How to Raise Venture Capital for Early-Stage Startups

Knowing when to seek venture capital (VC) and how to do it are two of the most important things to know before when approaching investors for any investment. Many startups are trying to fundraise the wrong way and they’re wasting their time as well as any potential investor’s time. Therefore, we will be exploring the best ways to raise venture capital for pre-seed, seed, and series A rounds of investment.

This post will help to prepare you for when to seek VC, finding venture capital firms and investors that are the right fit for you, how you can get meetings with them, and how to prepare you for those meetings.

There are few free resources as in-depth as this.

You will learn:

  1. When’s the right time to seek venture capital
  2. The purpose of your first VC meeting
  3. Which venture capital firms and VCs to target
  4. The impact of networking to get VC intros
  5. How to get intros to VCs
  6. Cold emailing to VCs
  7. How to prepare for a meeting with VCs
  8. How to find the firms you’ll want to target

When is the Right Time to Seek Venture Capital Investment?

Here’s the thing about knowing the right time – it’s a case-by-case basis. However, having traction is the most important thing aside from having a good team.

Aside from traction and a team, being ready for investment usually depends on three other things:

  • Your product or service’s scalability
  • How you grow
  • Your rate of growth

I will very briefly explore these.

Team

As talked about in the earlier email about startup success, having the right team in place is quite important in your ability to get funded by a venture capital firm. So before you look for VC, you should have a great team already in place. Solo founders can get funded, but it’s rarer to see.

Scalability

Perhaps you need to hire several developers to build out the full version of your product full-time. You’ve had great success with your minimum viable product but you can’t take it much farther in a short-enough timespan without investment because good developers are incredibly expensive to hire. This calls for capital investment.

If you can sustainably grow without VC, then it’s probably not right for you for the time being. Although, things could change in the future.

There are also situations when a startup just cannot scale without a large infusion of cash.

Here’s an example of this:

You’ve grown fast with a unique physical product. Your total addressable market (TAM), which is the revenue opportunity available for a product, is in the hundreds of millions of dollars. However, you’ve reached your ceiling for growth due to low margins and production time. The supply cannot meet the demand.

You can raise your margins, but only if you can lower your cost per unit considerably. And the only way to do that is to place a high-quantity order overseas because labor is cheaper and buying in bulk is cheaper.

The problem with that is that you can’t afford to place the order and warehouse it all.

And it’s at that point that you’re ready to seek venture capital investment.

Raising capital for the sake of raising capital isn’t a good plan because you need a plan for the capital.

You need to need the capital. It has to have a purpose and you’ve got to show how you can legitimately grow from the infusion of venture capital investment.

Now that you understand more about when to seek venture capital, let’s explore the topic of the first meeting with a VC.

How You Grow

You should be doing growth experiments and have seen clear evidence of success from doing them. These experiments should be repeatable first and foremost. And you should also have methods of growth, which you’ve already tested, that are scalable.

If you don’t have any scalability in your product and your marketing, then you’re not going to be able to grow properly and you’re not going to be able to secure funding.

While at first, you should be doing things that don’t scale and building your initial customer-base, once you’ve reached a threshold of 100+ customers is when you would ideally start doing more scalable marketing tactics.

Your Rate of Growth

When you’re growing so fast month over month that you need to scale up in order to both handle the workload and maintain your rate of growth (assuming it’s repeatable and sustainable), then that’s a pretty good indicator that you’re ready for venture capital.

While you can grow steadily without venture capital, your rate of growth will slow down unless you continually keep branching out through other customer acquisition channels in a cost-effective manner. Remember, VC is the accelerant that drives you to your next milestone quicker than doing it without a large infusion of capital, wisdom, and resources from the venture capitalist.

The Purpose of an Initial Meeting with a VC

The purpose of your initial meeting with a VC is not to secure funding immediately, no matter how dire your straights are.

Rather, the purpose of your first meeting is to get the next meeting and continue the conversation.

You don’t go on a first date and expect to marry that person. Instead, your goal is to build interest and comfort so you can get to the next date.

Getting venture capital investment is the same way.

In your first meeting with one or more VCs from the firm, you’ll do a pitch deck slide presentation.

You may also provide them with your executive summary during the first meeting.

However, that can often be provided via email afterward. It depends on the situation and when they ask for it. There are many firms that ask you on their website to include your executive summary, business plan, or pitch deck with your email when cold emailing them.

Venture capitalists want to do their due diligence on you, your team, and your startup.

If they don’t ask for your executive summary or business plan after the meeting, then it probably means that they’re not interested in talking more.

Anyway, it’s important to understand the purpose of the meeting so you can learn the process of getting investment.

Now, check out the section below to find out how to know which VCs and firms to target.

Which VCs Do You Target?

The most important thing is to make sure that the VC you want to connect with invests in your industry.

For example:

There are some VC firms that solely invest in healthcare and healthtech. Then there are others that only invest in SaaS. And other firms invest in combinations of a few to several industry sectors.

