Network with VC-backed Entrepreneurs
Your most valuable asset while fundraising is your network, which will help with your pitch, investor list, introductions, references, and backchanneling.
The most important part of preparing for a fundraise is networking. There are five key ways you are going to leverage your network:
Pitch Feedback
One of the key priorities in Phase I - Preparation is drafting effective fundraising materials. That’s a process that typically requires feedback and iteration, even if you have prior experience with pitching.
Asking for feedback on your investor deck is a very effective way to network, in particular with VC-backed entrepreneurs. And it has the fantastic side effect of helping you improve your fundraising materials and practice your pitch.
Invest List Feedback
Another key priority while preparing is building a pre-qualified investor list. Part of that is about doing online research to uncover basic facts about investors.
But a much more important component is uncovering tacit information such as investor beliefs, preferences, and character. Such data can only be found out by networking with people, who have previously worked with the investors you want to connect with.
Introductions
Introductions are certainly the most critical function of your network. The best introductions are essentially endorsements about you and your vision, grit, and skills.
While preparing, you are looking for introductions to folks who can connect you with investors. When it comes time to kickoff the actual fundraise, you are looking to get introductions to investors themselves, which is a significantly higher bar. Why is that the case?
The key reason is that connecting with investors is not like connecting with other kinds of working professionals. Because investors manage capital and capital is universally useful and sought after, VCs are constantly bombarded by entrepreneurs asking them to invest. This dynamic is made worse because most founders don’t take the time to understand the asset class and determine whether they are a good fit for it as covered in Company / VC Fit. Indeed, entrepreneurs have no incentive to do that because nowadays it is very easy to find the contact info of investors and just spam them.
On top of that, startup investing is like looking for a needle in a haystack. It’s very hard to tell what might or might not work early on. In the beginning, all startups look kind of crappy. They really don’t have a lot going for them outside of the vision, grit, and skills of the founders. And they are usually based on a very specific insight, which can be hard to understand for a company outsider such as an early-stage investor.
What that means is that investors live in a world with a very poor signal to noise ratio. The demands on their time and attention are incredible. There is a lot of information - some of it invaluable as it can lead to investing in the next big thing, but most of it truly irrelevant - and it is incredibly hard to tell which is which. Plus, most investors are ultimately only able to invest in an exceedingly small number of companies - think 2-3-4 per year - if that!
When you consider all these factors together, it becomes clear why people say that 50% of fundraising is the intro. How you connect with investors is half the battle because it can help your story be part of the signal rather than the noise. And that is why it makes sense to over-invest in getting the right intro. That’s the biggest reason why networking is critical.
References
In the same way that you are doing research on investors, they will also ask around about you and your team. It really helps to have mutual connections, which can offer a glowing recommendation.
Your goal while preparing is to expand and prime your network so you can check this box easily. While investors will certainly run independent reference checking, you should also actively mention mutual connections that can vouch for you. By leveraging your network like that, you maximize your chances of standing out.
Backchanneling
Backchanneling refers to indirect communications with an investor via a mutual connection. That comes in very handy, in particular during the late stages of fundraising conversations. Typical examples including getting feedback on an investor’s mindset or communicating key updates to an investor, all without engaging directly with them, which can help in the context of negotiations.
Your goal during preparation is to develop a robust network that can help with backchanneling, when the time comes. That function can be performed by the person introducing you, but it can’t hurt to have multiple points of contact.