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How to approach investors

How to approach investors

Startups
May 26, 2021
by
Matt Johnson

Learning how to approach investors is a critical skill for founders. Here’s our guide for how we approach connecting with prospective investors for our startup.

Fundraising for your startup is a huge pain, particularly for first-time founders. The process is nebulous and involves several moving parts. You might feel like you are making no progress. Then all of a sudden you are. It usually starts to come together when you find a lead investor, giving you the terms and momentum to get the rest of the round closed.

Here’s my guide for how to approach investors that will hopefully make finding a lead and closing your round simpler.

Step 0 - Start fundraising before you are fundraising

You have to do this weird dance as a founder where you are sort of constantly fundraising, but not fundraising right now. So, the first step is to start this pre-fundraising process well before you plan or need to be fundraising.

The reason is, you want to be building relationships with investors well before you are officially fundraising. And your first interactions can be centered around advice and feedback from the investor rather than asking for money, making it is easier to get an initial intro or call. When you are fundraising, you can more quickly reach out to your warm investor relationships and momentum going.

We’ll cover this in more detail in Step 3 below.

Step 1 - Identify your target list of investors

How to approach investors

There are several investor databases out there, which are suitable for finding funds/VCs. If you are in Europe, then check out Dealroom, and in the US, Crunchbase works well. Run a search on investors who have invested in your space and stage. Ignore later stage funds for now. Use this as your starting point.

You should also drill down on the actual partner at the fund that would be the best fit. Sometimes you can find this info on their website, where certain partners focus on specific sectors. You can sometimes find which partner was involved in particular deals in Crunchbase. Or look at their LinkedIn and see which partners have worked in a similar space with similar startups.

Check out our database of active pre-seed funds

If this is your first round, individuals/angel investors are likely your ideal targets. The best way I’ve found of identifying angels is through LinkedIn. There are two ways I’ve approached it in the past.

The first method is finding angel investors in your LinkedIn network - whether directly connected or through a mutual connection. Here is a link to run a LinkedIn search that will show you every 1st and 2nd-degree connection with ‘angel’ in their title. This is an excellent place to start because you are either already connected or know someone who can introduce you. We’ll touch on how to approach these warm connections in the next section.

Another method is by finding professionals with expertise in your sector or space that could be potential investors. For example, if you are building a fintech startup, it might make sense to reach out to former finance execs. They’ll tend to be wealthy enough to invest, as well as interested in the space, and have some expertise they can bring to the table as well.

Step 2 - Find the warm intro if you can

No matter what an investor says, they almost certainly prefer a warm intro. The nice thing with the LinkedIn searches mentioned above is that you can likely identify that intro path through mutual connections. If there are no mutuals, then it becomes a bit trickier and requires getting more creative.

The idea route for an intro is from a founder the investor previously backed. The investor trusts the founder, so their backing carries more weight. Avoid getting introductions from other investors that have passed on you unless there is some specific reason they passed. For example, they only invest at later stages, or you are out of their scope/thesis. And steer clear of services that offer to make introductions to investors for you.

If you aren’t able to find a warm intro, then absolutely consider a cold approach. Investors are increasingly receptive to cold outreach, and some are even calling for warm introductions to be banned.

Step 3 - Avoid fundraising in the initial outreach

As we mentioned previously, ideally, you can start making connections before you are officially fundraising. In this case, you are trying to get introduced to investors for feedback and advice.

There are a couple of reasons this is good. For one thing, you get some advice from someone quite experienced in your space, which is why they are on your target list in the first place.

Second, it makes your first conversation with the investor, not about fundraising or asking for money, but instead a less transactional introduction. It also shows you are eager for advice and feedback, which is a good thing.

If you have a warm intro route, then it’s a good idea to draft an email that your mutual connection can forward, including why you want to connect and the ask. It’s generally a good idea to get an opt-in intro. Rather than introduce you directly, your mutual connection shares your ask with the prospective investor and gives them the option to decide if they want to connect. This saves time for all parties - if the investor isn’t interested, you can move on and avoid an awkward phone call.

If you are going in cold, then find the investors email address, and send the ask yourself. Keep it short and simple, and make it clear what you are asking for (e.g., can have 20 minutes to get your feedback on our go-to-market strategy).

An excellent tool for finding investor emails is Hunter.

If you go right into the fundraising conversation via a cold email, check out Paul’s tweet below to approach it.

Make sure to ask anyone prospective investor you connect with if you can add them to your monthly investor update. This way, you keep them in the loop on your progress. Use these monthly updates to keep showing improvement. You could start to excite investors down the line and get them interested in joining your upcoming round. Or, better yet, they get so excited they reach out to you about investing.

Read our guide on investor updates

Step 4 - Get the lead

Now comes the hard part.

If you are ready to go into fundraising mode, you can go back to all those warm investors and let them know you are raising a round and if they want to jump on a call to discuss. Focus your initial outreach on the funds or investors you think are likeliest. Hopefully, this helps you build momentum quickly.

You are going to get some straight-up passes. You might even get discouraging comments from investors. Take on board their criticism. But keep in mind they are wrong all the time - it’s part of their job to be wrong. Sequoia, the greatest VC of all time, passed on Google. Don’t get down on yourself when you get a no. Use the information and feedback to keep improving, and soldier on until you get that commitment.

Often you won’t get a clear no. This is the nebulous nature of fundraising. They’ll likely ask you to keep them in the loop as you progress on the round. There are a few things potentially happening here. One is that they are keeping their optionality open. If you manage to snag a big-name fund as the lead, then they might jump on. Or they want to see a few other interested parties but aren’t willing to be the first one in. Sometimes funds require you to have a lead in setting the terms. If they aren’t progressing you further in their process, then move on. Your focus is finding a lead with enough conviction to commit the first dollars.

Keep your head down until you kiss all the frogs and find the right investor until you find that lead. Once you do, you can go back to all the maybes with a term sheet and look for a definitive commitment to close off the round.

TL;DR

To recap:

  • Step 0 - If possible, start connecting with investors before you are officially fundraising. Your first conversations aren’t about money but instead about feedback and advice.
  • Step 1 - Narrow down a list of investors interested in your sector or invest at your stage.
  • Step 2 - Find a mutual connection to make a warm intro if you can
  • Step 3 - Draft a short and sweet ask for your warm introduction or cold email
  • Step 4 - Nail down a lead investor

Good luck!

May 26, 2021
by
Matt Johnson

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