As a founder, especially if it’s your first time starting something, there’s a lot you need to quickly wrap your head around, and not all of it will be your core skill set, but you’ll just need to roll your sleeves up and figure it out.

Everything from product design and development, developing and executing a go to market strategy, acquiring first customers, and then figuring out how to iterate on all that. All of this, of course, should be built on some novel / unique / interesting perspective you have on a particular market, the problem you're solving and why your solution will be different, appealing, and compelling. Crucially, you’ll need to be confident that you’re the person / team to solve this problem at this point in time.

That’s a lot. But if startups were easy, everyone would do them.

There's no shortage of advice out there for founders raising their fist round, all of it is subjective and opinionated. Including this post! These are just my opinions, based on my experiences, and you should probably make sure you take a range of inputs and combine with your own perspectives to decide on what might be right approach is for you.

Do you really need funding?

Of all the startup arts you need to master, fundraising can be the most challenging, especially if telling a convincing story and backing it up with substance isn’t in your wheelhouse.

When founders tell me they want to raise a pre-seed round, the first question I ask them is if they really need funding, and what exactly do they need it for? Seriously, many founders just assume they do because it’s what they’ve been told or what they’ve seen others do. Others believe they can’t start the process of building until there’s money in the bank.

To be fair, I can't blame founders for thinking like this. There is a common misconception that building tech startups at the earliest stage is about the tech, when really, it’s not. It’s about the founders' ability to pull apart a problem and research a solution that they think people will pay them for. Lots of the earliest work that is undertaken at startups is simply just talking to people. People who might be customers, partners, resellers, employees, and maybe even investors. And funding isn't needed for any of that.

Do you really need Venture Capital funding?

The question of if you need to raise venture capital is fundamental to the direction you ultimately take. There is no playbook when it comes to building a startup. Every startup is different, even if they’re built around the same idea or going after the same customers. The thing that makes the difference is the people, and that’s ultimately what the first employees, first customers and (if really needed) first investors put their faith in.

Deciding to not raise venture capital is just as valid an approach to company building as raising venture is. Though you could be forgiven for thinking that most investors don’t rate bootstrapped businesses, and often dismiss them as “lifestyle” businesses. This is because they would probably not get the kind of returns they need. However, I’ve lost count of the number of times I’ve seen founders have better outcomes from bootstrapped businesses compared to contemporaries that took the VC route.

Not every startup should be venture funded, because venture funding is best suited to startups that have high growth potential. That often means, in very simple terms, that they can use technology to enable their users to do much more with much less, and their revenue model has exponentiality built into it.

But taking venture capital comes with its own set of challenges, and it may make more sense for founders to bootstrap or take funding from different sources, based on their personal goals and aspirations, business model, and what the market will bear.

The basics

Anyway, in this post, I’m going to explore some of the things that I wish I’d known over the years when raising from VC. The majority of this was eventually learned through repetition and personal experience, so it's subjective and probably opinionated, and you should probably not solely rely on content in a single blog post to build your fundraising strategy. That being said, hopefully it’s somewhat helpful to founders out there trying to figure out how to raise their first round.

VCs are in the relationship building business, but many don't think / realise that and often their first time conversations with founders can feel transactional. It’s not obvious, but when you’re fundraising you’re in direct competition with every other startup that each investor you’re speaking to has looked at that day, week, and probably month (depending on how often they make investment decisions).

If you’re talking to an associate at a well known firm, and they invest in 1-2 deals per month, you’re easily in competition with 10’s if not 100’s of other startups, depending on their space and market. This is particularly true for funds that invest across geographies such as Europe, rather than just sub-regions, such as Ireland.

Are you a fund returner?

For every VC you meet, one question will be more important to them than all the others: do you have the potential to return their current fund multiple times over. This is unlikely to be a question they straight up ask you. But every other question they ask feeds into their ability to answer it themselves.

If they have just started to invest out of a new fund, then answering this might not be as pressing as if they’re in their final year of deployment and markups haven’t been great. Markups are directly impacted by their portfolio founder behaviours, and indirectly by market behaviours / changes. If founders do what they set out to do commercially and with their product, and go on to raise subsequent funds, investors get to mark up the value of the investment.

Investors care deeply about this because they likely want to raise a subsequent fund, and they charge management fees on each fund (typically 2% per year for 10 years, or 20% of the total fund). So they are motivated to keep that train running. Management fees are used cover the cost of running the firm, and paying salaries etc. It's not cheap. Without fees, a VC cannot do their job.

Given that most startups either fail completely, or plateau and don’t reach an outsized valuation (which may as well be a failure in a VC's mind) then they are relying on a relatively small number of startups to keep increasing their markups and eventually hit some kind of liquidity event and the investment returns the value of the fund multiple times over. Depending on when the fund was raised, and what the markets were like at the time, they will have promised their investors (known as Limited Partners or LPs) a minimum of 3x, but possibly much more.

So, in the back of every VC’s mind is that question: can this founder return the value of our fund multiple times over?

Focus on the relationship, not the pitch

Because they're in "hunting mode" (that's actually an expression used by some VCs!) there often isn't enough time for you to get to know them. They have info they need to collect so they can do their job. This is especially true of junior VCs. So, I believe it's important for the founder to drive each investor interaction as a "get to know you" session, rather than "a pitch".  

Sending over a short deck will ideally set an investor up to come to the conversation with good questions. But those questions shouldn't drive the conversation. You're evaluating them as much as they're evaluating you, and there needs to be balance. Don't sit back and wait for the next question like it’s your first job interview.

Have a clear goal of what you want to get out of the interaction. For example you should have a good sense after the first meeting if this a) is the right investor for you and b) if you’re the right kind of startup for them.

