Don't Be Shy with Questions
Fundraising is hard enough. Get (and track!) the information you need from investors to run a smooth, effective process.
Greetings! We hope you’re gearing up for fun 4th of July activities and weekend relaxation.
💭 Thought Bubble: Prepare & Ask Questions
Over the past couple of weeks, I’ve participated in a handful of panels centered on demystifying the fundraising process and how investors assess companies. Serendipitously, many of the questions that arose during these conversations mapped to what Rachel McCrickard, CEO at Motivo Health, discusses in VC Minute episodes 119-127. There is a reason Rich couldn’t narrow down her episodes to just five—she has terrific, actionable insights.
One topic she discusses in episode 125 is how critical preparation and questions are for investors in the early meetings. Rachel discusses that in the early days of her journey she often moved from investor pitch to investor pitch without taking a pause to refresh on who she was talking to and relevant points of discussion. When you’re in the midst of fundraising, it’s easy to roll from one conversation to the next, barely stopping to take a sip of water.
As we discussed in “Bring Investors Along”, jumping straight to the pitch is a big mistake founders—especially those new to fundraising—often make. Fundraising is a relationship building process for everyone involved, and like any new relationship, those early conversations can benefit from establishing common ground. As Rachel discusses, starting the conversation by mentioning something that fosters that initial connection can be powerful. This first link can be very loose, such as a shared connection on LinkedIn or a brief interaction you had with the founders of one of the investor’s portfolio companies.
On one of the panels I participated on, a founder asked how to screen out investors who might not be actively writing checks right now. This is where episode 125’s other topic of preparing questions comes into play. Even in the best of times, people can be ambiguous about their willingness or ability to write checks, but in this market, it’s particularly critical to understand the check writing capabilities, or dry powder, of potential investors. Some questions to ask investors that can help you triangulate this include the following:
What was the last investment you made? When was that done?
When did you raise the fund you’re currently investing out of?
How many more investments do you expect to make out of it?
Are there specific areas where you’re most interested in making investments in the next six months?
Beyond helping you qualify investors, questions can also help you run an organized, efficient fundraising process. Knowing what an investor’s decision making process is, average check size, and whether they lead can help you identify which investors you should be prioritizing at different points in the process.
Just like you use a CRM to track sales conversations, you should have something to track investor conversations. It doesn’t need to be fancy or complicated; a Google sheet that helps you stay organized is perfectly fine. While you can definitely get creative and customize what you include, a good baseline to start from is the following:
General status; e.g., Warm intro received, first call, second call, advanced diligence, passed, or committed;
Firm name;
Specific point person;
Average initial check size;
Whether the firm has a practice of leading;
Next steps;
General timeline to decision; and
Any notes that are helpful in personalizing follow up.
When you’re fundraising, it’s easy to feel like you’re in the hot seat and should be fielding questions, but remember, fundraising is a two-way street. Don’t be afraid to ask investors questions to help you decipher fit and run a smooth process.
😱 More Cap Table Nightmares
A LinkedIn post by Katie Dunn highlighting cap table red flags caught my attention. Also in “Bring Investors Along”, we highlighted four cap table scenarios that give investors nightmares. Katie’s post builds off of this, including one area we previously discussed and see far too often, a founder giving up too much equity too early.
Why is this problematic? Beyond founder incentive, which we discuss in “Bring Investors Along”, the trickier part of a founder giving up too much equity comes into play at later rounds when later-stage investors might try to right size founder ownership in the company by cramming down earlier investors. Early-stage investing is risky enough, and early-stage investors know their ownership will get diluted over future financing rounds, but the risk of significant dilution down the line is too much for most investors to bear.
As Katie advises, you should absolutely talk to a legal expert who has familiarity with startups before you give up equity. It’s a situation that’s relatively easy to prevent but an absolute horror show to clean up after the fact.
🚀 Accelerator Outcomes
Chances are you’ve heard of the big accelerators, like Techstars or YC, and have maybe even thought about participating in one. Depending on the program and needs of the founder, accelerators can be a great resource in the early part of the founder journey, but not all are created equal. A recent report, “Quantifying the Success of YC and the Largest Accelerators: Takeaways for VCs, LPs, and Startups” by Pitchbook explores the impact of different accelerators on company success, including capital raised and exit value. For those considering participating in an accelerator, flip to page 22 to see qualitative feedback from founders on what they liked about different programs and what they wish was included in the curriculum.
🕸️ Becoming Well-Connected
Building and having a strong network is an integral part of finding success in any domain but especially in fundraising. I stumbled across “How to Become Insanely Well-Connected” on First Round Capital’s site and almost didn’t click on it because the title felt too transactional. I’m glad my curiosity got the better of me, though. The post is filled with solid strategies to approach building a great network and anecdotes of these strategies in action from Chris Fralic, a partner at First Round Capital.
Particularly helpful for founders fundraising is this quote on how to handle rejection from investors: “For example, Fralic is always impressed by founders who — when turned down — send some variation of, ‘Thanks for looking even if it’s not a fit. If you have other ideas for us or if anything changes, please let me know,’ or, ‘Chris, when we met, you had a question/issue about X. I just wanted to show you what we’ve done about it — no need to respond.’
‘A person who says that shows she’s savvy enough to not take bad news personally, or create obligation or awkwardness, or continue to argue their point after you’ve said no. I’ll remember her for it,’ he says.”
😴 Decompression Zone
Hopefully, the 4th of July holiday gives you a little extra time to enjoy a podcast episode or two. I am late to the game, but I am loving the Parcast Espionage series. At the top of my list this weekend is to listen to Espionage’s parts one and two on Alan Turing.
👋 Have a great 4th of July!