Insights from VentureCrushATX

Top-ranked law firm, Lowenstein Sandler hosted a Mistakes Startups Make panel at Umbel’s office in Austin, TX, featuring panelists Jon Bassett, Kin Gill, Kathi Rawnsley, Steve Sachs, Valeska Pederson Hintz and myself, Lisa Pearson.

Part one of the series covers fundraising.

You have the next great idea, but your bank account tells you to make it a reality, you must find investors. One of the most challenging parts of the early stages of entrepreneurship is raising capital. It’s not always intuitive, and the traits that make you a great founder might not be the ones that allow you to secure capital.

How do you go about getting introductions to venture capital firms?

Don’t come in cold. Do your homework and identify the right investors for your startup.  Review the data available at CB Insights and CrunchBase.  Once you have done the legwork to identify those investors, then mine your network and ask for a sponsored introduction. Very few, if any, deals ever come from cold introductions. Make it easy for the person brokering the intro by drafting an email that they can flip to the investors and include a short pitch deck. The email should contain about two paragraphs discussing who you are, what you are doing and why it makes sense to talk to you.  In drafting that email, enable the investor to stop reading early by clearing obvious hurdles early.  For instance, if they only invest in startups located in Silicon Valley, disclose your location early in the email. They can modify and simply forward along with the messaging you know is most valuable.

If a partner at a fund has passed, you need to know that and so does the person making the intro, because you’ll need a really compelling reason to reach back out.  Also, avoid sending your information to a fund that is presently invested in a direct competitor.

What are the biggest mistakes you see founders make during investor pitches?

Being an entrepreneur takes courage, hard work and vision. But vision alone doesn’t raise capital. If you’re a founder, be prepared to share your vision, but know VCs may “discount” founder exuberance by 50%. They’re not trying to get you, but expect that you will be challenged to answer how your vision will become a high performing business.

Don’t attack the world from a solutions first mindset. It rarely works. Focus on a problem that is keeping you up at night – then show how you’ll fix it.

In the meeting, be ready to answer tough questions from the venture capitalist. It’s not enough to have a bold, audacious vision. You should be prepared to summarize what you do and why it matters. Why should someone invest in your idea RIGHT NOW versus later down the road? Are there unnatural forces in the marketplace that will propel you to unnatural growth? What is your plan to build a category defining business? Who are your competitors? What is your business model and how will it scale? If you aren’t prepared with these answers, hold off on asking for an introduction. You don’t get a lot of second chances with VCs, and it’s expected that you will be confident in your answers to these questions.

How should founders assess fit between their startups and potential investors?

Get to know the focus of the venture firms you are considering in terms of their stage (seed, Series A, Series B, etc.), geography (only investing in certain geographies) and sector (only investing in certain industries). Most firms have a website that provides a good sense of these general investment themes.

Be wary of bringing in a strategic investor before your Series B round.  They can be terrific, but at the early stages they may be investing to figure out what is going on in the industry or have plans for you (e.g., want to buy you), but you are looking for an investor to be someone who will give you guidance and support.  Be mindful of strings attached, the strategic investor changing focus or dissolving its venture arm.

Think about a partnership you have that infiltrates your life on a daily basis. You will spend a lot of time working with them.  These are long term relationships (10, 12 or sometimes 16 years).  Think of it like any other business partnership.  Who do you trust?  Who do you want to be in the trenches with? You want a partner who will offer counsel, broker introductions, support you when the business is flying and, more importantly, support you when the business hits rocky patches. And they all do, at some point! How can you know if they meet these criteria? One, ask them. Probe on how they have worked with founders in challenging moments. Ask other founders they have invested in, especially ones that didn’t sell for a good price or that went out of business. Ask your connections that are in the VCs ecosystem — like law firms or financial advisors.

This is a long relationship, and it’s not one to go into cavalierly. Test it out. Ask the hard questions. But also make sure there is good chemistry and you believe you can trust them.  Other priorities to consider when assessing a potential investor are what stage you’re in, the location of both parties involved and the expertise related to your sector. If these align well, then move forward together.

Entrepreneurship is not for everyone, but it’s currently being fetishized in the media and made to look easy. Spend time learning the less than glamorous aspects of startup life. When you learn to fundraise successfully, you’ll next want to work on financing, as we’ll discuss in part two of Mistakes Startups Make.