Raising money from investors is most successful when founders approach the process with investors as business partners. For founders, fundraising is usually an all-encompassing task. All of the founder’s attention is focused on networking with the right people, getting emotionally drained from hearing ‘no’, developing the right financial and growth models, and articulating to investors what their value to customers truly is. For some founders this is more fun than running their business while others despise the process. Regardless of how much founders enjoy the process, developing a fundraising mindset will improve the experience and odds of success.
Investors Hold the Cash, but They're Not Your Bosses
It’s easy to start thinking about investors as bosses. After all, they decide if, when, and how much of their money to put into the business. Founders who’ve worked for large mature companies before are familiar with this mindset of getting their project funded by their boss and it’s easy to stay in that mindset. Convincing your boss that the company should make a strategic bet on a new area is not something that usually happens in mature corporations.
A founder’s job is different: a founder needs to choose when to change the business to attract capital and when to find different capital. This isn’t possible at a large company where the business strategy and direction are already set. Founders have the luxury of evaluating financiers and approaching investors who have already shown signs they want to make strategic bets in the founder’s area. Finding investors like this is finding a business partner, not a boss, and not an employee.
"No" Means Passing on Partnering, Not on Your Business
There are hundreds of investors out there, and most pass on 80-90% of the pitches they hear. Investors say no - a lot. Often saying no is for simple reasons: wrong geography, already made all the investments for the year, in the middle of a negotiation, wrong industry, wrong stage, and so on. In fact, Brian Chesky of AirBNB recently posted five rejection emails he received when he was raising his first round. You can see the variety of reasons vary from investor specific reasons to company specific reasons.
As a founder, the reasons behind the no can be hard to decrypt. Investors aren’t often forthcoming with long explanations of why they said no. Long explanations can take a lot of the investor’s time and energy for a business in which they’ll never hear about again. When investors do take the time to share, it is usually because they have an interest in the company even though they aren’t planning to invest.
Every Pitch Improves the Following Pitch
Take every piece of feedback during and after pitching, and thoughtfully incorporate that feedback. Often investors will repeatedly give the same feedback, providing an opportunity to refine answers or properly ignore the feedback. The difference between these two is fairly nuanced. Take feedback around the customer or market segment: investors may not believe that a new entrant can take an entrenched market by storm. This feedback should be taken differently if you’re Elon Musk building Tesla versus a new founder out of college building the next dating app.
Some impossible to build companies are impossible to build because funding them is so difficult. Other impossible to build companies are impossible to build because adding value to customers is so difficult. Understanding what part of growth investors are giving feedback on (future financing or customer growth) is often nuanced; however, understanding this nuance can improve the pitch to the next investor.
The Founder is Responsible for Capitalizing the Business
New businesses thrive when 1 + 1 = 3. Founders are responsible for pulling the capital and the people together in a way that creates outsized value. Recruiting capital to the business is not that much different than recruiting people. The capital has to add more value than dollar value of the investment.
Often founders hire ‘professional’ financiers to help them raise capital. They outsource the fundraising process to someone else for a share of the business. This works and is extremely popular in later stage or more mature companies. The problem with taking this approach for young companies in the first few rounds of financing is that the economics of the business aren’t truly established yet so the capital isn’t plugging into a machine that’s already working it’s being thrown on the workbench along with the people resources that the founder has put on the bench and they still needs to assemble the machine. If the founder doesn’t deeply understand the people or the capital on the bench, their ability to work with the team to assemble the machine is handicapped.
Takeaways
The fundraising process is the most challenging at the earliest stages. Investors are terrible at being transparent when it comes to their reasons for making or not making an investment. Remember that your looking for a business partner, not a boss. Every search for a partner includes being turned down and every one of those turn downs is an opportunity to improve. When your pitch resonates with a partner who thinks their capital can add more value than the zeros on the check, you might have found a match.