Lessons on fundraising from Marc Andreessen, Ron Conway, and Parker Conrad
4 tips for early stage fundraising
If you had to guess, what percentage of startups would you say receive venture capital funding?
Think of a number?
Got one?
Whatever number you chose, I’m sure you are probably way off the real number, which is just 1%.
Historically only a tiny percentage (>1%) of U.S. companies have raised capital from VCs.
Ok, that might have been slightly higher over the last couple of years, when money was definitely flowing more easily.
But now, as interest rates rise, things are getting harder.
Why is that?
As startups founders, we don’t necessarily think about the incentives that VCs face, but it is useful to understand the basic dynamic here.
It comes down to the risk free rate of return. Risk-free rate of return (Rf) is the interest rate on a "risk-free" investment - government bonds. (We’ll ignore the question of whether this is actually risk free, given a potential US debt crisis.)
So when interest rates go up, the return you can get ‘risk free’ from your capital increases.
Venture capital investments are riskier than bonds, so venture investors expect a return higher than the risk-free rate to compensate for that risk.
It’s easy sometimes to forget that VCs also have their own investors!
So higher interest rates mean venture funds need to generate higher returns on their investments in startups and growth companies in order to attract investment into their funds.
Founders might think their job is hard and that being a VC is cushy, but to do in VC is also really really hard.
Because the rising risk free rate is making it harder to be a VC, a lot of the newer, inexperienced investors will give up. We will see less VCs and it will get more difficult for startups to raise venture funding.
And this is what is currently happening.
A couple of insights from a 2023 CB Insights report were:
Global venture funding continues to decrease in Q1’23.
Every major region sees a double-digit drop in funding in Q1’23, except for the US
The unicorn creation rate is at its lowest level in 6 years, with just 13 unicorns emerging in Q1’23
Quarterly IPOs fall by 47%, hitting their lowest level in almost a decade
If you’re a startup founder then, there’s no doubt it’s getting harder to raise money.
No matter the conditions, there are always things that are in your control, and that includes understanding what VCs are looking for.
Today, I want to share with you 4 things top VCs are looking for if they are going to fund your company.
Let’s get to it 🚀
Raising money for your startup has always been difficult.
Even more so is getting one of the top VCs to invest, such as A16Z or First Round Capital.
Back in 2014, Marc Andreessen, Ron Conway, and Parker Conrad gave a lecture on how to raise money.
It’s an absolute gold mine of knowledge, so I recommend you watch the whole thing here, but here are my top 4 takeaways for early stage startups.
1. Don’t hide your weaknesses, highlight your strengths.
“[we] invest in strength versus lack of weakness.” ~ Mark Andreessen
VCs see thousands of pitches per year - they can smell BS from a mile away. So if you don’t know the answer to a question they have, it’s better to say so rather than making something up.
Investors will appreciate if you are candid.
Many outlier companies had glaring flaws in the beginning, so don’t let your weaknesses hold you back.
The two critical points that you have to be strong on are insight and traction. If you have a strong unique insight, and you have some early traction, this is enough to offset many weaknesses.
2. Have a clear one-sentence description of what you do.
“When you first meet an investor, you’ve got to be able to say in one compelling sentence, that you should practice like crazy, what your product does so that the investor that you are talking to can immediately picture the product in their own mind.” ~ Ron Conway
Step one is making sure investors understand what you do.
People often overcomplicate their pitches.
But you need to keep it ridiculously simple. Anyone should be able to picture your product in their mind after your first sentence.
A classic technique is to use a well known company for comparison - “We are Uber for X” or “Airbnb for Y”.
Using a well known example helps orientate a potential investor quickly.
Of course this is not the only technique, but the critical thing is to get them on the same page as you before you start to talk about anything else.
3. Show how you can become a massive company
"So the conventional statistics are in the order of four thousand venture fundable companies a year that want to raise venture capital. About two hundred of those will get funded by what is considered a top tier VC. About fifteen of those will, someday, get to a hundred million dollars in revenue. And those fifteen, for that year, will generate something on the order of 97% of the returns for the entire category of venture capital in that year.” ~ Mark Andreessen
Venture investing as Mark Andreessen noted, is a “game of outliers”.
Once you understand that VCs are looking for the fraction of companies that hit it out of the park, it makes it easy to understand how important it is to show how you will be a huge company.
You need to make a case for how your startup could scale into a $1 billion or $10 billion business.
Don't be overly humble - go big and bold in painting the picture of your market and immense growth potential.
Share your grand vision for the future.
4. Have a plan to make money
“I was so frustrated from this experience of having tried for two years to raise money from VCs and I sort of decided, to hell with it. You cannot count on there being capital available to you. This business that I started seemed like one that maybe I could do without raising money at all…..It turns out that those are exactly the kinds of businesses that investors love to invest in” ~ Parker Conrad
If you have a clear plan to to profitability, this will make your experience of fundraising much easier.
Traction beats ideas. If your startup is already gaining momentum, with metrics and growth trends pointing in the right direction, fundraising will be far simpler.
Because the better your actual business is performing, the more investors will compete to give you money. Investors do not want to miss out on the winners, they will FOMO in!
So in one of the paradoxes of life, the startups that need VC money the least, tend to raise the easiest.
All else being equal, it’s better to work more on your business than your pitch.
I hope you found these takeaways from the lecture useful, if you want more, check out the whole thing here.
Until next time,
Jamie
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