Most early stage find raising advice around fund raising is about casting a net as wide as possible to speak to 100’s of potential funding sources to land one investor.
Actually that’s pretty bad advice according to the data I gathered from Pitch Book.
Within your category or market there are far fewer relevant and willing investors than you can imagine. So casting a wide net is a big waste of time for most entrepreneurs.
Of course the larger the market (e.g. SaaS or Consumer internet) the more are the number of investors in each stage but it is still a small, finite number.
Most venture investors will share broad themes of their investment thesis so they don’t “miss” out on deals, but that does more disservice than good. So, when an investor says we invest in “consumer internet” – that purposely broad so they don’t “miss out” on any hot deals. As an entrepreneur, you need to ask more pointed questions about the sub categories within that theme.
Investors should follow the same advice they give entrepreneurs. Be niche, narrow and focused. Here’s the thing though. They are following that advice but only they don’t message or position it that way.
So the best indicator of if an investor will fund your startup is to look at what they do not what they say. Talk is really cheap I guess.
To prove this I looked at 3 segments. One older theme, one middle aged and one relatively new theme. They were CRM, SaaS and home automation. These are themes I know better than others. For CRM I looked at data from 1996 to 2002, SaaS from 2006 in home automation from 2008. Data does not exist for home automation for 8 years obviously.
I looked at total dollars invested over time and the number of investors over time as well. Then I plotted the graph over time to look at year over year growth as opposed to cumulative growth.
Here is what the data says. There are a about of 130+ unique investors in CRM over the 8 years, 47 in SaaS and about 15 in home automation. That’s is on the venture side.
So if you have talked to one or more of these and they said no, you will be better of rethinking your business or do without going to other investors. Going to other investors who have not invested in a theme will very likely result in you wasting time. Note that the rate of addition of new investors to a theme is slow. Even in a large market such as CRM.
This also explains two other memes. One that there’s a herd mentality among us and second that venture investing also follows the Geoffrey Moore tech adoption curve.
Once one or two “innovative” VC’s finds a new space then the herd follows but slowly. This explains the fact that new VC additions to a theme rarely exceed 10% YoY even on “hot” themes.
After the innovators, the early adopters and then finally the majority follow.
I suspect, but don’t have the data yet, but a VC innovator in one theme rarely is an innovator in many other. They like to stick to their knitting. Unless they hire a new partner with expertise in a new theme. Which is rare.
So, bottom line for you as an entrepreneur is this.
There is a very short list of VC’s who will invest in your area.
Going after hundreds of potential investors is a big waste of time.
Setup a google alert for funding keyword within your category for 4-6 months before you are looking to raise money and also for “new fund” in your category. Those are your best bets.
If you have exhausted the list of potentials then you are highly unlikely to raise investment. Go back to your positioning and business model and see if you can change something to try again in 6 months with the same set of investors.
Of course there are exceptions to this rule of thumb but they are rare.