5 Things VCs Over-Index on in a Startup Fundraise
Putting money into a company you don’t control, as many early-stage investors do, is an opaque process at its best- like seeing part of the picture through a curtain or a fence. From the outside, you never really know how things are going on the inside of the business. To make it more challenging for investors, there is a constant pace of potential deals, so the opportunity to study the company is limited. So investors develop unconscious and conscious shortcuts to help them more quickly determine high-potential companies and founders.
The five things I see investors over-index on when they are making an investment decision are only loosely related to the actual prospects of the company, but they are signals that may or may not correlate with successful outcomes. You be the judge.
The five things that matter (perhaps) more than they should are:
1) Response time. How quickly a founder replies to an investor email doesn’t directly have an impact on the business. But some investors notice response times from founders and extrapolate that they are on top of all of their tasks, whether they are or not. As a founder, if you are not good at email, I often suggest hiring a part-time virtual assistant to make response times faster. Other founders have devised a ways to get notifications from certain investors that they have emailed or who they think are likely to send an email. You don’t have to answer every email immediately, but if you want to play the fundraising game better, optimize your email systems. One last suggestion is to shorten emails as much as possible. VCs get tons of email, they generally don’t want a lengthy response unless they asked for detail specifically.
2) A well-designed or “pretty” deck. Most investors won’t admit it, but we tend to fall for the companies that have well-deserved those down. Investing is more of an emotional decision that VCs own up to. Being “consumer-ish” is also the new standard whether you are building for consumer or for B2B. As an investor, if you send an ugly deck, I will assume you will build an ugly website and an ugly product and no one will buy it. It doesn’t have to be expensive, I’ve seen great deck templates on the Internet or on design websites like Canva. It needs to be cohesive, and “on brand”. It should radiate the same energy your brand does/will, if anything about the deck is incongruent, I will struggle to make sense of the deal (and I might not be conscious of why I can’t get comfortable with the deal).
3) Personalization or creativity in the pitch. I estimate 10% or less of all deals that are forwarded to investors are personalized from the founder who sends them. I would hold as equivalent an email that is is a cold outreach from someone that has done some research about me or the fund I’m with next to or better than a blanket email referred from someone I know. Most commonly, I get an email or a Linkedin message or that is impersonal, a form, that’s been sent to as many people as possible in the hopes of getting a deal done. I don’t want any part of that deal. Even warm emails were I’m forwarding to another investor I ask founders to include a couple of lines about why they think that investor would be right for them, or I don’t send it. I’m not interested in wasting anyone’s time.
Clever founders can use personalization and research to their advantage to at least get a meeting even if it doesn’t always lead to investment. The founders of a company called Next Big Sound are an example. They wanted a local fund to lead their seed round, and as recent college grads, they realized their team slide didn’t have the years of experience and fortune 500 logos that other founders did. Instead, they recreated with their own team the photo of the VCs they wanted to invest from that fund’s homepage. It worked. The fund invested. One thing investors can extrapolate from creativity is that if this team is able to be this creative with a team slide, think about how creative they will be building their company.
4) Regular communication. A big part of the fundraising process is keeping everyone updated along the way. Everyone in the deal wants to feel momentum, and that can be momentum around the raise or momentum in the company. Every two to three weeks feels about right and fundraisers, if things are moving, a month is probably too long. In updating investors as you make progress, you’re also giving them more data points about how you perform, and the more you’re able to move forward and keep momentum, the more assured they will feel that they invested in a high-growth venture. Mark Suster has a great post on this called, Lines Not Dots.
Founders should be using a CRM tool to track their investor conversations, and it should not be possible for investor to feel like they are out of the loop for very long. That’s one way to make your round fall apart. If you do it well, investors will extrapolate that you are good at communicating and you are a skillful collaborator, both helpful talents as the leader and a startup. Final note: it can be hard for investors to get information about how the company is doing after a deal closes, it’s not common, but it’s happened to every investor. I’ve been good at communicating, you also signal to investors early that you will not be one of those kinds of delinquent companies.
5) A well-organized data room. This one is a personal favorite as an investor with a legal background. At some point in the diligence process, you will be presented with due diligence requests. They can be time-consuming to map an investor’s list of requests with the documents you have. I much prefer when companies have done the work in advance of setting up a logically numbered, well-labeled and intuitive data room. For those companies, when they get a diligence request list, they can immediately reply with access to their data room and say, “Everything you need should be here, please let us know if there’s anything you feel is missing.” It communicates to investors that you are organized, and when it comes to due diligence, no investor can ask every question. So if you come to the table already organized, that investor will assume that it’s less likely that you have missed something big that could be a company killer or that could be a costly mistake down the road.
Companies that are messy and disorganized often have paperwork that’s missing, and that’s always a risk for investors. Plus, being able to quickly reply with a data room shifts the work back to the fund to figure out what they need that isn’t there so that you can go back to running your business. Some notes here are worthwhile. The first is, lots of funds use associates to actually do the due diligence, or perhaps an attorney. Only some investors will even see it. Still, being able to reply quickly with access to the information, that will be noticed by a partner and likely will speed up the deal. Last note, it is possible to be too organized in your data room. If you go too far into being perfect, they may think you’re spending most of your time doing admin tasks not running your business. Goldilocks rule applies, keep it simple, clear and easy to find important documents and it will say a lot about how the company is run internally.
There are more things that investors pay (too much) attention to, consciously and unconsciously, to get comfortable investing in a company. Remember, Investors have to make a decision based on what they CAN see and experience; they can’t really know the company without working in the business. Keep that in mind when you say or send things to investors, they will never know the company the way you do, your job is to make them feel like they can see well enough through the curtain.
