As a start-up CEO, I’ve raised about $80 million from US Venture Partners, Greylock, TCV, NorWest and others.  I’ve made a lot of mistakes along the way.  The best one (or I guess I should say the worst one),is a mistake that a I made over and over again.  I pride myself on “never” making the same mistake twice.  But, in this case, I didn’t even realize the mistake until a couple years ago.  It was hiding in plain view.  I now believe that this blunder was the primary reason that two of my companies were not able to raise capital.  I also believe that it kills other new ventures every day of the week.

In one notable recent fund-raising exercise, I brought in $10M from a first-class VC at a tier one venture firm.  But the process was butt-ugly.  I pitched over 50 different firms without getting a single offer.  I almost gave up.  My then-current investors, from two prominent venture capitalists in their own right, told me it was time to give up.  It probably would have been smart to throw in the towel given that 50+ seemingly smart investors turned me down, and given that my investors ultimately lost their money. Nonetheless, I believed in the strength of our product and team, so I forged ahead.

To arrange this plethora of meetings with 50+ investors, I reached out to every venture firm that had invested in my prior companies.  I secured additional introductions to VCs from our Board members and from others in my network.  Very quickly my calendar was full of pitch meetings.  So far, so good, right!  Wrong, but we’ll get to that.

At each meeting, I described our innovative new SaaS product that had already attracted multiple Fortune 100 customers.  I told them about the talented team that built the product.  I was getting so much practice pitching the company that I got better and better at it each week.  In fact, I got rave reviews for my pitch.  What I wasn’t getting was traction on the funding.  I kept my best game face on, but I was getting demoralized.

In the end, the only VC that maintained interest through this gauntlet of meetings, and ultimately invested in the company, was the very first person I pitched.  He had learned about the company from the founder, and was interested our company long before I took over as CEO.  Closing a deal with him was a pyrrhic victory.

What was I doing wrong to cause this lack of traction?  The short answer is that I was pitching the wrong investors:  VC’s who were never going to invest in my company.  Here’s the thing that I somehow missed, for over 15 years.

A VC won’t in a start-up unless it matches his “investment thesis,” which is a lofty label for that his chosen area of specialization.  Some call it their “wheelhouse,” or their “sweet spot.”  (Note that by “investor” I mean one partner at a venture firm, not the firm. When you pitch a VC firm, you’re usually presenting to just one of the partners, at least initially.)

What does an investment thesis look like?  Here’s a concise example from Brad Burnham at Union Square Ventures, who wants to invest in new ventures that have:

“Large networks of engaged users, differentiated through user experience, and defensible through network effects”

Brad is just not going to invest in a bio-tech start-up, even if it credibly claims to cure cancer, because he knows that he does not have the necessary knowledge to judge the veracity of that start-up’s claims, its potential market fit, nor to size up its competition.  

Considering the enormous breadth of start-ups seeking funding, it makes all the sense in the world for a partner in a venture capital firm to specialize, and “go to school” on his chosen specialty.  He will work hard to build a network of executives and thought leaders in his chosen domain:  people that can help him evaluate a new venture, and bring other potential investments to his attention.  He will attend all or most of the conferences and other industry gathering for that domain.  He will try to get on stage at these events as a speaker or panelist in order to get his face and name in front of the right people in his domain.  In addition to his investment thesis, he may also have a stage preference (e.g. seed stage or Series A or later stage), and geographic preferences (e.g. Silicon Valley or New York or China).

Many smart, confident VCs graciously avoid wasting entrepreneurs’ time, and their own time, by telling the world what kind(s) of investments they are seeking, in plain English, right on their web site.  Sadly, many other VC’s do not do this, likely due to FOMO (“fear of missing out”) on some hot deal that’s outside their wheelhouse.  They suck up a lot of CEO time educating them on this unfamiliar turf.

The Dating Game:  How to play it.

