The question I get asked most often is “would Homebrew like to invest in my startup” (and we do our fair share of chasing too -> “please let us invest in your startup!”). The question I get asked second most often is “if not Homebrew, will you introduce me to some VCs who would like to invest in my startup.” There’s a reason why I won’t – because it means putting my reputation on the line for a founder I don’t really know. And in this business, reputation is very important.
One of the most important things in writing an effective cold email is to keep it short. However, communicating all the things necessary to elicit a response in 3-4 sentences can be extremely challenging. One way I’ve been able to overcome this and start dialogues with many c-level execs and big time entrepreneurs is by communicating my message in a more visually engaging format that’s easier to consume than text.
You need strong alternatives to hack a term sheet. Create alternatives with focus: pitch and negotiate with all your prospective investors at once. Focus compounds scarcity and social proof, which closes deals. Focus also yields a quick yes or no from investors—either way, you will soon get back to building your business.
It is very common for investors to get introduced to founders with the proviso that a term sheet will be signed in the next few days. As a result, founders and investors are spending very little time getting to know each other before entering into long-term business contracts. This is bad news for everyone.
The 5 main qualities of an ‘exceptional startup,’ in the following order: 1. Traction, 2. Team, 3. Product, 4. Social Proof, 5. Pitch/Presentation.
Don’t talk to one investor at a time, talk to all of them at once. It’s the only way to get market-clearing terms. Meeting every investor over a short period of time creates a positive feedback loop of social proof and scarcity that closes deals.
Having raised a number of VC rounds personally and observed many more as an investor or friend, I’ve come to think there are a set of dominant best practices that entrepreneurs should follow.
I have to live with occasionally not living up to other people’s expectations. And to telling people to bug me multiple times if I haven’t responded to an email that they deemed as important. If that’s you – I apologize now, in advance. I’m willing to accept that I’ll never be a black belt in email.
Seed-stage investors don’t like top-heavy companies: CEO, COO, CXO, CYO, VP of X, Y, and Z. It’s almost an immediate pass. No sophisticated investor is impressed by titles in an early stage startup.
VC’s don’t like to invest across multiple funds. I thought I’d do a quick post on why VC’s don’t like to cross funds so entrepreneurs can better understand the situation and how to talk with their investors about it.
It is not uncommon to see a VC talk about “total assets under management” as in “We have $1.5 billion under management.” I don’t really understand why VCs do this since it’s mostly a meaningless number. I’m writing this post to explain to entrepreneurs what you should be thinking about in terms of the VC’s you approach and the size and stage of their funds.
When you visit a VC to tell them about your wonderful idea it’s easy to imagine that this person is not evaluating any other deals at the moment. I have no idea why, but that’s always how it always felt to me when I was an entrepreneur raising money. Of course I knew that they sat on other boards that kept them busy but somehow it seemed like I had all of their attention to myself during the fund raising process – especially the ones who seemed to like me and spend time with me. Even when you’re getting the VC love this reality I imagined couldn’t be further from the truth.
Respond immediately and be available to meet immediately. BCC the introducer. If you don’t live nearby, find out where the investor is and let them know if you’re going to be there soon. If you’re not going to be near them soon, propose a phone call. Propose specific times to talk. If there’s a deadline on the financing or you’re going to be oversubscribed, politely let them know. Write less — you have no idea how busy a typical investor’s inbox is. Don’t be colloquial. Attach a copy of your deck. Use an email program like Gmail that generates narrow fucking columns. Don’t write HTML emails. Include a cell # and URL in the signature and not much more. Bonus: include one line of good news — or start the email with a substantive sentence about a mutual acquaintance or something about the investor’s portfolio or blog or whatever.
Suppose there is a pre-profitable company that is raising venture financing. Simple, classical economic models would predict that although there might be multiple VCs interested in investing, at the end of the financing process the valuation will rise to the clearing price where the demand for the company’s stock equals the supply (amount being issued). Actual venture financings work nothing like this simple model would predict.
A VC will meet with pretty much anyone they deem “serious” in order to gather more information, which they can then use to discover interesting investments, do better diligence on potential investments, impress entrepreneurs and other VCs with their knowledge, gossip with other VCs about recent deals and trends, and give seemingly informed advice to their portfolio companies.
From my experience, picking the right partner is very important. For example, in two companies I seeded, the same top tier VC firm invested in later rounds. In one case the partner has been super helpful, and in the other case pretty much absent. As I mentioned above, the partner’s influence within the firm also matters. A influential partner can, for example, “pound the table” to do a follow on financing when you need it.
The biggest question that I get asked is how to find angels. It is really easier and should be a test of your entrepreneurial chops to figure this out but I’ll give you a cheat sheet.
You’ve pitched several angels and VC’s. Everybody seems to like you but nobody seems to be getting out their checkbooks. Most of them are telling you that they just need to see a bit of traction before they’d be prepared to invest. Your friends and advisers tell you that this means you need revenue because in this economy VC’s will only fund businesses with revenue. Unfortunately your advisers are wrong. The “more traction” feedback is a very typical scenario is a down market economy like the one we’re in. Investors are giving you a version of the “soft no,” which basically means that they’re not prepared to invest now. So if it’s not necessarily revenue that’s preventing an investment, then WTF is traction?
Most VC’s have a “submit your business plan” place on their website. Don’t. Instead you should get intro’s as follows.
While I know I should be better at processing email, I know that I’m not alone as a VC in getting back-logged. Frankly my experience with email is that the same things happens when you email CxO’s, SVP’s, i-bankers, etc. We’re all overloaded. So what should you do about it?