…and how to get VCs to give them to you. These common traits define every startup successfully raising venture capital in today’s traction-centric market.
What it Takes to Raise a First Round
VCs are ultimately judged by their own investors on their Internal Rate of Return (IRR). In order to optimize that metric, they need to time their investments so they’re getting in at exactly the right point in history… or at least they need to feel that way. It’s up to startup founders to create the sense that this time is NOW.
An early-stage investor will back a company once they believe they will see a substantial return on their capital in a reasonably short time horizon. For a seed-stage fund that’s about 20x in a 5-7 year time-frame (or about 1x the entire fund’s size). In today’s market of rising seed valuations, GPs at funds are looking for real product traction and simply won’t be interested if they think a startup still has major go-to-market assumptions to figure out.
If you are successful at defining metrics that tell a narrative of traction, measure progress towards increasing them, and regularly update your most interested potential investors on that progress, then the barriers to raising capital will begin to crumble quickly.
The precondition for this is that founders need to have effective conversations with actual VCs in order to understand what investors perceive as the venture’s core assumptions. Here’s the trick for how to get started…
Learn What VCs Love… and What They Hate
The first thing to know about startups — and really business in general — is that market forces always win. And if you want to be a venture-backed startup the market that matters most is that of venture capital… so let’s start by clearing up some facts about the wonderful world of early-stage VC.
The biggest problem professional venture capitalists face is deal flow. A venture capital fund will typically invest in only 1 out of every 50 startups an investment team meets. Partners at funds LOVE meeting founders of startups they believe will be an investable opportunity in the near future. The trouble is that nearly all of the startups they encounter are not a ripe enough opportunity.
Just like with your first users, it’s important to understand the wants and desires of venture capitalists if you’d like to sell your opportunity to them. If you approach your early conversations the right way, potential investors will coach you on everything from your business model to your go-to-market strategy, and also educate you on the market climate for ventures similar to yours.
And I do mean climate… trends in VC change faster than the weather. Having gone through the funding process several times myself, it’s quite something to see how the types of deals being done change from month-to-month and even region-to-region.
Like the rest of us, VCs love talking about the weather. VCs also love being trendy. They will happily tell you what your deal needs to look like so your venture can be one of the 10–20 deals they‘re expected to close for the year.
What VCs HATE is when a founder comes across as naive, pushy, and immature trying to raise capital before they’re ready. The one thing VCs hate above all else is when their deals look weird. Word gets around quickly in the tech community, and VCs get judged harshly by their peers when they do something strange. When a VC hits a home run, they’re a genius visionary who saw an opportunity before everyone else, but when they strikeout they can defend their decision by saying they checked all the boxes for what a good deal looked like when they swung the bat. Raising even a small fund takes about 18 months — much longer than raising a round of capital — so the last thing in the world they want to do is alienate potential investors in their future funds.
Learning how to talk to VCs in order to understand what they love, and to avoid what they hate, is the critical first step on the road to raising capital from them.
When and How to Talk to Venture Capitalists
The right time to raise capital is NOT when you’ve just had your great idea, but that IS exactly the right time to start meeting investors to collect their invaluable feedback.
If you approach the conversation with a learning mindset, a VC will gift you with all that they’ve observed from the hundreds of other companies playing in your space. These are their insights from the hundreds of companies they’ve been talking to that either weren’t good enough for their investment or may have even been opportunities that got away.
A good VC will tell you EXACTLY what they need to see in order to invest in your venture.
So the goal of your first meetings are simply to:
- Aggregate feedback on your business concept
- Learn exactly what your venture needs to look like to raise capital under current market conditions.
- Build a network of VCs interested in your venture
When you meet a venture capitalist that you think might become an investor, ask if they’d like to be kept updated on your progress. Use what you’ve learned from all of your conversations to understand what the market will need to see. Then start sending monthly updates to your potential investors that demonstrate progress on the things they told you they care about.
The 5 Traits Every VC-backed Startup Has Today
So, in order to raise capital from a VC, you must have these traits:
- A compelling idea
- A position in a large and growing market
- A viable business model
- Demonstrable traction on metrics VCs care about
- Deal terms that look familiar to the VC
Just remember that this process doesn’t start with spending every dime you have rushing to market with a Hail Mary pass of a first product. Raising capital starts with establishing a deep understanding of your potential investors and then defining a clear plan of action to meet their explicitly stated expectations.
Harlan Milkove is a repeat VC-backed startup founder, and Managing Partner at Foundational where he works with early-stage startups to expedite their pursuit of venture capital. His prior venture Reonomy, a commercial real estate data analytics platform, has gone on to raise $125M+.
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