“Just visit ten investors,” my friend Dave said to me. “If no one is interested, then you should just move on.”
Dave is a dear friend, a mentor, and, at the time, a VC. Usually his advice is spot on. However, this was one time I just couldn’t agree with his advice.
“But you told me you only invest in one company for every one hundred you take a face to face meeting with. I don’t think the numbers add up if I quit after just ten meetings.”
Dave thought about what I said for a minute. Then he smiled at me and said, “I think you’re right.” Then he laughed and said, “Ignore my previous advice!”
A. You need to understand that raising money is a numbers game.
That 100:1 ratio is what stuck in my head, not the meet with just ten investors. Think about it. If investors only invest in one out of every one hundred companies, then your odds of getting an investment from any one investor are around one in hundred.
So when I was raising my initial funding, I told myself that we needed to meet with at least 100 investors to get the odds in our favor. In our case it took 64 investors before we were able to raise our funding.
In Tim Westergren’s case, he met with over 300 investors before he secured Pandora’s funding. The point is fundraising is unpredictable, and your dreams of instant success may not be realized.
That leads directly to my next point…
B. You never know when lightning is going to strike so…
You should always be prepared from your first meeting. I remember meeting with an entrepreneur in San Francisco when I was an EIR for Dave’s fund.
After we shook hands and explained pleasantries I waited for him to start his presentation. He looked at me and said, “Here’s a slide that might work.”
Then he started looking for the slide in his powerpoint deck. Eventually he found the slide.
You can guess the result of the meeting. He told us at the end of the meeting that we were the first fund he had met with and he didn’t think we would be interested in investing. In other words, we were being used as practice.
The sad thing was we were genuinely interested (why else would we have taken the meeting?) and we thought he had a good team around him. However, we couldn’t get over his lack of preparation.
So learn your lesson and be prepared from your first investor meeting. Even then though…
C. Give yourself at least six months runway to raise your funding.
It’s unlikely that the first investor you meet with is going to write you a check. It’s much more likely that you’re going to have to find your way.
You’re likely going to have to improve your pitch deck as time goes on. And it may take some time before your story gels. Plus there are external factors such as the economy that greatly extend how long it will take you to raise your funding.
So a six month minimum time frame to raise your funding is a good bet. But..
D. Better yet, give yourself at least one year to raise your funding.
It took us over two years to raise our initial funding because we started raising money at possibly the worst time imaginable (The Great Recession). Plus our type of company (semiconductor) was falling out of favor with investors.
So assume six months is the average time it will take you to raise your funding and then pad that by another six months. That’s why I always recommend that you give yourself one year to raise your funding.
Now that you’re raising money remember…
E. Most of the feedback you get from investors will be worthless, but…
Every so often, you will get good, useful feedback from investors. For example, I got a phone call from an investor letting me know he was passing.
Now, an investor calling you to let you know they are passing is unique enough, so I was listening intently when he said, “I think you should change the chart showing your growth from a log/log chart to a straight linear chart.”
I thought I was making it easy for investors to see we were growing at a predictable pace. However, I was, more importantly, masking how explosive our growth was. I changed the chart, and I immediately noticed that investors eyes lit up when I showed them the new slide.
This leads to my next piece of advice…
F. Don’t do silly things that will hurt your chances with investors.
“Where’s your CEO?” I asked the CTO who was giving the pitch.
“He’s too busy meeting with customers to be here,” the CTO responded.
“Well, I appreciate your honesty, but we can’t invest without without hearing from the CEO.”
Not going to an investor pitch is a silly thing to do if you’re a startup CEO. There are other silly things you can do like trying to set the valuation for your funding.
I know there are those who would disagree with me, but let me ask you a question: Who has negotiated more deals, you or the investor you are talking with?
I think you get my point. You can only hurt yourself by suggesting a valuation. Instead let investors suggest a price. You can always make a counter offer, or, better yet, get a competing term sheet.
Speaking of valuation…
G. Valuation is not the most important thing you should look for…
But, investor alignment is the most important thing you should look for between you and your investors. Investor alignment means that your goals and your investors goals need to be in alignment.
For example, if you are focused on going after market A and your investor wants you to go after market B, then you are not in alignment. If you want to sell your company for $50M and your investors will not be happy if you sell your company for less than $500M, well you’re not in alignment.
So this alignment thing is pretty important.
Let’s say you’re in alignment with your investors, then…
H. You should under promise and over deliver.
I learned this one the hard way. I had learned before becoming CEO to present engineering schedules with no pad and no buffer.
The result was we started falling behind our schedules and our investors took notice. From my perspective, nothing was wrong, but our investors became worried. I was causing a problem with the way we were presenting the information to our investors.
Jeroen, our VP Engineering, and I came up with a much better way (Eli Goldratt’s Critical Chain methodology) to present our engineering progress to our investors. Our investors concerns went away a couple months after we adjusted to the new methodology.
The same concept holds for other key metrics, especially sales related metrics. Most entrepreneurs are overly optimistic about the sales growth of their companies. You should give yourself a buffer when you present to investors.
I. Your ability to recruit a great team with a great company culture will give you the best chance of success.
Investors are going to place a big emphasis on you, the CEO, and your ability to build a great company. There is no better way to show investors you’ve got the right stuff than building a great team.
Oh, and the nice thing about building a great team, is it turns out it’s the right thing for you to do. Building a great team of people that have integrity, are smart, are passionate about your company, and fit your company culture gives you the best chance of success to build your company.
For more (and even more tips for pitching investors), read: What Do VCs Notice When You Pitch Them?