TO be hard.
Because no one actually likes fundraising.
Because you need to get back to working on your business.
Let’s assume you’ve got a startup and need funding. The next logical question is: Now what? So many entrepreneurs struggle with this when looking to turn their idea into a fully fledged business.
And it is no wonder… you’ve never done this before. And there are plenty of ways it can go wrong. Which is why I recommend you read Part 4 of the Ultimate Startup Fundraising Guide: Top 13 Mistakes Startups Make While Fundraising.
Assuming you have read that and the previous articles above and that it is actually the right time to go about raising (if you’re not sure, see this post) then it is time to get down to business.
The 7 Steps to Any Successful Startup Fundraise
1. The Ask
Before even considering creating a pitch deck or pitching investors, you need to know how much money your business ACTUALLY NEEDS. That’s the entire purpose of the fundraise after all. You wouldn’t be giving up hard earned equity in your business if you didn’t REALLY need the cash.
Hence why I say NEED here. Because if you are reading this article, you’re probably pretty new at this, i.e. early on in the startup growth cycle. Which of course means that raising too much or too early could spell major dilution for you as the founder(s). And no one wants that, so let’s focus on what you NEED.
First question: What are you going to use the money for? Many startups like to throw around big round numbers and huge valuations because it looks good and sounds cool.
“If XYZ raised a $1M pre seed, we can probably get $1.25M, right?”
But where does that $1.25M number come from? How are you going to deploy that capital? Hire some developers, hire some salespeople… Pour a bit into Google and Facebook ads (btw I hate advertising as a main acquisition channel because it keeps costing money. If you’d prefer viral organic growth, let’s talk about how I could help scale your marketing blowing your money on ads 🙂 Heck, maybe you’d even like an actual office and for the founders to be able to afford more than Ramen and pasta…
All of that seems reasonable, right?
But what does $1.25M actually buy you?
What does it mean in terms of runway?
How many new people can you hire?
What will happen to your burn rate and cash reserves? (Btw, there are always unexpected costs…)
Sure it can all seem a bit overwhelming at first, but that’s your job. And while you don’t need to be a CFA to succeed as a startup founder, you do need to be able to do some back of the envelope math, or better yet, bust out some Excel. You NEEd to understand your numbers and overall financial plan — even relatively early on.
Because that funding round you’re planning better cover the next 18 months. With the 5–6 months it generally takes to raise a round, you’re left with basically one year (12 months) to make serious progress and hit your next sets of milestones.
And time flies when you are having fun practically drowning and racing a million miles a minute.
PRO TIP: You should dedicate an entire slide of your pitch deck to your ASK — i.e., how much you need with a pie chart breakdown of how you’ll use the funds. For more, see Part 3 of this guide: Crafting a Killer Pitch Deck.
PRO TIP 2: Remember, you’re raising money to accelerate growth. That needs to be taken into account for funding and team needs. Said another way, if your overhead costs in 12 months aren’t significantly more than they are now, you’re probably doing something wrong or not growing fast enough.
2. The Pitch Deck
Shows like Shark Tank, Silicon Valley and Billions have glorified entrepreneurship, hyping up “the pitch,” and “the art” of raising money. Most are terrible examples for real startup founders. That’s because most founders that go on TV are either really inexperienced (and there because the producers want laughs) or raising money for businesses with almost no chance of venture scale returns (i.e. the ability to 100x). And if a company can’t go 50–100x, most VCs aren’t interested.
If you haven’t already read Part 3 of our Ultimate Guide to Startup Fundraising: Crafting Your Killer Pitch Deck and created your “deck” as it’s called in the venture world, you should do so now.
And if you’re having trouble quickly explaining your idea/business or grabbing people’s attention, it is worth re-reading my Elevator Pitch guide a read as well:
(Still need more help? I help lots of companies perfect their pitch deck and plan their fundraise. Let’s talk).
3. The Investors
Having the right investors can make or break a startup. Do you think Uber or Airbnb would have become super unicorns if their early investors had expected an ROI in the first couple years? Of course not.
