Paul Hsu
For years, the zero interest rate environment fueled an ambitious ecosystem of venture capitalists and technology innovators seeking to raise big rounds, drive hyperscale, and move on to the next if the first thing didn’t work out. The path, rules, and standard practices reflected an era of risk-on, almost free money.
Today, the technology industry is recovering from the bear markets of 2023 with a new discipline focused on traction, substance, and capital efficiency. Limited partners have become more selective with investments into venture funds. Venture investors have raised the bar for deals, requiring due diligence to reveal some traction to showcase a startup’s potential, depth in the data room demonstrating the substance behind the vision, and a path toward capital-efficient growth.
With these new areas of heightened investor focus, what are the new rules for identifying, pitching, and partnering with the right venture investor?
The following is a compilation of 12 “dos and don’ts” for how innovators should pitch and partner with a new class of technology venture investors who balance market realism with optimism in driving a vision with substance.
Overall
1. DO allow experience to inform and challenge your perspective
More than ever, and just like any relationship, finding the right venture investor starts with building a foundation based on vision, values, and trust. Early-stage venture capital requires a team effort to find product-market fit and accelerate revenue growth. But value-add venture investors have the strategic advantage of guiding founders toward signals versus noise, drawing on prior case studies of success and failure in a particular domain, and connecting companies to valuable sales and distribution partnerships.
2. DON’T give up
Like many activities in the startup world, success finds those who have grit, courage, persistence, durability, and adaptability. Venture capital often finds nonconsensus and nonobvious deals, but the process may take hundreds of meetings before the first yes.
At the same time, balance this grit with the realistic optimism of taking feedback from every step of the process to confront and confirm the compelling need for venture capital. Almost every company is better serviced by not raising venture capital and instead relying on profitable growth and other sources of capital.
Financing round prep work
3. DO prepare for your fundraising process like your company’s life depends on it
Much of the fundraising work begins before your first pitch, with detailed research into the venture funding landscape focused on your vision. Prequalifying potential venture partners is essential to avoid spinning your wheels later. Some venture investors are pre-product investors focused on a particular sector. In contrast, others may require more traction and are generalists — a variety of venture investing strategies will impact your success.
You want to ensure the venture partners align with your stage of business and the check size you are looking for. After this prequalification, staging your process by phases of outreach and conversations can help kickstart the fundraising momentum you will need to close your lead investor.
4. DON’T assume all investors are created equal
In most fundraising, identifying and closing a lead investor can catalyze the entire round. An effective lead investor performs the requisites such as doing due diligence, setting financing terms, and attracting follow-up capital into the financing syndicate. Some innovators close funding on a rolling basis, while others use a first-come, first-served basis. This can lead to complications later on in the deal process. When you pitch an investor, especially in 2024, one of the first questions is whether they have the capacity and capability to lead your financing round.
Outreach
5. DO leverage your professional network
This includes entrepreneurs, investors, ex-colleagues, attorneys, CPAs, contract finance professionals, marketers, PR firms, and other consultants for warm intros to venture partners. All requests for introductions and meetings must be made with as much context as possible. The similarities to job hunting are very close; the more resistance barriers you can lower, the better. Similar to a job search, validation from people who have worked with you in the past can help improve the likelihood of venture financing.
6. DON’T abandon cold outreach altogether, especially if you have something “big”
Venture partners are generally less discriminating when it comes to taking intro calls and meetings from entrepreneurs who can demonstrate durable use cases and revenue, so LinkedIn outreach may suffice and has the potential to yield conversions.
This includes an overview of the request (e.g., intended financing structure, financing size, funds use, and timeline to close), a punch list of bona fides (e.g., stage of the company, revenue growth, notable customers and investors, industry awards), and availability to connect (e.g., via video or in person).
The pitch
7. DO spend a few minutes establishing rapport and outlining an agenda for the meeting
Cover the basics like company description, financing overview, financial snapshot, target customer, intended durable use case(s), network effects, management backgrounds and unique qualifications to attack the market opportunity, market size and drivers for growth, intended business model, and legal structure.
Allocate a reasonable amount of time for Q&A. This includes being aware of the length of the meeting and tailoring your pitch to leave adequate time for questions and discussion about the next steps. Ask about the venture partner’s background, sweet spot, typical terms, process, and timeline. Most importantly, detail the next steps in the process.
8. DON’T overwhelm investors with too much information in the initial pitch
Entrepreneurs need to walk the fine line between providing enough info to ensure no significant showstoppers but not so much that it overwhelms a potential partner on the first meeting. There is power in brevity and conciseness, showcasing how an innovator can distill a complex market into an investor’s digestible understanding of why a company can get big.
Venture investors are looking for the key data points on why a company gets big, why that moment is today, and how fast that company grows. Sharing this information concisely and persuasively will help investors make the investment case to their partners.
Everything in your deck is a way to prove how you are building a multi-billion-dollar company. Your product is just the details of what people will repeatedly buy from your company. Your prototype and waitlist are the reasons for demonstrating that your product has product-market fit. Your go-to-market is a marketing strategy in service of a believable distribution channel.
Due diligence
9. DO communicate clearly, accurately, thoroughly, and punctually
Completing things promptly and accurately at the beginning of your relationship with a new investor is critical to building credibility and trust. Speed testifies to your intelligence and experience — the best founders can ship with speed, execute their fundraising with speed, and communicate with speed. When you get back to a VC in less than a day with well-thought-out responses, you show your commitment to this early partnership, as well as your hustle and intelligence. It makes an impression. Delay works against you and suggests you’re not interested or are shopping terms.
You don’t need to have everything figured out. You do need to have everything consistent.
10. DON’T exclude important due diligence items like a product roadmap that aligns with your vision
The quality of a due diligence data room can quickly invalidate a great pitch. A big red flag starts with what’s missing from the data room, as this shows a gap in the intended substance of a pitch and the execution details to fulfill such statements in the pitch.
In addition, avoid sending a product roadmap that misaligns with your vision and mission — this is one of the many inconsistencies that can kill a deal fast. Don’t send info in a manner that can’t be shared with others internally, that obfuscates financial shortcomings like churn by cherry-picking retention metrics for specific periods or cohorts, or that can come off as being a bait-and-switch with substantially different sets of projections pre- and post-term sheet. And don’t send financial models by PDF or PowerPoint.
The best fundraisers run like clockwork. The best pitches have super alignment. The best ideas are coherent. So many stories don’t add up when a venture investor looks under the hood. If what you say in your pitch deck does not align with your financials, your website, or what you have on LinkedIn, it’s an immediate red flag.
It’s all about making it as easy as possible for your venture partner to say yes to an investment.
Closing the deal
11. DO understand your audience and their motivations
The associates who originate deals are evaluated on their ability to find and close high-quality deals and are predisposed to saying yes. Hence, they arm themselves with the info necessary to present the merits of the opportunity to their internal stakeholders and push them to involve other decision-makers in the process. Very few deals will close on one or two meetings, so your goal in most interactions with venture investors is to get to the next stage of conversations.
They are your champion, not your gatekeeper. Don’t try to get around them. Your success is their success.
12. DON’T hide issues, withhold information, or delay delivering bad news
While no one likes to hear about missed plans, top long-term venture investors understand that wins and losses are part and parcel with operating startups, so it’s better to tackle the issue early and head-on when time is on your side and options are abundant. Alternatively, venture relationships can go south quickly when one party or another receives an unwelcome surprise at the eleventh hour.
Fundraising is about momentum. Demonstrate momentum with weekly investor updates that show you’re tracking up and to the right. Capitalize on every significant milestone and achievement with another headline.
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