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10 Misperceptions About Venture Capital

1) You need it.  Not every company raises venture capital—most don’t.  Not raising gives you flexibility about the market size you want to go after, speed of growth, and de-risks your plan—because once you start spending someone else’s money, the clock starts ticking on your “out of cash” date.  Slow and steady isn’t a bad thing.

2) Only 22 year old hacker dudes get funding.  Before this remark generates too much controversy, let’s be clear:  It is absolutely true that a huge percentage of startup teams are young, technical white dudes.  That’s different than saying only young, technical white dudes get money.  In large part, that is a result of who pitches to VCs, not surprisingly.  We can debate how to get a more diverse stream of people in the top of the funding funnel for sure, but the fact is that VCs just want to make money.  We’re kind of predictable that way.  If you have a clear plan for making a lot of money—and some proof points that you’re on the right track to doing it—I don’t think you’ll be short of investors willing to work with you, no matter who you are.  In my own case, of the 7 deals I’ve sourced and/or led at First Round, the profiles of the founders look like this:

  • Married, non-technical female, mid-30s, mom, white
  • Single, non-developer (knows how the tech works, though) male w/outsourced offshore tech team, 30’s, dad, white
  • Two single non-technical guys, late 20’s, white
  • Two technical mid 30s guys, one is a dad, white
  • Non-technical, mid 30’s dad, white
  • Non-technical single guy around 30, white
  • Early 20’s technical + non technical single founders, white

So, while it’s not a huge statistical sample, we’ve got less than 30% in their 20’s, 14% women, over 50% parents.  Young, sure, but not early 20s…and that’s a lot of kids.  A bit white, though…

3) VCs hold the power.  In New York City, at least, there is a TON of money out there—lots of alternative sources of funding.  Not only that, there are a lot of VCs and angels all walking around competing for the best deals.  No single VC can make or break your company—and, in fact, we’re often so competitive with each other that it feels like we don’t have very much power at all when a company is showing traction.  At the end of the day, you choose us, we don’t choose you.  It is absolutely withiin your power to build a company that allows you to say know to us.  We, on the other hand, *need* to invest our money, so we don’t have the luxury of turning down good deals if they come along.

4) You get one shot at pitching.  Getting to a yes can often take time.  Fred Wilson just wrote that it took a couple of tries for the Soundcloud guys to get a yes out of him.  I heard Kickstarter went the same way with some of their backers.  I may have concerns now that you’re able to address down the line—you should always come back in that case.  Just because you get a no once doesn’t mean it’s permanent if the facts change.

5) Money solves all of your problems.  Too many times I hear pitches that include “And we haven’t even spent any money on marketing yet” as if money was this magic dust that makes everyone want to download your app.  Sure, it can make things go faster, and it can hire a user experience expert—but it doesn’t guarantee that your team will discover product market fit or that customers will engage with your product once you get it in their hands.  It also doesn’t guarantee that any developer will want to work for you—so lack of a tech team isn’t instantly solved by cash.

6) VCs are looking for a reason to turn you down.  Whenever I ask an entrepreneur to e-mail me, I can tell they’re feeling like I’m brushing them off.  Trust me, I’m not… but I’m not going to write you a check right here in the hallway of this conference, so why don’t you give me a chance to read all the information you’ve put together as part of your story when I actually have time to focus on it?  I am absolutely looking to fund as many promising startups as possible.  Statistically, I’m usually going to say no, but I really do want to say yes and am trying to find that company that no one else notices.  So, you’re not wasting my time with questions, nor would you be wasting my time if you’re too early.  I get paid to do this and I absolutely want to engage with smart entrepreneurs. 

7) If you could just get 10 minutes of a VCs time in person or on the phone, they’d understand.   You won’t get 10 minutes of “live” time with every customer, so if your company doesn’t stand out in an e-mail pitch then you need to work on the story.  Personally, I think pitching over the phone is very difficult, so I’m not sure I’d really be straining to get a quick call in either.  All a company should really need is a compelling landing page that makes an investor say, “I need that.. I’d click to signup” or “That’s huge… everyone in your market would go for that.”   The deck is the details, but the high level idea should carry you to an in person conversation.  

8) It’s always good to have deep pockets around the table to fund you when things don’t go so well.  Ever see news about a company and think to yourself, “Jeez, that company is still around?”  Overfunded companies that doesn’t have upward momentum are the walking dead and they can be the most miserable places to work for both the founding team and their employees.  I understand the “never say die” mentality, but your time is valuable, and if your idea isn’t working, maybe you should seriously think about trying something else.  That’s why I think it’s really questionable to take on a bunch of money before you’ve de-risked the idea, because then you’re stuck with it.  There are exceptions for sure, but “raise as much as you can” can eat a 5 year chunk of your career and give you nothing to show for it.  Sometimes a VC who says, “Listen, this obviously isn’t working at all—let’s find a nice home for the tech or shut this down” can be your best friend, even if it kinda sucks to hear it. 

9) You need a deck.  Just tell me, or better yet, show me what you’re working on, and tell me why you’re doing it.  Tell me how you got there.  Or, ask a question and get some advice.  Getting funding starts with building a working relationship.  Sometimes the best conversations start out when an entrepreneur is in the process of trying to find out whether he should even get funding or not. 

10) All VCs will be really hands on in helping you build your company.  Different investors are good at different things—and they provide different levels of engagement depending on stage and how much they have invested in you.  When you’re an early stage startup, you’re going to need a lot of help—you can’t really afford to have an investor base where there isn’t at least one really hands on VC, despite how much you think you’ve got it all figured out.  There are some big funds that are amazing at helping early stage companies and others that look at small investments like placeholders.  You’ll be lucky to hear much from the latter.  Finding someone who works well with companies at your stage and given your particular set of needs is imperative—so do your homework.  Contact companies that this investor has worked with in the past—and more than one.  Not every relationship works out well, but with a few diffenent signals, you should be able to triangulate whether or not this investor is going to get you what you need.

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