One of the most frequent questions I hear from 1st time founders is ‘How do I raise venture capital?’. There are so many smarter people blogging about this (for example Paul Graham, Naval Ravikant, Mark Suster, Brad Feld and Fred Wilson) but I think you can break it down into 2 ways; the ‘Data Way’ or the ‘Story Way’.
Or said differently, the Traction way and the Hope way. Let me explain;
Option 1: The Data Way (Traction).
This is where you have some early traction and supporting facts around your business model. For example, you might open your pitch with;
“Hello, We have $10K a month in recurring revenue and have been growing 20% a week since we launched 8 weeks ago. Our margin is 85% and are acquiring our customers via an equal mix of referral and paid sources.”
By this stage, most early stage investors / angels will have dropped their iPhones and start rummaging around for their check books :) They still don’t know your name or even what your company does but you will have their attention. By leading with traction data you will have differentiated yourself from the 99% of startup pitches they normally hear.
Unfortunately most early stage founders do not have much data or else they are too afraid to share it when they feel their data is not positive. This means that the vast majority of early stage founders need to fundraise via option 2.
Option 2: The Story Way (Hope).
This is the long hard journey that most founders, myself included, end up having to take. This is the long drawn out sales process where you have to sell your vision to multiple investors in the hope that it resonates. This route relies on articulating your vision and hustling to get introductions and meetings. You need to learn and master the ‘soft skills’ to craft, communicate and present your ‘story’ in a clear, concise and compelling way.
In terms of workload, you will probably produce 50+ versions of your slide deck, have 100’s of coffee meetings and give so many pitches that you can recite it backwards by the end of the process. You will spend weeks ‘imagining’ different versions of business plans and forecasting a number of ‘what if’ scenarios on growth rates and estimates on the costs of customer acquisition and life time value.
Unfortunately, this route really sucks and rarely works! Worse still, every day spent fundraising means another day you are not building your product, acquiring customers or growing your team. When you consider that raising a ’story round’ normally takes 6-8 months, you are taking a huge gamble relying on ‘Hope’ as your main fund raising strategy.
The answer should be fairly self evident by now;) You should aim as close to Option 1 as you can. This means staying as lean as possible (with some Angel financing) until you can get the ‘data’ you need to validate your core assumptions and demonstrate you have begun to unlock growth. One of the best (and maybe more extreme) examples of this is Ryan Smith’s story at Qualtrics where he talks about how you should aim to ‘Nail it before you scale it’.
In line with Ryan’s advice, I often tell founders who ask me about fund raising that they are simply asking the wrong question. Instead I ask them ‘Where is your Normandy?’ because if you can first gain traction, even in some tiny niche, you are much better placed to demonstrate the proof (i.e. traction data) that you have unlocked a formula for growth. A formula that will more than likely lead to investors coming to you and hustling you to listen to their ‘story’ on why you should allow them to invest in your company.
And who doesn’t enjoy hearing a great VC story :)