A lot of very very smart, experienced investors have put similar information out there over the last few years. If you've read it before, consider this a reminder. If you haven't read it before then consider this a starting point. This post shouldn't be seen as a comprehensive list. It's more of a response to various pitches I've been getting from multiple sources over the last month.
"Understand the investor's mandate, fund size, investment reqs. Pitch the right investors and build releationships with others" - TJ Sassani, Founder of Zozi.
Research
Before going out and trying to approach investors, take the time to create a spreadsheet of the various investors you want to approach. This will be your scrappy CRM for managing your investor pipeline. Some of the columns in your spreadsheet could be:
- Why you want them to be investors
- Can you get an intro to the investor from someone that the investor knows and trusts
- Have they invested in your market in the past
- At what stage do they typically make investments
- What is the fund size
- What is their typical check size
- What criteria do they use in determining if you're a fit for them
Connecting with Other Founders
Understanding a VCs Motivation and Economics
Market Opportunity
Ideas Vs. Products with Traction
Investments in Your Vertical
Investments at Your Stage
Get a Refferal
Your Pitch Deck
AngelList
Once you've built this matrix (and customized it according to your needs), filter out the investors who don't invest in your market or don't invest at the stage you are at. Then look at the other criteria and keep filtering. Once you're down to a list of investors that have an investment thesis that your company would fit into, begin your approach. You may want to consider speaking with the investor that is least likely to invest in your company first. Pitch them and get feedback. Incorporate that feedback into your pitch. Become awesome (if you aren't already) at your pitch each time you pitch someone new and move up the ladder. The investor you want most to be in your current round should be the last one that you pitch to so that you've received enough feedback to make your pitch really awesome.
This is something that you should consider doing as part of your research. Try to connect with founders that have raised money from some of the VCs in your pipeline. Connect with them, meet with them if possible and discuss very specific questions that will give you some insight into the VC and if there is a fit with you, your company, the stage at which your company is at, specifics that you would like the VC to help with and what the VC can help with. Finding what companies a VC has invested in is usually not that difficult. A good place to start for recent investments is AngelList.
VCs typically invest in many many companies. Out of the investments they make, the majority don't yield positive outcomes (check out this report by the Kauffman Foundation). Hence, most VCs need to invest in companies that are going after large opportunies, have balanced teams, focus on execution and have a higher probability of a large positive outcome to help offset some of their losses. There are many reports/blogs/articles and books that talk about the economics behind VC funds and I would urge founders to read as many of these as possible before approaching VCs. If you haven't read this post by Mark Suster yet, you should.
One of the most important things that founders need to think about and understand is the fact that investors, generally, need founders to go after large markets. If the market you're targeting is Rs. 500 Crore and it's not growing rapidly, then opportunity isn't large enough to go for venture funding. Even if your business winds up controlling 80-90% of a Rs. 500 Cr market, the market is still too small and wouldn't yield a large enough return for the VC. For example, after dilution, if the investor winds up holding 10% of your company, in the best case, it would probably not be worth more than Rs. 100 Crore. Something like this would make a great lifestyle business, however. So think about your market carefully before deciding to raise venture funding.
Ideas are a dime a dozen. They don't matter. What matters is execution and traction. If you're looking for funding at the idea stage, you had better have strong successes in the past. Most investors (VCs and angels) won't invest in ideas. They want to see that you've built something and that you have some measurable traction and possibly, some defensible intellectual property that's worth something. If you have a revenue stream, even a small one, already in place, it adds significantly to your chances of getting investors interested.
If you're at the idea stage, talk to as many people as will listen about your idea and get feedback. Learn as much as you possibly can during this time and don't worry about someone stealing your idea. Chances are, people have thought of similar ideas, they just haven't done anything with their ideas. Don't be that guy. Go build your idea.
It's important that you spend time understanding if the VC you're approaching has done investments in your vertical. For example, e-commerce is a very broad vertical. It may be sufficient to determine that VC X has invested in e-commerce companies in the past hence, your e-commerce business selling gourmet chocolate online fits in to their investment thesis. However, to be really prepared before approaching them, you may want to research if they have invested in online food ordering or other food and beverage related businesses before. It can only help if they have.
Making sure there is a fit in the life cycle of your startup and what VC X typically invests in is critical. For example, if you just launched your prototype, have 1000 users on board and are looking to raise 50 lakhs in funding, you probably shouldn't approach a VC who does much later stage and larger deals. At your stage, you are probably better off approaching an accelerator program.
At the same though, you shouldn't shy away from connecting with and building relationships with investors that may be a better fit for later stages in the lifecycle of your startup. Everyone is busy so don't despair if an investor declines to "have coffee" with you. Keep trying.
I can't stress this enough and I'm sure you've heard and read about this multiple times. Read it again. Get a referral to the VC(s) that you're targeting. What does this mean? Well, it means that you need to start thinking very early on about some of the VCs that you want to approach. Find out who do you know that knows them - founders, mentors and/or advisors in some of their portfolio companies, angel investors that co-invest with them, etc. Start building relationships with these folks early on. Don't expect to meet someone once or twice and ask them to make an introduction to a busy VC. It doesn't work like that. If you ask someone for a premature introduction, you will most likely turn that person off and they may be unwilling to help you in the future.
Assume all of the other items above have worked out well and you're ready to start connecting with the VCs in your pipeline. Sending an email detailing what your business is and who your team is, etc. is not a good way to start the relationship. Remember, you're not the only person the VC is speaking/meeting with. Most VCs are extremely strapped for time. After getting the introduction, send over a deck with some very simple but impactful slides. If you're going to send over 20 or 30 slides, don't expect it to get even a glance. Start with Guy Kawasaki's 10/20/30 Rule and after that, take a look at The Triple Play of Presenting and Dave McClure's 10 tips for the perfect investment pitch.
I would make a slight modification to this. If you have any traction, e.g. number of users, number of downloads, revenue, etc., then you should start the first slide with this data. If I open a deck and I see some meaningful (though early) traction, I'm more inclined to go thru the rest of the deck to see what other pleasant surprises are contained in the deck. Move the "Problem" slide to the second slot and the "Solution" slide to the third position. Move the "Team" slide to the second to last, right before the "Money" slide. Rip out the projections slide for some early investors but keep it in for other later stage investors unless you have some traction on the revenue side and can make actual projections. Most early stage projections are completely useless so let's not event waste time on them.
If you aren't using AngelList, you're losing out on an incredibly valuable resource for connecting with investors. I've done a few talks in New Delhi/NCR about the importance of AngelList for Indian startups and I think many Indian founders are beginning to see the importance. Though it's a chicken and the egg problem with regards to Indian founders and Indian investors on AngelList, the one thing that you can be certain of, is that many many US investors are on AngelList and they are watching India closely. The boundaries and borders are coming down. More and more US based investors are getting active in India (we're one of them) and AngelList gives you a direct line to them. Long story short, before contacting an investor, make sure you have a properly filled out AngelList profile ready to go. Include your AngelList profile, Twitter and Facebook in investor communications. It helps them to get to know you and see what's happening.