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Fundraising is not easy. However, two simple rules can improve your chances: know your audience, and be truthful.
Consider this, investors only get fired for the deals they actually do.
Not one of them lost their jobs. Why? Because investors are only held accountable for the deals they actually do.
Just like startups, venture capitalists have to raise money too. They raise those funds from Limited Partners (LPs). LPs come in all shapes and sizes, such as foundations, endowments, pension funds, insurance companies, and family offices. The VCs pitch those LPs on a differentiated approach to startup investing and promise above-market returns. The LPs then commit capital to the VC and periodically receive reports on the fund’s performance.
Do you know what’s in those reports? A list of investments made.
You know what’s not? A list of investments NOT made.
Why is that important?
As a founder, it is useful to understand the lens through which an investor views a startup. While the investor will consciously wrestle with whether you are working on a big opportunity, have a differentiated solution, and boast relevant domain experience, subconsciously, the investor has a separate question in their mind: “Will this startup get me fired?”
Since they only get fired for the deals they actually make, investors have to be incredibly risk averse. They need to eliminate surprises and deeply understand the risks of your business. They do this by asking a predictable set of questions to try to craft a narrative of what the future might hold. They call it “building conviction.” It’s not easy. Why? Two simple reasons:
So, we have investors who are at personal risk when they deploy capital, who expect entrepreneurs to misrepresent the truth, and yet who must reach long-term conclusions anyway (often with very little time).
Knowing that typical venture investors face this dilemma, how can the entrepreneur improve her/his chances of landing capital? That’s easy. Start with the truth.
If an investor does invest in your startup, it will represent the beginning of a long journey together.
Yes, the dance between investor and founder is a negotiation. Gamesmanship by both sides is likely. But it’s also the start of a relationship; the best of those are built on a foundation of trust. When they first start to evaluate your startup, the investor is looking for reasons to run for safer ground. Be prepared so you don’t give them any.