Tag Archives: fund raising

It is not that I dont think you are great, but I am not confident about my ability to pick winners consistently

I had a very interesting conversation with an entrepreneur yesterday who I was keen to invest in. He had soft circled $250K of his $750K seed round. I have been a big champion of him and really respect his determination, thoughtfulness and diligence.

I committed to $50K and was going through the details of the investment with him, but letting him know that even if it took him a while to raise the remainder of the funds, I would ear-mark the $50K for his venture.

He then asked me “You know and influence a lot of other investors as well, can you please convince them to join the round”. I said that I can introduce him to investors who have invested in the past with me, but they will have to make their own decision.

I was not going to lean in on them to invest.

He mentioned that I “leaned in” on another VC to invest in a portfolio company, which is what he heard from the other entrepreneur, who I had worked with.

He was correct. I did lean in. So, the signal I sent him (although that was not my intent) was that I was not as committed to his venture as I was to other the one where I leaned in.

First, I dont have as much influence as entrepreneurs give me credit for. That’s just the truth. They may attribute the fact that I am at Microsoft Ventures as a signal that the corporation thinks this is a good investment, which is absolutely untrue.

Second, I believe there’s a HUGE difference between an angel investor (who I dont like to lean in on) versus a institutional investor (who I will lean in from time to time).

Most angel investors invest by reputation, connections and referrals. VC’s will judge an entrepreneur and their opportunity on its own merit, do their required due diligence and will likely pass EVEN if there was a strong referral from a person they trust.

Referral’s get you in the door with an institutional investors, whereas with an angel investor it will usually get you a deal.

Most angels I know have “day jobs” or “other interests” with angel investing being their side project, activity or means of giving back. That does not mean they don’t want a return on their investment, it just means they don’t do as much diligence as an angel group or an institutional investor would.

Knowing that, I believe the biggest challenge is the confidence in my ability to pick winners all the time. I am investing as an individual investor because I believe in the entrepreneur. I don’t know if that entrepreneur, problem set, idea or market is right for the other angel investors I know and invest with.

Well, I do know that to a certain extent, but with angel investors, the relationship I have would be personal as well as professional. With VC’s it is rarely (exceptions exist) personal.

So, when I meet the other angel investors over dinner, with their family, I don’t like having uncomfortable conversations about “the investment that went south”. Many of them are great folks, but not mature enough as an investor to realize many of these angel deals (in fact 70-80% of them) will return in loss of their investment.

Many of the angel investors I invest with are not in the “early seed market” for the long haul and have not seen ups, downs, sideways deals, etc. So, end up investing in 1 or 2 companies, solely because of referrals and recommendations.

I don’t think I have confidence in every deal I do to end up returning my money or generate a great return.

That does not still mean I dont believe in the entrepreneur when I invest in them.

This is truly one of those cases, when its not you, its me.

How to get on an venture investors “radar, then their “shortlist” and finally on the “spotlight”

If you are looking to raise your post seed round or series A, I would highly recommend you find a way for venture investors to seek you than you seek them. The process is much quicker and you get better terms. How do you do that?

First you have to understand how the venture process works – like most other processes, they go through stages. For the purposes of our discussion, I am going to define the process into 3 steps.

Venture investors have associates or principals, who are smart young folks whose job it is to do due diligence, source new deals and keep their eyes and ears on the ground to new opportunities. Many folks malign them, but they are good folks mostly and have their heart in the right place for most parts.

Many of them are from a Ivy league B school and most likely have been at a management consulting firm after that like Bain or McKinsey. They tend to think very much top down, but I have know a few folks to hustle and pound the pavement as well.

I spoke with 5 associates and principals over the last week to understand their role and the new changes so I thought I’d share some of their thinking to help you.

Venture principals have “categories” of companies on their radar or “spaces”. Given their background in management consulting, that’s to be expected. They think top down – what are the meg-trends, which are the big industries ripe for disruption and which sectors are ready for startups to innovate in. This is important to know. They may have a few companies, but many a sector is likely in their radar.

The associates then spend about 2-6 weeks doing a “deep-dive” on that sector – meeting entrepreneurs, talking to companies, reading research reports (not necessarily in that order) and forming an opinion. Most of them will pick a theme or category based on their experience and some level of “comfort”.

Then, they would present their findings to the “partnership” meetings on Monday. If all looks good, (and I am grossly simplifying), they get a “yellow” light to go ahead and source / look at companies. Not a “green light”, mind you, that’s only given if they have already a list of 3-5 companies identified on their “shortlist”.

After the partnership meeting, they will be assigned a “executive sponsor” partner – someone who can make decisions to write a check on behalf of the firm. The associate has to provide a weekly status update to the partner, who in turn will brief the rest of the folks if they find something “hot” to invest in.

With the yellow light, the associates then tap into their “network” to get proprietary deal flow – usually folks they went to college with, or folks they met at some conference or others they read about on blogs like Geekwire, TechCrunch, etc. In the last 2 years, many folks are also sourcing from angelList or other platforms.

That’s the opportunity for you. Meet with the associates and principals, because not many folks take them seriously. They cant write checks, so most folks ignore them. They are the most crucial part of the equation to get on the “shortlist of companies” within the radar. Typically 7-10 of the 30-50 companies the associates meet will make the “shortlist”.

The best way to make the shortlist is to get you other startup friends and CEO’s to recommend what you are doing to the investors.

The next step is the “spotlight” – the executive champion and your associate will usually meet the 7-10 companies for 2-3 meetings and finally pick 1-2 to bring to the entire partnership.

The process I explained above works “most of the time”. It may happen that the entire process is completed in days as well. I had a chance to speak to 3 partners at venture firms as well, and they attributed about 40% of the deals to this part of the process. The rest were the partner’s networks and recommendations from invested company CEO’s legal partners, etc.

To raise funds for your startup use a fishing pole not a fishing net: A #contrarian view

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.

New Investor Additions Each Year- CRM, SaaS and   Home Automation
New Investor Additions Each Year- CRM, SaaS and Home Automation

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.