That’s why aligning investor expectations is so so important. (For more on this, see Part 4: The Most Common Fundraising Mistakes Startups Make and Part 2: Understanding the Pros and Cons of Each Type of Investor).
But having investor alignment on things like timing, check size and follow-on funding aren’t the only things to consider when building your “dream investor” list. And yes, you should have a dream investor list, even if only to show that you’ve done your homework and understand the space.
Because anyone that thinks all money is created equal is probably too naive and inexperienced to make it in the brutal world of venture.
You need to know that most investors have a thesis or a sector focus. Some only do B2B or SaaS, or only B2B SaaS. Others only invest in California, or in Europe, or in Asia. Most firms have a specific stage and check size — like pre seed, seed, Series A etc… and not all funds are willing to lead a round (i.e. set the deal terms and be the main investor — this usually only becomes a topic at or after seed).
All of these things are things that founders need to know. If you pitch The Vision Fund on a pre seed startup or look to YCombinator for your Series E, you come off clueless. You wouldn’t ask Gordon Ramsey to pour a bowl of cereal or McDonald’s to smoke you a side of caviar, now would you…?
To avoid looking dumb and possibly ruining your chances an investment (either with the VC you’re pitch or with other firms, because word gets around…), consider the following factors before deciding which investors to reach out to:
- Stage
- Sector
- Geography
- Portfolio track record
The first three are pretty straightforward. They either do seed stage fintech, or they don’t. They either consider Swiss companies, or focus elsewhere. You should be able to find the basics on their about us, thesis or portfolio page.
Portfolio’s a bit different though. That is where you can really differentiate the funds in terms of their focus and track record, and also possibly separate yourself from the competition. Knowing a thing or two about the investors you’re pitching, shows you’ve taken the time to research them and can help grab their attention, especially if you reference their investment in a relevant company when structuring your outreach.
“I know you invested in Uber. Well, we’re like Uber for boats, so anyone can grab a ride to the mainland and hop aboard from anywhere…”
3a. Finding the Investors
Attracting investment is unfortunately a numbers game. To increase your chances of success, you should pitch at least 100 investors… If that seems like a ton, it is because it is. You need to break through all the noise. Remember, many investors receive dozens (more likely hundreds) of pitches and pitch decks a week.
Even if you are the best thing since sliced bread, it is good to keep in mind that most investors passed on Facebook, Uber, Airbnb etc… Hence why fundraising is all about hustle.
But now that you know what to look for and how many investors you’ll need to find, it’s time to start looking. Sites like Crunchbase and CB Insights can be great places to start. Both feature lists of top investors by geography, sector, even stage… Which let’s you whittle down your list of prospects and save time for honing your outreach.
Other great resources include Angellist (which have both syndicates and venture funds — for more on the differences, see this post), Signal (a new venture focused “social” platform), DealRoom or even good ole Linkedin. On top of that, I’d recommend Googling for things like: “top biotech investors” and “top seed stage investors,” all which combined will give you a pretty good base to start building your VC list.
Which then becomes an overwhelming mass of spreadsheet rows.
So it’s time to pick favorites.
3b. Ranking Potential Investors
As we’ve said, some firms are better than others — either in terms of their fit for your company or their overall reputation and signaling power. Get a terms sheet from somebody like Sequoia, Andreessen or Benchmark and there’s a good chance more money will pile on — not just in this round, but in subsequent rounds as well.
That’s why it’s important to pick favorites. There is only so much space in your round (and every VC is going to want their bite).
Ranking your prospective firms will help to prioritize your outreach. That said, scoring everyone from 1–10 is probably overcomplicating things. Give each investor a score from 1 to 3 based on everything we’ve already outlined.
And then, all the sudden, after countless days of research, you’re ready.
Are you ready…?
NOTE: Don’t reach out to your Cinderella funds right away. Odds are, you’ll botch the delivery or do something dumb. It is much smarter to first pitch the lower “tier 3” investors that you’re not all that excited about first. That will get the hiccups out of the way and help you tailor your pitch based on the feedback and reactions of those initial calls.
