Managing Fundraising Expectations
Raising money can break morale and cause Founders to give up on their company. Despite the buzz, less than 1% of founders ever raise Venture Capital, 78% of which is spent in three states, none in the Midwest and, if you are a female founder or minority founder, your chances of getting VC funding are even less. In the last decade only 2% of VC has gone to female founders and less than 1% to Latinx and African American founders. We spend a lot of time talking about these statistics so founders manage their fundraising expectations from the beginning.
To fully understand the problem we need to dig a bit deeper. Although there are many individuals that self-identify as investors on Linkedin, many aren't actually deploying capital. This scarcity makes raising money from investors even harder than selling to early adopters. Investors are not only in short supply, they invest at different times, in different verticals and multiple stages. They are also notorious for leading founders on. One day they are ready to sign a check and the next they wont return emails or phone calls. The truth is investment decisions are difficult.
Investors are often making decisions on things they do not fully understand. This, combined with the fiduciary responsibility they have as they manage their family, or someone else’s wealth, tends to make them very wary. This is the reason why many investors take a long time to make a decision. They are not playing games with you, they just can’t make up their mind. Investors also like to hang out with other investors. Although they hate to admit it, most investors are followers not leaders. Don't tell them we said that! 😁 The biggest factor in their decision making process is often influenced by the opinion of other investors or friends in their inner circle. This is by far one of our biggest pet peeves because this dynamic often leads to an unstable system and unconscious bias. Instead of getting a bargain to be first in the cap table, it encourages fear, greed and lack of diversification. Being exposed to this dynamic is what led us to launch StitchCrew. If we want to change the status quo we must increase the number of investors as well as the number of startups.
As opportunity increases, it will make the market more efficient. But this will take time and will require startups, like yours, to be successful. In the meantime, here are a few tips on how to avoid letting fundraising destroy your morale. Bootstrap.
If you can bootstrap your way through revenue, do it. The only cautionary argument we have is related to competition and being first to market. If you're working on something so unusual that no one else is likely to think of it, you can take your time. If, on the other hand, you are building something others are already trying to solve, taking your time is going to make it harder for you to compete. Technology changes rapidly, so time is of the essence.
As the process of starting a company gets cheaper bootstrapping will become a more viable option. But for now, while bootstrapping sounds great in principle, it’s not the norm for technology startups. Set Realistic Expectations.
The reason raising money destroys morale is not simply because it's hard, it's that it always ends up being harder than expected. The feeling of disappointment drains your energy. Know before hand that your odds of raising money are scarce. You will get more no’s thrown in your face in the amount of time you fundraise, than you’ve gotten in your entire life thus far.
Flip your mindset. Your job is to get as many No’s as you can in order to get a Yes. Keep building.
Raising money can suck up all your attention and energy. It also always takes longer than you expected. This can be demoralizing and if you don’t keep up with product development, it can also make you less attractive to investors.
Investors want to invest in dynamic companies that are constantly making progress. A company that hasn't done anything new in months is not going to be attractive. If you keep the company moving forward while you fundraise—releasing new features, increasing traffic, closing deals — fundraising meetings are more likely to be productive.
More importantly, building and maintaining momentum will keep your confidence high, and your confidence level is one of the main things investors judge when evaluating startups. Don't stew on it.
Getting rejected by investors can feel personal. After all, they see a lot of deals and are more experienced. If they think your startup is not worth investing in, they're probably right. These are thoughts every founder has, but they aren’t necessarily true and certainly not helpful.
Don’t let rejection break you, learn from it.
First, know how common rejection is. The average VC receives 400+ decks annually and, depending on their size, invest in an average of 2 - 4 deals a year. In addition to the odds being terrible, remember that it's very difficult to judge startups. Great ideas tend to seem crazy at the beginning. Think of all the stories from investors who passed on AirBnB, Google, the Muse and DropBox.
After a rejection, instead of being discouraged, use the feedback to fuel your efforts. Get specific reasons for why someone is not investing. Take an honest look at your startup/pitch and ask if they're right. Figure out what's not working and change it. Don't let rejections pile up, sort and analyze them. Avoid inexperienced investors.
Although novice investors seem friendly and nonthreatening, they can be the most dangerous type. Raising smaller amounts from first-time angels can be as much work as raising millions from a VC firm. First-time investors also tend to hire inexperienced lawyers. While investors can admit they don't know what they're doing, lawyers have a much harder time doing so.
We are not suggesting that you completely avoid taking money from novice investors - we'd never have experienced ones if nobody ever took their money! If you do take money from a first-time investor, hire an experienced VC lawyer and drive the negotiation with your own paperwork. You can also try to get a lead investor and use first-time investors to fill up your round. Know where you stand.
When you're talking to investors, constantly look for signs of where you stand. How likely are they to offer a term sheet? What doubts do they have? What is their investment timeline? An investors' natural inclination is to resist commitment. It's in their best interest to collect the maximum amount of information while making the minimum number of decisions.
Apply a sense of urgency by asking what specific questions they need answered in order to make a decision. If you get through several obstacles and they keep raising questions, assume they're likely to pull out. The best way to get investors to act is to have term sheets by competing investors. Talk to several investors and focus on the ones most likely to say yes.
Remember, the biggest factor in making an investment decision is often influenced by other investors. If you manage to get one over the threshold of saying yes, it will make the others more interested. These are just a few tips to keep you energized as you go through The Fun in Fundraising. We are hopeful that as we democratize access to resources and networks, and increase the number of startups and investors, fundraising will become easier, or at least more straightforward. Given our current market dynamics, investors don't realize how much room there is for a potential competitor to undercut them. There will come a time when investors will start to make up their minds faster, as new investors emerge and move quickly.
In the meantime, know that startups don't reach success by raising rounds, but by making great products - so keep building!
- the Crew