The process of finding a VC to invest in your company (I’ll call him “Nemo”) is just like the process of finding a mate, except that there’s no match.com or e-harmony or tinder, and polygamy by the entrepreneur is culturally accepted and encouraged.  Aside from those two things, it’s the same.  Both potential partners over-state their strengths and what they will bring to the relationship.  Many players are uncertain what they want from a partner.  If and when they do connect, there is always a one-sided pre-nuptial agreement.  Post-marital disappointment in the other partner’s performance occurs all too often, and lots of the marriages end in separation or divorce where somebody gets financially screwed.  Still want to play…?

The good news, at least for me, is that finding the right person to marry in the real world is the best thing that ever happened to me.  To make that happen, after 15 years of trial and error on the relationship front, I took some advice from a self-help book and wrote down what I thought I was seeking.  I then went to a few close friends and asked if they knew anyone who fit the description that might want to meet me.  One friend, after laughing at the detailed specificity of my “list,” introduced me to a wonderful human being that I’m still head-over-heels in love with after 30+ years.  It’s the nicest thing anyone has ever done for me.  Why it didn’t occur to me to try the same thing when I was looking for an investment partner seems really foolish in hindsight.

Finding Nemo

Given that many VCs don’t advertise what kind of investments they want, and those that do sometimes lie about it or don’t know themselves, how on earth do you find the right ones:  the VCs whose investment thesis, stage preference, and geographic preference are a match for your company?   The answer is that, just like the way that the VC’s have specialized,  you must specialize in finding, then meeting, then pitching VC’s that want to invest in companies like yours.

Taking the time to do the necessary research to identify the right investors and get the right introductions can be terrifying if you wait too long to start the fund-raising process, and it’s easy to see why.  If you run out of money you will go out of business.  I have been there and done that.  Two of my companies died a painful death because I was looking for love in all the wrong places.  In both cases, I had a great network that lead to a bunch of quality intros that lead to meetings with blue chip investors that lead to…nothing.  The process felt really good right up to the point when none of them showed me the money and I had to lay off all of my employees:  people who had become my friends.  Dating in the real world never leads to such dire consequences.  I guess that’s one other way fund-raising is different from dating.  In dating, you don’t lose your company if you don’t find the right partner soon enough.

If you start too late, you will probably fail.

If I’ve convinced you that this outcome is worth avoiding, then you must invest the time to find the right investors, then secure quality introductions, then hold initial meetings to to ask for advice, not money, and then have follow-up meetings to pitch them on investing in your company.  Important:  do not meet with any VC’s, even if they are call you, before doing this research.  It’s not just a waste of precious time, it’s dangerous.  When VCs don’t know your market, the questions and objections that they raise will likely be off point.  At best, you’ll waste time educating them and chasing down answers to questions that don’t matter.  At worst, your confidence will be shaken, and you will get thrown off course my someone whose opinions are not relevant.

The up-front time that you need to invest to avoid this fatal mistake of pitching the wrong investors usually takes an uncomfortably long three months.  This is because you are looking for a vanishingly small handful of needles in an over-sized haystack.  If you start too late, you (or your Board) will decide that there just isn’t time to do this research. You’ll feel pressured to get a lot of futile spinning-your-wheels effort underway ASAP.  But sometimes you need to go slow to go fast.  The best way to avoid the timeline pitfall is to start the “Finding Nemo” process six months in advance of your first VC meeting.

Fortunately, given the wealth of information on the web nowadays, this science project is less daunting than it was even five years ago.  My recipe for how to do it involves just three easy, time-consuming, tedious steps.

1. Build your prospect list.  Start by creating a list companies that are comparable to but not competitive with your company.  Then find out who funded those companies – because those investors the ones that are most likely to have an investment thesis that matches your company. Find the specific partner at each firm that led each investment, along with the amount and the stage.  Here are some sources for doing this research.
   • VC web sites – will often tell you which companies they have invested in, which partner led each investment, and sometimes each partner’s investment thesis
   • Crunchbase.com – can often tell you who participated in each round, how much and when
   • Your network — Ask anyone and everyone you know (and also their friends!) whether they know any investors that make investments in companies like yours.
   • Web sites of comparable companies – will often list the company’s Board of Directors, which usually includes the partners who led some/all of the VC investments.
   • Conference/event web sites of conference organizers who hold events serving your industry. VC’s who focus on your market segment that attend as speakers or panelists are often listed on the agendas for these events – even the events that have already taken place.
2. Find the best match-maker you can muster. The two best tools to do this “who knows who” research are:
   1. LinkedIn – Look for people you know who are linked (one level away only) to your prospects that might be able to introduce you, and then put that list in priority order, taking into account your relationship and the credibility of the potential referrer.
   2. Your network. Ask everyone you know if they know how to get an intro to the prospects on your list, reaching out first to your current investors, your Board of Directors, and your Advisors.
3. Execute a professional outreach.  Once you have identified the best referrer for each prospect, it’s time to ask for the introduction.  (Do not use LinkedIn’s introduction facility to accomplish this – the success rate is far too low).  Since you’ve done your homework, you can now make a very specific email request to each referrer, like this:

