The pace of VC investing today is faster than ever. Investing over Zoom, and the incredible rise of SaaS unicorns and decacorns, has changed everything in the past 18 months.
But not for everyone. For most of us, raising venture capital is still hard. It’s really only easiest for the hottest and most obvious startups. And I see founders make one key mistake. They don’t derisk things for VCs. This is even more important today. Because VCs are expected to make decisions in days, not weeks and months like before. So they have to make quicker decisions, with less information.
Remember that investing in start-ups is very risky — and why. Not only do most start-ups fail, but it is more than that. It’s really hard to do enough diligence in enough time:
- It’s hard to really get to know the team that well. You might have literally just met them. And often, they will have zero real track record, or close to zero.
- It’s hard to know if the handful of customers they really have, if any, will grow.
- It’s hard to know if founders might quit if it gets too hard.
- It’s hard to know if founders will spend too much of the money, too quickly.
- It’s hard to know if there might be a better competitor just across town.
There just almost never is enough time and bandwidth to know for sure if you should do the investment. Startups are … raw. And startup investment periods are often compressed.
And yet … and yet when you see a startup you think is in the top 5%, you want to invest. Often badly. And quickly. Because the great ones produce all the returns.
But that’s often a moment in time. If you stumble after, and/or the diligence gets worse, or you become even a tiny bit of a less attractive investment … that prospective investor will often fade away.
So de-risk things:
- Share as much information upfront as you can. Don’t make VCs have to guess about your churn, your burn, your growth rate.
- Prepare a set of customer testimonials. VCs will often still want to do their own customer diligence. But putting together 10 testimonials can really help a lot to get an investor 50%-90% of the way there.
- Prepare a great competitive analysis. It doesn’t need to be 20 pages long, but something that does again 50%-90% of the homework for investors.
- Don’t hide stuff. Be upfront with the “less good” and just present a plan to address it. No VC expects there not to be some less good news in the early days especially.
- Show how the cash will last 18-24 months. Your financial model doesn’t have to be amazing, but make sure it shows the cash will last 18-24+ months. This again derisks a potential investment. It gives you enough time to hit the milestones necessary for the next round.