How to avoid being rejected by investors: step by step guide
We all hear how “connected” founders whoosh through their rounds. But if you don’t know a single investor personally the chances of being rejected are pretty high. This is a workable plan how to avoid it.
“How did you first get funded outside friends and family?”
— this is the question I just love to ask founders I work with.
Most of them actually say either “I knew the right people” or “I made the right product” (that is, to be honest, just another variation of the first statement, because let’s face it — if you don’t know the right people how on Earth would they find out about your right product?!).
However, very few and rare unveil the fact that the only way to get angel investors or VCs on board is through the hard and systematic work for about 4–5 months when you have to stay focused on nothing than this task. I really like this approach, because in contrast to “knowing the right people” it is something very replicable with very low level of luck to factor in. And that is why it’s something I’d love to share.
So, let’s see what should be done.
Step 1. Research
Founders are multitaskers. Founders have to wear many hats at a time. Founders have to build a product, run user tests, hire people, plan go-to-market, write copies for Google Ads and post regularly on Twitter because how else are you supposed to build a community of early users?! Still, if you’re serious about getting funded you have to put all these activities on hold and give yourself sometime to make your research. It should be thorough, deep and wide. By the end of your research you should know “investors market” as good as you know your product and your audience.
You have only one chance to reach out to investors. And you’d want to make sure you’re reaching out to RIGHT ones.
What does it mean, right investors? Basically, investors who will be more inclined than others to fund your venture. The right investors are the ones that not only stated but have already invested in startups in your industry. Investors who’s Investment Thesis aligns with your product or service. Investors who share your values and beliefs about future and the way technology would go in the next few years.
Where to look for right investors?
· Google search
· Investors lists like Crunchbase or AngelList
· Twitter and Facebook
· Through startups in your location and/or industry (look up who invested in them)
There are also 2 very useful lists for US-based and EU-based microfunds who deal with seed startups (if you are on the pre-seed stage they would probably be of no interest to you right now and you will be inclined to skip this step — but please, don’t do it. The smart way is to put all the names you’re going to reach out to, now and one step ahead in one spreadsheet, and I will explain, why a few lines later).
Here are the lists:
Step 2. Building your custom list
Now, when you’ve done your research and have all your names figured out, make a spreadsheet with several tabs:
· Pre-seed round
· Seed round
· Series A
On this stage you’ll be focusing on the first 2 tabs. The last 2 you may leave empty or fill them in with some generic stuff that you will be probably using like “bank loan, private equity, strategic investors and venture funds”.
Why filling in two tabs if you’re on a pre-seed stage and not even sure if you make it in 10–12 months perspective? Because you’re going to share this spreadsheet with different trustworthy people who would help you pave your way to investors.
And you’d probably want these people to see that you know what you’re doing, that you’ve got a strategy and that raising now is a part of your “grand plan” instead of being a desperate move to cover your burn rate (even if the latter is true).
Presenting results of your research and showing wholistic approach to your startup journey is the best way to do it.
For each investor in the tab specify
- the name,
- the check size,
- the reason you have included this specific investor in your list,
- what startups from your industry have they already invested in,
- contact info
- and most importantly — who can you reach out to and ask to make an introduction.
I know, I know, this is the hardest part. Because, if you had mutual friends with the investors you would probably not have to sit and do all this sorting job. However, I’m not referring to mutual friends here. There are many ways to get introductions. For instance, through the founders of the companies in their portfolio. Ok, you don’t want to write a cold email to investor, because it’s your only chance. But how about your peer founders? Every fund has a dozen of portfolio companies. It makes couple of dozens of founders. How about checking their friends lists in social media and find some connections to them? If you have mentors and/or advisors, certainly think of involving them into finding these connections too.
If you have already raised something (even through crowdfunding) — address all your existing investors in DMs or via email and SHARE the spreadsheet you have created. If some of the lines are still empty — this is fine, it’s how it’s supposed to be. Ask everyone you’re sharing your spreadsheet with, to open it up and actually help you fill in the missing parts of the puzzle.
Why share the spreadsheet instead of just asking to brainstorm and trough you some ideas?
- as I’ve mentioned above, people you’re addressing would love to see you doing a great job so far and
- while seeing other contribute they will be more motivated to come up with at least one idea.
Some additional advice:
1. Before sending this file to everyone you’d want to see it, ask a friend or any other outsider to go through it, just to make sure it makes sense. Sometimes we fill in information presuming others would know what we’re talking about (like, using acronyms). In reality that’s almost always not the case. If an outsider outlines some reservations or point out ambiguous parts, go ahead and fix them.
2. Think twice before involving investors that you had reached out to, but who had not invested in you yet. How likely are they under these circumstances recommend you to someone else?
3. After you reached out to a trusted person you hope would contribute to this spreadsheet and you get no response, follow up once or twice. If they still don’t answer, reach out to the next person. Just don’t send out the spreadsheet to everyone at once. If they have answered, don’t forget to express your gratitude.
4. And finally, make sure the document you’re sending is actually editable (I personally have open up someone’s link so many times just to find out that I can only stare at the content without editing it).
And so, this is it: the secret pathway to VCs money just revealed. After the spreadsheet is filled in, start acting on it. Contact the person in the “who can introduce” line and ask to introduce. You can actually do it while still filling in the spreadsheet, just not to bother the same person twice. Establish a connection with investor and do your bests to make sure it was not in wain.
I’m not saying this strategy goes with 100% guarantee. All I’m saying: it is the most efficient way of getting funded I have encountered and it is probably the only workable one if you “don’t know the right people”. Fortunately or not, the startup finding industry is still on the stage where retail was in XVIII century (when you had to know personally every shopkeeper to have your credit line opened). It is still very much a playground for connected. However, if you don’t belong to this circle the plan I’m offering, is as good as any other. So, why not give it a try?