In order to prioritise how you're going to rank investors when it comes to running a structured, time-boxed fundraising process, I really believe that a consistent line of questions from your side is important.

At a minimum you should have done some basic research on each investor, such as:

→ What is the fund size?

This gives you an idea of how much they need to return, and how much their share in you will need to be worth at exit.

→ What is the fund stage of life?

This tells you how ready they are to deploy,  early = faster, late = slower.

→ Roughly how many investments they've made this year, and total number out of the current fund so far?

Are they on target, are they holding back, will they waste your time / drag things out because of internal inertia?

→ Ideal stage of investment: pre-seed, seed, series A etc.

If you're not a match, deprioritize. No point in talking to Series A investors at pre-seed.

→ Typical cheque size

Same as above, if you’re not a match, move them down / off the list.

→ Ability to follow-on in future rounds

If they don't, then that reduces future bad-signaling risk, but also means you can't count on them in the future. Pros and cons to this.

→ Size, makeup of team

It can be an indicator of their ability / inability to move fast, and get internal buy-in, amongst other things. It could also be a sign of their ability to support you in ways beyond just capital.

→ Backgrounds of partners and the person you're speaking to

The ability to understand your space, and where it's going makes all the difference. You do not have the time in your fundraising process to educate an investor on your space. If they don’t have enough industry context to judge your approach and your abilities on their merits then they’ll either be a fast no (good, but why bother talking to them in the first place), a slow no, or a FOMO driven yes. In the current environment you’re unlikely to see the latter, but taking on an investor that doesn’t know your space well enough can be an overhead on your time and energy as you progress.

→ Fund thesis

If it's not a match no point in wasting time.

→ Reputation amongst founders etc.

This one is very important. Founders talk. VC rating sites like Landscape have become invaluable. It’s worth spending time getting to know other founders and learning from them about their experiences with VCs. Sometimes a VC will offer to introduce you to a few founders in their portfolio, and chances are they'll put in a mostly good word, but may add some not-too-controversial colour about what they're like to work with. It's probably worth looking to other founders in the portfolio that weren't suggested. All that being said, you should probably be somewhat pragmatic about this, if you have a term sheet and all other indicators look good, it would be missing the point to reject an investment based on something the 9th portfolio founder told you.

Digging deeper

All this kind of info, above, is mostly easy to find on a VCs website, places like Crunchbase, Dealroom, PitchBook and other sources. Don't waste valuable time in the first meeting asking them about this stuff, unless you’ve not been able to research it or you really want to hear their pitch.

Getting to a point where you can see a future partnership with the investor is what's important. Bear in mind they’ll also have goals for the meeting and will also want to get to a point where progressing to the next stage starts to make sense (or not) for them.

The kind of questions that I think are most helpful when talking to a VC for the first time are (but not limited to):

→ What do you like about this space?

This is a great way to instantly get a feel of their broad knowledge of your space, it'll be easy to spot bullshitters. But also, can be a great way to quickly surface up aspects of the space that you may not be familiar with.

→ What go to market strategies have you seen work in this market?

This helps you understand what kind of competencies / interests / background they have beyond investment. But if nothing else, you might gain a new insight.

→ Have you invested in / thinking about investing in other founders in this space at this stage?

Are they tourists, or do they really believe in this space? The only thing worse than tyre kickers are VCs that are using you to educate themselves on your space so they can invest in a competitor. It happens. This also can be a useful way of opening up the conversation to get a sense of who they think is at the top of the space.

→ Where do you think we could be in 5 years?

This combines all of the above, and requires some nuance. Another easy way to spot bullshitters. Beware, however, you also need to have a good answer to this question. Obviously, no one is a fortune teller, and it’s easier to see the next 12 moths than next 5 years. However you should be able to talk about it at a high level to the degree that others can get excited about it.

→ What do you think our biggest challenge will be in the next 12-18 months?

How well do they understand early stage investment, what have they seen before? The framing of the response on this could be general startup stuff, or space-specific, or just specific to you / your startup. You’ll notice a difference between investors that have been founders before and those who have not. But also, investors that have spent most of their career working with pre-seed and seed founders will probably be more realistic about the challenges that come with this stage, and will probably have some interesting observations. It's a good opportunity to ask them about edge cases / unusual scenarios they've seen.

→ What's been your favourite / least favourite investment in the past 3 years?

Not best / most valuable, you want to open this answer to being more than just a financial transaction. They also don’t have to name names, and they may also not want to talk about this at all, which is fine. However, this can be a great way to get a sense about how they think about their relationship with a founder after investment, through good times and bad.

→ What kind of founders do you like investing in?

Reinforcing the fact in their minds that this is what pre-seed investment is about… investing mostly in people. Most responses will probably be about backing exception founders that are smart, execution driven, domain expertise, commercially minded, operating in a large market… all those clichés, but you're looking to push past. In between the lines, this question is really asking about what kind of founder relationships they invest themselves in.

→ Are there any companies in your portfolio who would be good customers for us and can you make an intro?

Always be selling! This is such low hanging fruit, and should be a standard to close out the meeting on if it's not already been brought up. But this is also a good way to quickly gauge their level of interest. If they like you, they’ll happily make the intro as it’s probably helpful to everyone.

It's all a process

The point of questions like these is that they help unlock the potential for good founder-investor fit. You may not have time to ask a long list of questions, as they're trying to do the same, and you may not get useful answers to them. But that in itself will help shape your direction in your fundraising process.

Remember this is about building a relationship, and while it takes time to do that (and you won't be able to do it with everyone), asking the right questions can create a more efficient path to getting there. This isn’t an exhaustive list, and every founder that has raised beyond seed has their own version of this. It’s definitely worth spending time talking to other founders to get a sense of how they have approached this.