Non-Obvious Fundraising Learnings

I’ve been a co-founder in three VC-backed startups:

  1. Qloud. We raised $3.5 million from Steve Case’s Revolution fund (sold for $8.5 to BuzzMedia)
  2. Kapost. We’ve raised $20m from Salesforce, Floodgate (SF), Cueball (Boston), LeadEdge Capital (NYC), Tango (CO local), Highway 12 (Idaho fund), Fraser/McCombs (CO), and Access (CO).
  3. Onward. We have just recently raised a $1.5m seed round from Matchstick Ventures, Royal Street Ventures and JPK Capital

From these experiences I have pitched (with Toby on the first two) to hundreds of VC firms and learned some non-obvious lessons. These only really apply to Pre-Seed, Seed and Series A.

Here we go:

The Size of Fund Matters
It matters more than you think. It’s probably the biggest indicator of whether or not you’ll be a good fit with your investor. Before you do anything, check out the size of the fund of the VC you’re meeting with. If your company is small and you don’t see how you’re getting to $100m in revenue, you’re way better off raising from a smaller fund. A general rule of thumb I use is: the size of the fund is equal to the minimum sale amount of your company that the investor would be OK with. For instance, you’ve raised from a $20 million fund and you get acquired for $20m. They’re ok with that. But if you’ve raised from a $400m fund and you’ve got an offer to get acquired for $20m, they view that as a failure and a waste of time.

The size of the fund triggers all of the VC’s behavior. At a $400m fund, they have only 4-6 partners and each partner needs to bring home at least $100m in returns (this is rough estimates) thus each company a partner invests in must be capable of getting there. Do the math.

When we were small at Qloud, we knew we were small and likely getting acquired for small amounts. Investors knew it too. That’s why they started throwing out liquidation preferences and things like that to block a small sale from happening.

Early in Kapost we weren’t going after a huge market so we targeted local smaller investors. Now when our market is huge and our opportunity is huge, we’re talking to bigger investors.

Don’t Get Excited
A “yes” and a great meeting still only means “maybe.” A VC never wants to burn a bridge. Their job is about relationships and access to startups. Saying “no” goes against that and will almost never happen. Thus, you’ll always feel like they love you, until they back out – and they’ll do that only if they have to. They’d rather they stay informed and involved indefinitely or until you hit profitability or until you’re a risk of going somewhere else.

Here’s a great quote from First Round Capital partner:

And here’s the deal on the VC side: both partners and associates are paid to get out there and build relationships with promising young companies, but there’s no commitment. Investors want to make sure they get “the call” from founders when they begin fundraising — so they’re motivated to send “happy vibes” in order to stay around the hoop. These happy vibes are heard by a founder’s “happy ears” — often leading the founder to draw false conclusions about the true level of potential VC interest.

So, how do you truly measure a VC’s interest? Look at time spent. That’s a VC’s most valuable resource and I find that they mainly spend time with new companies they truly interested. If you’re getting a lot of time, they like you. If not, then move on.

Finally, it’s not hard to get an initial meeting with a VC, but don’t think that a meeting validates anything or represents interest. It’s their job. Often they’ll take the meeting just to learn about the market.

You’re doing them a favor
This part is related to the attitude and frame of mind you need to have when meeting with a VC. This isn’t an issue for everyone but I see this quite a bit with people fundraising for the first time, and those who have heavy imposter syndrome.

If you go into a meeting with a VC thinking that you’re asking them for money or you’re lucky to be having the conversation, you’re dead. When pitching, remember, you’re not asking for money. You’re sharing with a potential investor your secrets, your hard work, your path for how you’re going to make them money. You’re presenting them with a chance to be a partner and get on board. That is the only way to frame it. If you act like they’re doing you a favor, you’re done.

Related: if you don’t fully believe that your venture will make money, you should solve problem that before pitching.

Intro’s Matter
Anyone can get in front of a VC, but if it’s a cold meeting at a conference or through office hours or something non-personal, you’re starting off in a bad place. You need to be vetted at least a little bit for them to listen. It’d ideal if you come in the door by a referral from someone already in their portfolio. If it’s from someone they like and respect, that’s good too. If it’s from someone they just kind of know, that can work. If it’s not from any of the above, it’s probably not going to happen.

How do you get this intro? Find a company who a VC has invested in and meet with the founder. Build that relationship or at least convince them about your idea. Then ask them to make an intro.

Keep in mind the big 3: Team, Product, Market
Every VC has a different way of evaluating you but it all boils down to team, market and product. When you meet with the VC, make sure you have great answers for those and you need to be great at one of them. If you’re a first time entrepreneur, I’d spend all my time getting my product to be awesome in a good market. That’s the best way to combat an inexperienced team. Mark Zuckerberg is the best example of this.

A good post from Marc Andreesen about why he favors market over the other two categories.

Your secret and your story matters more than the business plan
This is for seed and maybe ‘A’ rounds. You need to know how you’ll make money but more than anything you need a good story. That story should have a secret. Chris Dixon agrees. You’ve started this company for a reason and that reason is unique to you and your background. It’s should be a good story. It highlights why you’re better to capture this opportunity than anyone else. It’s also sheds light as to why nobody else has thought of it.

For instance, at Qloud, we pitched and had a story of that we had been working at the music startup Ruckus for years.  There we were talking to college students about how they consume and find music. From that experience we knew how to solve music discovery. VC’s were interested in what we had learned and how we were going to build that into a product. We were unique. We had a secret.

At Kapost, we saw how media companies were shifting their business technologies to WordPress and Drupal. We saw how the professional media and content business was evolving. We then saw how marketing departments were mimicking journalists. We had studied what worked in content marketing and what didn’t. We were experts. We had a secret. You need one too.

Venture Capital Might Not Be For You

It probably isn’t. As they say at First Round Capital, they are selling jet fuel.

They want to fund jets – business that are growing fast. You have to be one of these. If you not yet, you should be aware that if you take VC money, then you will need to become one.  Growing organically and methodically is not what most VC’s want. If that’s your plan, don’t partner with venture capital.  The media and the VC industry has led you to believe that raising VC is the correct and best path. That’s not always true. It’s possibly that your market isn’t big enough or your product hasn’t achieved product-market-fit yet.


Good luck!

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