I’ve heard founders say that meeting with potential investment partners is like going on a hundred first dates, and I’ve heard others liken it to a “Bloodsport.”
In my experience, neither analogy is quite right. Well-trod metaphors aside, you do need to approach the fundraising process with a certain amount of art and strategy. While it may seem like you’re simply walking through your pitch deck, you’re really selling yourself, your team, and your vision (the art) while also sizing up the investor and sifting the dolphins from the sharks (the strategy).
So before you sit down at the table—or log into the Zoom call—keep in mind these five things an investor is probably thinking about your software startup, but will never say outright.
Yes, they asked for a forecast and yes, it’s important that you give them one. But guess what? It’s not about the forecast.
Investors mainly ask for these numbers so they can gauge the quality of the data you used and get a glimpse into how well you understand the scalability of your business. They will use your data to create their own forecasts—you can count on that—and they have much more experience dealing with financial models.
So instead of spending a lot of time trying to create something for investors without context, ask them specifically what they are trying to understand with a forecast and work collaboratively to deliver the data without unnecessarily disrupting your team.
Valuing a company requires analysis, most of which investors can complete independently. They’ll consult market trends and analyst reports that make it fairly easy to come to a quick consensus about your valuation.
Diligence? It’s mostly about people.
I’ll never forget the first time I learned this valuable lesson. A software company from the East Coast was visiting Elsewhere Partners in Austin so we could take a deeper look at the product and meet the leadership team face-to-face. We’d completed our initial research, and I found the product to be very interesting, well-architected, and well-positioned in an exciting market. I couldn’t wait to give it a big “thumbs up.”
But after the meeting, before I could share my thoughts, one of our partners said, to him, it was an obvious pass. His reasoning? The founders seemed uncoachable, which meant we’d have very little chance of making the company successful.
I zipped my lips and nodded in agreement, because I knew he was 100 percent right. I hadn’t even considered that aspect of the company during my evaluation, which had focused exclusively on the product, how it was built, and how it had achieved initial product-market fit. Since then, I vowed never to make another investment without visiting a company’s headquarters and spending at least a day with the founding team.
Some people have ninja-like abilities when it comes to building startups; with rare exceptions, they usually aren’t the same people who excel at growing scaleups. Getting a product idea to market and capitalizing on initial product market fit require a different set of skills than growing a business from $5M in ARR to $25M in ARR.
It’s (sort of) sad, but true: most of your leadership team won’t make it all the way through to the exit.
Understanding this fact should help you enter negotiations with a clearer sense of your objectives. If you have startups in your blood, for example, consider structuring a deal so that you are happy with the money but also able to put the right people in place to take the company to the next level — freeing you to go start your next venture.
Many, many product companies start out as services companies or as companies that offer both products and services.
There’s nothing wrong with that, and it’s not something you need to dance around. The key is to be forthright and talk openly about how you’ll work together with your investment partner to complete the shift from being a services company with a product to being a product company with services.
If you keep these things in mind as you prepare for early-stage discussions with potential new investment partners, you should be able to make more efficient use of everyone’s time during the startup funding process, from initial conversation to product demo and beyond.
The VC will appreciate your ability to bypass the awkward dance of the first few conversations, and you’ll both benefit by getting on the same page as quickly as possible—whether or not you end up crossing the finish line or tying the knot.