When Luke Skywalker had to drop a proton torpedo into a reactor vent shaft, he had one shot. Failure was not an option.
Startups, on the other hand, have lots of little failures and successes over time. Growing a company is a process with lots of little iterations over time--just like fundraising. Just ask Dennis Crowely. He’s done it twice. The first time around, his meetings with Union Square Ventures didn’t result in a check—not until a little nudge got Fred thinking more about it. We know how that ended.
More recently, Andreessen Horowitz was totally out of the running—they took themselves out.
““We withdrew our funding offer to Foursquare and we are out,” said Horowitz in an interview with BoomTown. “This is playing out too much in public and clearly someone has an interesting agenda here, so this is not something we want to participate in.”"
And now we find that, once again, the second time’s a charm as that very same firm just put $20 million into Foursquare.
At the end of the day, investors want to invest in great companies. Not all companies start out that great, and sometimes, visions need a little more work before they appear great. Sometimes, it takes a little work to build a great working relationship with an investor. Rarely is that just done in one meeting.
So when I get notes like this, it kind of makes me cringe a little—but I understand where too many entrepreneurs are coming from. They’re afraid that they only have one shot to make a great impression, and they don’t want to waste it when they have too little to show.
“We wanted to check with you in advance to let you know that we are working on development of our latest... prototype and don't anticipate our beta to be ready for another month or two... we have recently refined our concept and had to take one step back and start work afresh on our prototype. While it has been time-consuming, the market research, retailer meetings and focus groups with consumers has driven us to iterate in this way and we believe we have a much more realistic, and great business proposition in front of us. While we have plenty of materials to show you (including business plan, financials, design mockups, etc.) let us know if you think it may better to meet once we are closer to having our beta finished.”
Figuring out the market for your equity, appropriate capital structures, reasonable milestones, and most important of all, the right partner, aren't things that usually happen on the first try without some amount of trial and error. A lot of startups, however, don't seem to realize this. Instead, believing that they've only got
one shot to win over an investor, startups often pitch far too late and fail to build a relationship over time with an investor.
Let me be clear about this: Never pass up an opportunity to have a “way too early” conversation with an investor.
- Investors have an information advantage. They’ve undoubtedly seen a ton of companies in and around your space—potential competitors, collaborators, lessons learned, etc. They’ve seen a ton of similar patterns, things to be aware of, or even potential hires that may want to join a company like yours. Why wouldn’t you want to benefit from that knowledge?
- They also know what’s likely to get funded—what milestones you’d need to hit for them or others at a similar stage to get funded. First Round, the firm I work at, tends to ask a lot about the next round of funding—what’s your pitch after you spend our money? We have a good sense of what later stage VCs are going to look for and can help think about how much you need to raise to get additional interest down the line.
- Sometimes, we even have good product feedback. You shouldn’t build for us, necessarily but we do tend to see a lot of this web stuff. Why not ask people who may have entrepreneurial, operational, sales, marketing, etc. backgrounds at startups?
- Maybe, most importantly, investors like progress. It’s hard to show progress in one meeting, but if I meet with you when you have something super early that breaks all the time, and then 3 months later when you’ve sured up the product, struck a biz dev deal, and bolstered the feature set—after you told me that’s what you were going to do—that’s going to get a big check mark on execution. Of course, that’s different than trying to come in 3 weeks later with just one more customer if my initial concern was executing a sales plan in a market with hundreds of thousands of potential customers. That’s the same story all over again.
Of course, there are mitigating factors around actually pitching too early. You don't want to be out in the market too long, because then it makes your raise look stale. Lack of momentum can kill a startup. So how do you maintain a relationship with investors without being seen as pitching over and over again? What actually counts as a pitch?
To use a dating analogy, this is a little bit like trying to be just friends with a girl you like who has indicated she's not ready to date right now--maybe because it's too soon after a previous relationship. It’s cool to invite her to the movies with a bunch of other people—but late night dinner at your place—dude, that’s a date. I can’t give you a hard and fast rule for determining between the two, but I know a date when I see one—and I know a pitch when I see it as well.
Admittedly, it's a very fine line between what's just being friendly and what is a clear pursuit.
First off, when you have a product launched, even something raw, it's so much easier to keep a product conversation going versus a fundraising one. You can always try to get an investor to use your prototype and get thoughtful feedback, or try to get useful business development introductions. Even some specs or wireframes… If you email me some wireframes, you can get me to give you feedback and I’ll never even think get that pitch meter running. A powerpoint deck, however? Pitchy.
Here's an area where I think entrepreneurs could make more productive use of LinkedIn. Few come to me with a set of asks on the introduction side. My network is out there. If we connect and you see that I'm connected to three key partners that you're trying to strike deals with, don't be afraid to ask for specific intros. The more time you save me from trying to imagine who would have interest, the better. This way, you're getting the product feedback you need from customers and partners, I'm seeing what the market thinks of what you have, and we didn't even talk money at all yet. If the feedback is great, I'm going to lean forward with some more interest. If the feedback isn't good, I would have found that out anyway in the due diligence process and you might have looked bad for trying to pitch for money without having enough customer dialogue yet.
When the product is a consumer product or one targeted at professionals like me, you can keep a backchannel dialogue going for quite a while before getting to the Jerry Maguire question. I'm using at least three or four products that are potentially fundable right now and none of them have officially pitched yet.
Something that is a clear indication that you're pitching is when you go out to a lot of investors. If I go find my friends on your social service, and Sarah Tavel, Eric Weisen and Andrew Parker are already using the closed alpha—and every other VC, then you're fundraising.
Another indication that you're fundraising is when product development can no longer continue without capital. If you've burned through your friends and family money and it's clear you have more work to do on the product, it's pretty obvious why we're talking, despite the fact that you say you're just looking for feedback.
Still in all, I see way more companies not vetting the viability of their idea early enough—and pushing a big rock up a hill for too long—than I see people getting tired on the fundraising trail. The number of companies I wish I had seem earlier, and tracked their progress over time while providing useful feedback seems to be growing.
Lesson: Don’t be afraid to talk about your product with an investor, but try not to beat them over the head with your Powerpoint pitch.