Summary
Delve into the mindset of investors, building a robust network, developing a compelling vision, and maintaining a structured fundraising process. Learn how to foster investor conviction and secure capital in a highly competitive environment.
Gian Seehra shares his proven methods for raising venture capital. In his course, Gian shares his method, the Fundraising OS.
Raising venture money for a tech start-up is difficult and stressful. The expected average of companies that are successful at raising capital with angels or VCs is a merely 0.5 - 0.9%
It is clear that founders raising funding for their startups face significant challenges. This is a major obstacle to solving their problems and achieving success. According to CB Insights, 38% of startups fail because they are unable to raise capital, with 70% of these ultimately failing altogether.
Let’s explore the five main ways in which you can increase your chances of raising venture capital funding with angels and venture capitalists:
1. Understand how investors think
Most of the time, founders fail because they don't understand the investor industry and how investors think. When you are so ingrained in your product, you may speak to investors as if they were your customers or developers. Throughout your fundraising process, you may speak only about the product and fail to highlight yourself as a founder or the opportunity that you are presenting.
Whilst you think that giving investors all the information on your product will help them realize why your company is something they should invest into; it causes the opposite.
Investors will often never have the same depth of knowledge as you do about your industry. As a result, this can lead to confusion and a lack of conviction, as they will only be aware of high-level facts. While you may be enthusiastic about sharing all the details of your product, investors are more interested in simple reasons why they should be excited about your opportunity.
You have to speak to these investors in their language, not your own.
How to speak to investors in their language
To avoid falling into this common mistake, it's vital to do two things:
- Research how investors speak about companies
- Speak to as many investors and advisors as you can
There are so many resources to research how investors think. The three best resources are reading books (e.g. Venture Deals by Feld & Mendelson), reading investor blogs on the investments they did, and listening to podcasts that investors are on.
This will give you the chance to see and listen to how investors speak about companies and founders. Which gives you the knowledge to tailor how you speak about your own experiences and opportunity.
Secondly, speaking with investors and advisors can give you the opportunity to directly ask for their thoughts on you, and what they are looking for when you need to raise capital again.
Prime your network ahead of a funding round
A common pitfall that lead to fundraising failure is having a small, cold network. Founders often assume that they can just speak to investors when they launch their fundraise, or even worse can cold email investors expecting to get a reply.
In fact, according to the British Business Bank, warm introductions are 13 times more likely to reach term sheet stage, than cold outreach.
This tendency not to warm up their network leads to founders panicking about the lack of meetings they are getting. Sometimes, they overreact and shotgun email every investor they know.
This almost always ends in a failed fundraise because the founder either doesn’t get enough meetings in and investor perception isn’t strong (due to the mass-blast email).
Because funding is all about perception, you have to make the right impression when being introduced to investors. This rarely comes from cold emailing them or applying on their website. Warm introductions still reign supreme in this industry.
2. Create and nurture a network of investors and connectors
Creating a valuable network takes time. It’s important to think long term, at least 6 months, before you can start engaging this network for investment.
The most important part of building your network is to give more than take from them at the start. When you finally ask them for a favour to connect you to specific people, they will be more willing to do it because you have been so helpful to them.
Here a few simple steps to help you build a better network to raise capital:
- Create a list of every contact who could help you fundraise. They can be email contacts, Linkedin connections, and even Twitter friends you DM with. These should be people you’re willing to ask for help. Eventually, you’ll need to make the ask.
- Create a list of 100-200 investors you want on your cap table. There are databases with thousands of investor names. You have to be ruthless with who you actually want to speak to, and who might want to speak to you. Consider the fund’s sector, scope, geography, fund size, and portfolio companies.
- Find overlap between your contacts (#1) and your investor list (#2). You’ll start to find some degrees of connection. Linkedin is a great tool for this.
- Fill in the gaps: attend events and build your network. Over time, you’ll build your list which will help you find a direct connection to your target investors.
3. Adopt a robust founder mindset
Investing into early-stage start-ups is all about you, the founder. Everything is either:
- Up to chance
- Is unknown
- Decided by the founders
There is nothing tangible that investors can hold onto. The only controllable part that an investor can latch onto to feel comfortable, is you.
The investors are investing into your ambition, your expertise, and your knowledge. Investors invest in founders, not companies.
A large part of convincing an investor that you are someone they should fund comes down to how you think and speak about your own experiences and vision.
And this has to start with your own mindset.
How to build a robust founder mindset before your fundraise
Building your mindset has to come from within yourself. This will take time and no-one else can do this for you.
Ask yourself these six questions:
- What makes you a great founder?
- Why are you building this company?
- Why should investors be excited to work with you?
- What’s the biggest motivator that will keep you going?
- What are you looking for in this fundraise?
- What does success look like?
Reflecting and answering these questions will help you sharpen your mindset and prepare you for fundraising.
4. Craft a clear and compelling vision
In order for an investor to profit from investing in your company, you will need to exit for a large sum of money. The ultimate measure of an investor is their return on investment.
However, since the future is uncertain, an investor can never truly know how successful your company will be. They can only hope that you exit for at least 10 times the amount they invested.
Therefore, having a clear and compelling vision that inspires investors to join you on your journey is the most effective way to raise capital. Because once they want to take part in creating the future world you make, they will do anything to fund your company.
How to share your vision
Your goal in making a compelling vision that makes it easier for you to raise capital in three steps:
- Show the current world, the current trends, and the problems within it
- Amplify the pain with customer examples and show what the future will look like if it stays the same
- Show the new world when you succeed and how much better it is
If you have these three parts of your vision you will be successful.
After you have done this, you have to think about how the new world you are creating is:
- Big
- Inevitable
- Believable
5. Run a structured fundraising process
Not having a structured process is the most common reason for fundraising failures.
Without a process, the following challenges quickly arise:
- You don’t know where you are or the next steps you need to take
- You elongate your fundraise as you meeting investors ad-hoc
- Investors feel that you are not a competitive deal
- Investors feel like they can take their time
All of these will create the perception that you’re disorganized. Investors aren’t interested in disorganized operations. You need to make investors feel like you’re the deal they have to spend time on and the deal they need to close. How to get more term sheets
To increase the number of term sheets received through a structured process, there are three key things to keep in mind:
- Create a meeting timeline where all your investors meetings happen in a short period of time
- Develop new content for each stage of meeting with investors
- Use time constraints to create a sense of urgency and FOMO (fear of missing out)
This approach will help you build momentum and create a competitive environment, while also ensuring that you have a clear plan for each investor's next steps.
By doing so, you can keep the investors who are already interested engaged, while also communicating effectively with those who may still be unsure.
Final Thoughts
A successful fundraising effort can be simplified into three key factors:
- A close relationship between you and the investor
- The investor's trust in your abilities
- The investor's belief in your vision
If you can make an investor feel all of these things while working with you, you will increase your chances of success and get term sheets.
To improve your chances of raising capital, the investor needs to get conviction of you as a founder. Conviction begins with being gripped by the team or the idea, and only then comes the search for evidence to support it. Emotions come first, logic comes second. A fundraising operation system ensures you’re preparing properly, executing the right process, and having valuable conversations with investors that help them increase their conviction.
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