4. The Outreach
Think about how many emails you get a day. Multiply that times a hundred and you’re probably looking at the amount of cold inbound, email, Linkedin and Twitter DMs many VCs are dealing with.
So, what is going to make your pitch stand out?
A warm intro is always the best. If you know someone that knows someone, that can be your ticket to a first meeting. Check Linkedin — their connections feature is quite helpful.
If you’re somehow connected, that means you’re going in cold. That means you need to be attention grabbing and precise.
NOTE: Some funds have specific ways they want to be pitched or even pitch Typeforms on their site. Be sure to check before sending a cold email.
Assuming you’re going email, it always starts with a Subject Line. How do you stand out?
Including: PITCH: in the subject may help, just in case they have special email filters in place.
Then, it’s time for your elevator pitch or your traction, whichever is sexier. Maybe both.
Some Good Examples:
- PITCH: Amazon for collectible automobiles — Growing 30% MoM!
- PITCH: DTC Recycled fashion brand doing $30k/mo
- PITCH: Yoga app for the visually impaired — 20k users, $15k MRR
- PITCH: Email automation tool — min: 30% less emails, 1M+ downloads in 2 months
Short, sweet and to the point. Plus, they show you know what VCs care about and respect their time. If you’ve picked the right fund and they’re interested in your stage and vertical, they will open that email.
Then it comes down to the email itself and getting them to read your pitch deck.
For the email, keep things short and get them excited without revealing everything.
It helps to make things easy for them to set up a call as well.
–
Hi XYZ,
Saw you invested in Peleton. We’re doing something similar — instructor-led yoga-at-home sessions for the visually impaired.
We launched 2 months ago, have 20k users and are already at $15k MRR. We need $1M to accelerate growth and cover North America. Our CAC is $1 and our LTV is already 12x that with a churn of 1%.
Here’s our deck — I’d love to tell you more.
Here’s my calendar link or just tell me any time that works for you for a Zoom call.
Cheers,
–
That’s only six sentences and any VC is going to open that pitch deck and probably set up a meeting. The company’s crushing it, the founder is competent and the business model/elevator pitch is pretty unique.
Sure, it is probably not that easy for your company and the numbers here are made up, but think along the same lines.
What do you do?
What kind of traction do you have?
Why should the VC care?
If you answer those three questions well, you’ll pique any investor’s interest.
And if your pitch deck is awesome (which it should be if you followed the pitch deck guide), you should get a meeting. (If not and you need help, let’s talk).
5. The Pitch
While some investors have a specific way they want you to pitch, most will let you lead the meeting. That means, you need to have practiced a ton in advance. Think dozens of times in the mirror and in front of family and friends.
And even then, you might be nervous. Heck, you probably will be nervous. You are asking someone you barely know to give you a bunch of money to build your business that was once barely even an idea. That’s terrifying, especially the first time — Hence why you pitch the “ugly ducklings” first 🙂
But even before preparing your pitch, you should know how much time you’ll have. Nothing is worse than running out of time.
Unless otherwise specified, it’s probably safe to assume you’ll only have 30 minutes. That means, you should get your pitch done in 10–15 and leave the rest for questions and follow up.
That’s pretty tough. 15+ slides in 15 minutes… And you’re going to be nervous. That’s where practice and refinement come in. You need to know what you are going to say and how you are going to say it.
I can’t help you there. All I can do is emphasize again the importance of practice.
But don’t stress too much. If you mess up, laugh about it. Say you’re a little nervous, they’ll understand. If they don’t, you probably don’t want them as an investor anyway.
PRO TIP: Practice doesn’t only apply to the pitch, but to the Q&A at the end as well. Brainstorm any possible questions or objections investors may have and have great answers ready. Nothing’s more powerful, reassuring or convincing than responding automatically to their concerns.