“Hey John, I am raising capital for my new company Acme Analytics.  Our software helps consumer packaged goods companies measure the ROI on their TV and print advertising spend.  Our first two customers are Procter & Gamble and Kraft!  Bruce Wayne at Gotham Venture Partners makes investments in companies like ours, and your LinkedIn profile says that you know Bruce.  Could do you me a huge favor and provide an intro?  To make it easy, I have included  a quick company summary below.”

This “quick company summary” has to be just that:  no longer than one, unambiguous paragraph, in plain English, containing no more than 4 sentences.  (If you can’t write that paragraph, you’re not yet ready to pitch investors.  Go get help.)

When you construct your request like this, all John needs to do to is to “ReplyAll,” adding Bruce’s email address and a one or two line intro. Bruce can then read the whole thing in less than one minute.  Never ask John or Bruce to do more than this!  Otherwise, one or both of them will set it aside because they are busy.  They will plan to get back to it later, but often later never comes. 

Now it’s time for background checks.  Huh??

While you’re waiting for these outreach efforts to turn into meetings, it’s time to put each prospect under a microscope.  Find out as much as you possibly can about what each potential investor cares about.  Stalk their LinkedIn profile and everything connected to it. Creep on their Facebook page if you can. Listen to/read every presentation they have given at conferences and other industry events  (search for them on SlideShare.net).  Read their web sites, blogs and press coverage.

Now ask yourself some questions.  Does the prospect’s views about the future of the industry match yours, or do they have a contrary opinion that you may have to deal with in some way?  For each prospect, try to find out what kind of person he is.  Call other CEO’s whose companies he invested in, and ask what he is like to work with.  Are you likely to enjoy being around him, or might he drive you crazy?  Is he known for firing start-up CEOs?  If possible, try to get a read on his ethics, and cross him off the list if the ethics appear questionable.

Beyond narrowing your list, there are three more objectives:

1. Gather conversation fodder that you can use to get to know the VC a bit before you dive into your pitch.
2. Casually show the VC that you’ve “done your homework” for this important meeting.  Tell him why you sought him out as the right match.
3. Know his hot buttons in advance, so you can address them.

By now you’re almost certainly asking, “How can I afford to be so damn picky at a time when I need to raise money.  Money is green no matter who it comes from.”  Here’s the magic:  when you reach out to the right investors, i.e. to Nemo, even if you don’t have the best intro path, you’ll find Nemo more likely to take the meeting.  Nemo will “get” what you’re talking about, and you’ll have a much higher probability of reeling him in as an investor who really can bring more to the party than money. It’s magical because Nemo is actively looking for companies like yours.  That’s his mission.

The conventional (I call it “amateur”) route is to focus on the VC’s with whom you have the best connections.  This path will likely feel really good for weeks, or even months.  These VC’s don’t ask you the toughest questions because they are not even considering investing in your company.  Gracious and polite, they probably took the meeting as a favor to someone who will now owe them a favor.  This path is seductive but deadly.

What I describe here decidedly the road less travelled.  It requires a lot more work up front, so it looks like you’re going slow at a time when your Board and your own inner demons demand speed.  But you’ll get to the finish line faster, more confidently and more assuredly, when you develop the confidence and resolve to be respectfully selective. Always remember:

If you have an investment-worthy start-up,
the right investors are just as interested in finding you as you are in finding them!  

The wrong investors don’t care about your company at all, no matter what they say.