Meeting and Pitching Investors
Contents:
Bootstrap: Build a Company without Raising Money
Before you raise outside money, see how far you can bootstap the company. The more revenue and traction you can show investors, the less equity you will need to give up when you raise your first round of financing.
Some startups may not need to raise outside money at all.
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Bootstrapped, Profitable, & Proud. This series from Basecamp profiles companies that generate over one million dollars in revenues, and are profitable without taking VC money.
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Spanx. Sara Blakely bootstrapped Spanx from a $5,000 investment into a billion dollar business. She owns 100% of the private company with no debt.
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PlentyOfFish. PlentyOfFish founder Markus Frind never raised outside money. “By the time I found out what VCs were, I was already making millions in profit”. quoted here. That is a nice place to be. Frind owned 100% of the company when he sold it in July 2015 for $525 million.
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Non-equity Crowdfunding. Raising money from non-equity crowdfunding sites like (Kickstarter and Indigogo, etc.) is a fantastic deal. You raise capital without giving up equity. Have cake, eat it too.
Understanding VC Investors
Before you start pitching your startup, you should understand how VC investors operate. What are their motivations?
A venture capital fund has limited partners and general partners. The limited partners are big-money institutions (endowments, pension funds, etc.) that put up capital, wait 5-10 years, and hope to see a big multiple of their capital returned to them. The general partners do the legwork. They get down in the much with startup founders and decide when and how to invest the LP’s money. GP’s get paid in two ways. They get a fixed, annual payment from the fund, and they take a percent of the profits at the end of the fund’s lifecycle.
- Hackers Guide to Investors. VCs are looking for big hits: “the way VCs seem to operate is to invest in a bunch of companies, most of which fail, and one of which is Google.” Paul Graham, 2007.
Reading Your VC Pitch Meeting. VCs are not great at responding in real time. They often want to think more about your company, by equivocating they preserve option value. Seth Levine, 2017.
What I wish I knew about fundraising as a first-time founder. Preethi Kasireddy (2018)
Accredited Investors
Generally, startups should only raise money form “accredited investors.” Without getting into the details, you should just know that federal law will treat your fundraising far more favorably if you only raise money from accredited investors.
An accredited investor is someone who is sufficiently rich (under the US securities laws) to risk their money in the world of business startups.
More specifically, an investor is “accredited” if:
- they have a net worth of over $1 million, excluding the value of their primary residence, or
- their annual income exceeds $200,000 for the last two years, or
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their joint annual income with their spouse exceeds $300,000 for the last two years.
- What is an Accredited Investor? Yokum Taku, 2009.
Finding the Right Investors
Angel Investors / Seed Funds
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Upside Risk. Angels make their money from investing in rare companies that deliver 100x returns. The the real risk for angel investors is missing out on that outstanding investment, not failing to get their money back on their non-unicorn companies. “And yet angel investors continue to ask for onerous terms to mitigate their ‘downside risk.’ All this does is piss founders off, misalign incentives, and harm the investors’ chance of getting to invest in the best deals.” Sam Altman, 2013.
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How to Select Your Angel Investors. Don’t reach for the “celebrity” investors. Celebrity investors might help generate buzz, but its better to have investors who will roll up their sleeves and help out when the buzz dies down. Chris Dixon, 2009.
Investor Introductions
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Don’t Ask Your Startup Lawyer for Investor Intros. “Nothing says ‘I can’t hustle’ like a paid introduction.” Jose Ancer, 2014.
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Don’t Ask for “Introductions to Investors” (ask for intros to specific people). Do your homework, pitch your contact first, ask for an intro to a specific person. Dan Shapiro, 2011.
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Why Most VCs Won’t Intro You to Other VCs (Unless You Follow These Steps). Hunter Walk, 2014. Do your homework before you ask for an intro. Write the draft pitch and intro email for the VC. Follow up. Send periodic updates.
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Introductions and the “Forward Intro Email”. You write the draft intro email, and “I do only the things I’m best at — knowing the receiver, and sharing my opinion of you.” Roy Bahat, 2014.
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The Double Opt-In Introduction. Asking for permission to make an email intro before making it is good form. I try to do it as a matter of practice. Fred Wilson, 2009.
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Don’t Carpet Bomb For Introductions. Try for more of a surgical strike. Hunter Walk, 2014.
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How to E-Mail a busy person. Tobias van Schneider, 2014. From Spotify’s product design lead.
How Many Investors?
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How Many Investors are Too Many? “VC’s are like martinis: the first is good, the second one great, and the third is a headache.” By Mark Suster, 2011.
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Party Rounds. The rising popularity of party rounds is bad for companies. In a typical party round, no single investor cares enough about the company. Sam Altman, 2013.
For Start-Ups, How Many Angels Is Too Many?. Mike Isaac for the NY Times (July 2015).
Pitching Investors
Some Notes on Fundraising from Albert Wegner of Union Square Ventures. May 2021.
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Pitch yourself, not your idea. Tell the story of someone who has been building stuff her whole life and now just needs some capital to take it to the next level. Chris Dixon, 2009.
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How to Present to Investors. Practical advice on giving presentations: describe a compelling product and get right to the demo; focus on a narrow solution to a widespread problem, don’t waste time on business models or secondary matters. Paul Graham, 2010.
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How to Pitch Your Startup On Stage.
How you pitch is important, because investors aren’t obligated to expend the mental energy to figure out what you are talking about. Follow this basic flow: market and problem, your solution, evidence that your solution will work (traction, sales, your team’s expertise, etc). By Y Combinator partner and Twitch cofounder Justin Kan, 2014.
The Pitch Deck
Some example pitch decks:
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Air B&B. 2008.
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Linkedin’s Series B Pitch to Greylock. Reid Hoffman, 2004.
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eShares Series A. 2015. CEO Henry Ward suggests that financial tech companies meet with VCs on the East Coast.
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BufferApp Seed Pitch Deck. Dharmesh Shah, 2013. With commentary here.
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Dwolla Pitch Deck. Raised $16.5 million from Andreesen Horowitz, Union Square Ventures and others.
Archive of startup pitch decks 2018.
NDAs and Ideas vs. Execution
Don’t ask a serious VC to sign an NDA before you pitch. Instead, pitch your idea only to investors with a reputation for honest dealing. In any event, the value of a startup isn’t in the idea, it’s in the execution of the idea (or the potential for execution).
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Why you shouldn’t keep your startup idea secret. Chris Dixon, 2009. Talk about your idea to almost anyone who will listen: investors, entrepreneurs, friends, people on the street, the bartender, etc.
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The Myth of the Eureka Moment. Chris Dixon, 2009. “In the 10 years I’ve been involved with startups, I have never seen a ‘Eureka’ moment where someone suddenly comes up with a great idea. Instead, I have always found idea development to be a wrenching and often meandering process that is guided mostly by instinct.”
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Important Terms for Nondisclosure Agreements? Yokum Taku, 2008. For those times when you actually need an NDA, specifically define what information must be confidential, and who must keep it confidential (i.e., mutual or one-way obligation). Is the obligation not to disclose information, or not to use the information, or both?
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NDAs with investors and potential partners. D. C. Toedt, 2015.