Moreover, a lot of VC firms have partners that each invest in specific areas of focus.

This focus allows each person to make better decisions regarding potential investments in that space.

Follow These 5 Steps to Target the Right Firms and Partners:

1) Before you try to contact anyone, ensure that your startup will be relevant to them.

2) It’s also important to find investors who are somewhat close to you. It will make the entire process so much easier. And because of this, a lot of firms only invest in startups in specific regions.

3) Next, you find out if they make investments in pre-seed, seed-stage, Series A, Series B, and so forth.

You only want to target firms who invest in the stage(s) that match your stage.

If you are planning on doing a seed-stage round in the U.S. and you become a StartupDevKit member, then you won’t have to worry about this step.

4) Then, find out which partners have both the power to make investments and the time to put into working with you.

Senior partners or managing partners have the most power to sign off on investments but have the least amount of time to give. This is because they’re juggling the demands of running a VC firm and also the commitments to the investments they’re directly involved in.

5) As you search, make a list in a spreadsheet of the firms you want to target (we provide this template in our StartupDevKit Incubator and Accelerator memberships) who to contact, who is referring you, and any notes about the firm that stick out in your mind (think about their mission).

There’s more info on how to actually find the firms later in this email.

For additional information on this topic, I suggest you check out this article: Raising VC Money: Which VCs to Target?, by Jo Tango, a Partner from Kepha Partners, a VC firm.

Now that you have an understanding of who to target, let’s see how to enhance the probability of landing a meeting with a VC.

Who You Know Matters

Approximately 50% of people find a job through friends, family, or acquaintances. Likewise, if someone refers you to buy something from a company, that company gains more credibility because it was suggested by someone else.

It’s human nature to want to feel a level of comfort when you moving forward with someone or a with a purchase.

Similarly, introductions to venture capitalists from connections are more often than not, beneficial to the startup founders in landing meetings with VCs.

VCs get hundreds, if not thousands of emails every week from startups. They want to know who is worth their time responding to.

Any introduction provides credibility to you, especially when that individual referring you knows the venture capitalist well.

Either way you look at it – it’s social proof.

VCs prefer introductions, as well. It makes them feel better about you.

What’s the moral of the story?

Do everything you can to get an introduction to a VC!

How Do You Get an Introduction?

You can network with the founders from a portfolio company of your target VC firm. Once they know a little bit about you, request an introduction.

LinkedIn is a great tool to help you do this. You can usually find the firm’s portfolio companies on their website, but if they’re not there, then you can check Crunchbase to see who they’ve invested in.

Then, you go to each portfolio company’s website and find the founders. Then if their emails aren’t listed on there, go to Hunter.io and try to find their email addresses that way.

Similarly, you can see mutual connections on LinkedIn between you and the VCs in the firm, if you have any. Through them, you can also try to get an introduction.

However, some connections may have not actually worked with them in any capacity, may not actually know them, and they’re just in the VC’s LinkedIn network.

For more tips, check out: 11 hacks to get meetings with investors in Silicon Valley on Hackernoon.

When communicating via email, try to get a meeting set up ASAP. Answer any questions they have before that, of course, but do your best to book a meeting.

Cold Emailing

Don’t do it. But if you’re going to cold email a VC, then don’t overwhelm them with a huge email. Keep it brief, concise, and make it relevant.

Christian Hernandez, a VC from White Star Capital suggests: “Have somebody I know and you know provide a recommendation, because that gives you higher relevance in my inbox. It’s their social capital endorsing you. If you can’t do that, use your first line to tell me that you tried, but that you’re reaching out because you read [my] blog post, and it relates to something you’re building. That will keep my interest.”

He also gives several other suggestions about cold emailing VCs in this article: A Tech Investor Analyzed His 5000 Monthly Emails and Explained How Startups Can Stand Out.

Now that we’ve got email out of the way, let’s see how to prepare for a meeting.

How Do You Prepare for a Meeting with Venture Capitals?

1) Practice your elevator pitch until you have it memorized and can say it naturally.

2) Create your pitch deck and use “Microsoft office remote” or buy a remote to use in your presentation.

3) Prepare an executive summary and print 3 to 4 copies to bring with you. Use this resource to help you: How to Write a Great Executive Summary from StartupDevKit.

You’re going to want to know the key information in your executive summary pretty much inside and out. They will ask you for the information that you would normally have in your executive summary, even if they don’t have yours in front of them.

4) Refer to this article: Don’t Pitch a Venture Capitalist Without This Checklist, by David Teten, formerly a Partner with ff Venture Capital and now a Partner at HOF Capital.

5) Check out this article: How to Get a ‘Yes’ from a VC by Robert Ackerman, Jr.

6) Do your homework about the firm and learn as much about them as you can.

7) Watch this video: 10 Things to Know Before You Pitch a VC by David Rose, a serial entrepreneur and investor.

Conclusion

Now you are equipped with a boatload of information to help you start your journey to raise a round of venture capital funding. May the games begin!

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