The
View from Initialized

Fundraising Fallacies

I’m speaking at Startup Grind on Monday, Feb. 22 at 9:00 a.m. PST on common mistakes founders make when going through a fundraising process. Here are some of the most common misconceptions I see:

When I joined Initialized Capital as a two-time founder in early 2019, I built a structured bootcamp for our portfolio founders to raise growth rounds. While I was starting out and designing the format of this program, I conducted an informal survey with about 40 investor friends and asked for the advice they would give others — specifically advice that they thought wouldn’t apply to themselves. Out of 40 investors, here’s what they ranked as the top fundraising fallacies (the cargo cults), or what they think everyone else gets wrong.

Initialized Partner Andrew Lee

Investors are Bold

Most investors are more conservative than you would think. To a founder, if you’re working within the ballpark of a market, have a part-time founding team, or a working prototype, you think that you’re clearly a fit. You’ll be surprised that many investors are not thinking about the future of your business but immediately thinking about “the next round of funding” in 18 to 24 months. Part of this is because an investor is managing another person’s money and this requires them to place some form of rigor to their investing. Most importantly, investors are primarily motivated by traction and social proof. You need to go into initial pitch meetings knowing that most investors don’t do 99 percent of the deals they see.

Any Intro Will Do

Many founders tend to think that a cold e-mail or a LinkedIn connection will be sufficient to get in front of an investor. Sadly, investors have, as one friend put it, “the attention span of goldfish.”  In that case, it’s important to realize that there is a hierarchy of great introducers as follows: successful portfolio founder, successful angel investor or non-portfolio founder, or another person that the investor admires and respects. If it is someone who has an actively weak tie to the investor, you may as well just send a cold e-mail and make it brief. In fact, sending a message to the investor in the most highly trafficked channel may actively work against you.

Always Be Fundraising

Founders tend to think that they should always be fundraising. In fact, the opposite is true. Most of the best companies only fundraise for a very short amount of time. If you’re fundraising all the time, it means that you’re likely not working on your company. Investors are constantly swapping tips and gossip. They “talk like the Plastics from Mean Girls,” as another investor described it. As a result, if you’re fundraising for too long, most investors will think that perhaps something is wrong with your company. A better option for a founder is to not explicitly be fundraising. Instead, follow the adage: “Ask for advice, get money.” If you ask for money, you’ll more than likely get advice. Lastly, many investors complained that founders still commit a cardinal sin–they are perpetually fundraising because they do it sequentially, so it’s not maximizing the opportunity that can be done in parallel.

Investors Are Mostly the Same

Things have changed since a decade ago. There are more and more investors nowadays. In the past, the old adage was twofold: all investors are just money and you should never talk to associates or principals or more junior partners. First, investors do primarily give money, but the size of the firm and the check sizes matter to help you determine how a firm can lead a round or follow on.

In today’s day and age, you never know the power hierarchy at the company, a smaller firm with a limited set of partners may have powerful associates or principals. Additionally, the types of investors now range from former operators. Moreover, many senior partners do not have the bandwidth any longer to take on more deals. As a result, many newer investors are part of a new vanguard to take over the new slots at these venture firms. So, don’t go disrespecting the junior investors as they may actually be the person making the decision. At the same time, it hasn’t changed drastically to where the decision-maker is a recent college graduate. Here’s a guide that can help:

Meeting With A Junior Team MemberMeeting With A Senior Team Member
Small FirmASK ABOUT PROCESSDECISION-MAKER
Big FirmLOOK FOR DECISION-MAKERNEEDS INTERNAL CHAMPION

High-Stakes All In One Meeting

While it is true that the interactions that you have with investors is important, every single investor I interviewed stated that they wanted to get to know founders first. Again, this should not mean that you’re always fundraising, but rather, you should be finding ways to passively let an investor know about your stellar progress. Ideally, many investors stated that they think others want the pitch to be the final step to confirm preconceptions about the business. Founders forget that they should be trying to lay all the groundwork based on the introduction, preparation, and surround themselves with traction and social proof to help them in that meeting. In many cases, founders themselves are caught up in the theatrics of the meeting and forget that the investor is trying to “understand the business” and come up with their own thoughts on it.

Investment Decisions are Financial, Not Political

You don’t realize this, but every investor you meet in three to five years is on average probably not gonna be working at that firm you’re talking with. In ten years, unless they’re the founder of the firm, they will likely have moved on. Additionally, since the feedback loop takes five to 10 years for a successful company, it also becomes hard to know whether an investor is good or bad. As a result of this dynamic, a lot of investors are trying to win internal buy-in and there are a lot of internal politics at venture firms because they are shaped in ways where everyone votes on each other’s deals. The key point here is to realize that the first person you speak to may be an opponent but may become your advocate in future meetings. As a result, never start this relationship out on a bad foot because you need as much help as you can get going into these meetings. In many cases, there is a lot of internal persuasion that any individual needs to do during these periods.

Lastly, one investor said that if you really wanted to move a meeting forward or to get a quick response, copy or CC someone who is more senior on the e-mail chain to create pressure internally.

You’re Dead to Them After One Rejection

Echoing the point about creating a relationship, a clear fundraising fallacy is that you somehow can’t improve as a company. Speaking from my own experience, at Initialized, we’ve invested in many founders that we originally passed on after they returned with more progress or evidence of traction.

You Need to Hang Out With Investors to Get Money

As my partner Garry Tan once wrote, “Investors tend to make all their money in two ways: being in the deal everybody wants to be in, or being in the deal nobody wants to be in.” Founders tend to think that hanging out with investors will automatically help them. In fact, it sometimes has the opposite effect. Many investors responded that there are definitely people who are “full-time conference attendees” and they tended to avoid those folks because it showed that they were not working on their startups. To achieve desirability, one does need to get to know investors, but that should be easy enough as long as you get an introduction from someone you know the investor admires and respects.

Well-Known Investors are The Best Investors

While many people tend to think that a famous investor is going to be superbly helpful on their board, many investors complained that some of the hardest working investors they know do zero marketing for themselves. There is something to be said about workhorses versus showhorses. Just because a well-known investor becomes your investor or on your board doesn’t necessarily mean they are superhuman. They have the same number of days in the year as everyone else. If they are serving on a large number of boards or have become extremely wealthy, the relationship does change.  Now many of these famous investors have amazing staff that help optimize their lives, but some founders are looking for a weekly (sometimes daily) investor who they can work with. Other founders are fine with a board member who checks in every quarter. Your mileage may vary and it depends on the type of investor that is right for you. Remember that some of the greatest companies out there raised from unknown investors and only now do you know the investor’s names.

Once I get this round of funding…

Perhaps the greatest fundraising fallacy is the one that happens after the founder gets the round — they think they have achieved something. For many founders, they think that millions of dollars in the bank means that they’ve made it. They fail to realize that large amounts of money divided by people and time turns into a small amount of money very quickly. The goal of fundraising, like college or university, is to go through it, not to end at it. Sadly, many investors complained that the media coverage has shifted to investors as the gatekeepers within the technology industry and it sadly has caused funding to be a more important step than it should be. Many investors (perhaps the most curmudgeonly lot) wished that coverage was focused on the innovations and not on the funding rounds themselves where people could celebrate the growth and wins. 

The most interesting part of writing this article was from one investor: “The person who needs to know these fallacies will not heed them, while the person who does know them may not be stubborn enough to win.”

You want to be perceived as a cult leader, not a cargo cult leader.

Cargo cults appear throughout society, but appear a lot in fundraising and technology
Source: Tell Me About Blog, 11/2017