PRO TIP 2: Do a bunch of push ups, sprints or jumping jacks before practicing your pitch. Huh?… Think about it. Your mind will be racing and your heart pumping when you give your actual pitch… Doesn’t it makes sense to practice under similar circumstances?
NOTE: Your main goal with the first meeting is to get a second meeting, because most VCs need at least 2 meetings before investing. As such, your follow up is one of the most important aspects of your pitch. Be sure to both thank them for their time and casually add one or two more reasons for them to act now so they don’t miss out on your round.
Maybe something like:
–
Thanks so much for your time and questions. We’d be honored to have you as an investor as we disrupt the $100B+ unsustainable fashion market and cut out 50% of the costs for consumers.
Let me know if you have any more questions or want to set up another call before the round closes. I’m available whenever and would love to share more.
–
And then you hit SEND.
Suddenly, you’re done. You’ve made it through your list of investors, tons of pitch emails and had a handful of solid (if nerve-wracking) calls.
Now, cross your fingers, pray to whichever god or otherworldly deity you believe in (plus maybe a couple others for insurance sake… fundraising is a numbers game after all :), and then, get back to building your business. All you can do is hustle. All you can do is dedicate everything to building the business bigger, faster.
Because more than anything else, success attracts success. Winning solves pretty much everything else — like your cash crunch, your need for investors, your struggles attracting customers… The bigger you are and the faster you grow, the easier everything else becomes — other than HR, operations and being a “real” CEO, of course. But you’ll get to those later. First, you need to survive.
Which is all about money.
Which means revenue.
Unless you get a term sheet.
6. The Term Sheet(s)
Step 6 is a PS on a particularly successful fundraise, it means you actually have investors interested. Congratulations! Only 0.05% of startups ever attract venture funding, which puts you in rarified air.
And if you’re in the fortunate position of having multiple term sheets, all the better. Because beggars can’t be choosers…
Assuming you’ve got the term sheet in hand, you won’t have long to think about the offer. You’ll need to evaluate it pretty quickly (unless you have lots of leverage in terms of other term sheets). That means, it’s worth knowing the ins and outs of a term sheet and also having a lawyer ready to read things over. Some things are best left to the experts, hence why I’m going to link to the following rather than try to clarify everything to know/look for in a term sheet:
Term Sheets: What You Need To Know
The startup founder’s ultimate guide to term sheets
When it comes to negotiating, weigh your options carefully (YC has a good guide here). How bad do you need the money? Do you have multiple offers? Is a bigger valuation really worth potentially wrecking the round? Is the VC someone you like and trust? Remember, you’re going to be in business together for a long time, at least if things go well.
So, think before you sign.
Step 7: The Due Diligence and/or Close
A term sheet isn’t actually a done deal. It takes time after a VC agrees to invest for additional due diligence on your company. They will want to check everything you claimed in your pitch deck, see more about the inner workings of the company, the finances, the cap table, legal structuring etc… All that takes time.
Generally, startups should plan for closing to last about 30–60 days. That means if you’re desperately fundraising and running out of cash, you might need to start your fundraise even sooner
NOTE: Of course, if you get a term sheet and are about to die, investors can expedite the process to keep the company afloat, but the more time and runway you have, the better… because negotiating is all about leverage.
And that is what fundraising is, a negotiation.
Closing Thoughts
Fundraising is a means to an end, not the end itself. And now that we are at the end of our Ultimate Guide to Startup Fundraising series, it’s time for a new beginning. It is time for you to get down to business and get started preparing your fundraise.
I hope this has been helpful.
I hope you raise your round.
I hope you change the world.
Now, good luck, get back to work and please reach out if you need help with your fundraise, your business in general or want to build your flywheel faster to grow and scale your business.
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About the author
Matt Ward is a multiple exit entrepreneur, growth and strategy consultant, startup advisor, ex-tech investing and futurism podcaster, and occasional angel investor looking to join a venture fund, startup studio, or top accelerator in Zurich, Switzerland to promote and invest in world-positive, game changing entrepreneurs. If you are interested in learning more about me or possibly working together, please feel free to reach out here:
