If your company is ready to raise a Seed round, then this may be your first time approaching VCs.
Seed-stage VC firms come into play when you are raising $500K to $5M in your first outside round. To justify that size of check, most VCs do want to dig into the idea, look at prototypes, and see a detailed business plan.
Approach VCs last
Should you pitch your raw idea to VCs and let them tell you if it is any good?
Way too many entrepreneurs approach investors first. Seeing VCs first will deplete your credibility. Either you don’t even realize you are too early and you are an amateur, or you do realize it and you are too lazy to do your homework. Either way, they will not be impressed by your premature pitch, and you will lose credibility.
Investors are sixth.
See customers first, add cofounders second, add advisors third, recruit vendors fourth, and win investment interest from 2 or 3 angels fifth. Now you are ready to pitch VCs.
If you already know a friendly entrepreneur or investor, it’s OK to approach them earlier than sixth, but for networking and advice, rather than for money. (Our VC fund Pillar loves to see people who are still figuring out their plans).
The saying “ask for advice when you want money and ask for money when you want advice” is among the most accurate proverbs in start-ups.
Research Your List
To avoid wasting your precious time and energy, invest 10-20 hours of research to create a list of targets who lead seed stage investments in your city.
Narrow it down rigorously before you ask for introductions, and be cautious about accepting well-meaning but unfiltered introductions. Protect your own resilience in the future by screening every target carefully now.
For Series A, as the check sizes get large, VCs will often specialize on particular sectors. However at Seed stage, checks are smaller and VCs tend to be more general on field while specific on the early stage. Seed VCs also expect to spend a lot of time with you, and so it is usually best for you and for them if your lead seed VC is based in the same city and can come over to see you in person as needed.
You can start by looking up other start-up companies in your city who raised Seed recently. Who were the VC partners (and you need to look at partners, not firms) that led the round for each?
Seed VCs expect to spend a lot of time with you, and so it is usually best if your lead seed VC is based in the same city.
This takes elbow grease! To get you started, there is a partial list of Seed VCs organized by specialty on Signal. You also can find records of Seed financings on Crunchbase, Pitchbook, Google, the SEC (many Seed deals are recorded with publication of a Form D), the business press such as TechCrunch, Xconomy, Forbes, VentureBeat.
Screen aggressively. There are also a lot of VC funds out there that say “early stage including seed” but really focus on Series A or later, or who do not have any cash left, or that have not actually started making investments because they are still raising capital for their funds. None of these are relevant to you.
Cross out anyone from a VC fund that is “about to close”. VCs without money will still take your meeting (!), because they want to show potential wealth capital sources they have good, fresh deal flow. These people waste your time.
Cross out anyone from a VC fund who has not actually led and closed a Seed deal in the past 180 days.
Cross out anyone who works at a VC fund that is already backing one of your direct competitors.
For all the partners remaining on your short list, carefully review their Medium blogs, LinkedIn posts, and Twitter feeds and also cross out anyone who turns out to be a poor fit for your company. For example, you make hardware and they say in a podcast “we never invest in hardware.” Believe them and move on.
Next to each remaining partner on your list, use your research to write down the reason why you think they could add value or see a connection to your company. “Sue backed TripAdvisor, so may be interested in our site that collects user-generated content.” “Beth has a PhD in materials science and we are developing a new material.”
Now prioritize into three levels: a Tier I list of strong-fit prospects at the most famous firms, a Tier II list of other highly appealing prospects from reputable funds, and a Tier III list of partners who fit on paper but work at regional, less well-known, small, or family office funds. Note that these tiers are not about partner quality or fit with you, but about volume of deal flow and signaling the quality of your company to future investors. Your chances are lowest at the Tier I firms because they are mobbed at all times, however, if you can win a term sheet from one, then this is a strong positive signal to everyone else.
Screen each VC firm before you even ask for the meeting.
Screen each VC firm before you even ask for the meeting. What are they saying about their investment strategy on the website and on their social media? Who is in their portfolio? What was their most recent investment? And why is the background of the person you are asking to meet a good fit for your project?
Corporate VCs come with baggage that make them too complicated to be good lead Seed investors. Save them for Series B and beyond.
Finally, put your list in a spreadsheet and share it with any angels or advisers for comment and refinement. Create columns and as with any pipeline, track your targets by entering the date you achieve each step: intro scheduled, first call, site visit, due diligence, received pass, received term sheet.
You will soon fill those columns!
Begin Reaching Out
Begin with Tier II prospects. Select 10 of them and for each one, use LinkedIn and consult your advisers and angels to figure out how you can get a warm referral.
Referrals are critical. VCs are swamped by mediocre pitches and eager to ignore founders who do not have sales skills. If you can’t figure out how to get a warm referral, they will safely assume you do not have what it takes to succeed.
The most valuable referral you can get is when one of the VC’s existing portfolio CEOs knows you well and can vouch for you and your business.
Referrals are only valuable when made with actual credibility and enthusiasm.
Otherwise ask anyone you both know well enough in common to vouch for character in both directions. Ideally bring the referrer through your deck first, so that the referrer can truthfully say “I think this is a great person with a great idea.” The VC will pay more attention.
The least useful is a referral from anyone who hasn’t actually seen your pitch, or doesn’t actually know the investor well enough to have mutual trust.
Your referrer may well ask you “send me a blurb I can forward.” A common mistake is to then try to pack in tons of information that will take 10 minutes for the VC to read. That is a book, not a blurb, and likely will be ignored.
Send no more than one paragraph! All you need to do is intro the topic enough for the VC to see if the deal is in-scope and relevant to his or her interests. If so, you can be sure he or she wants to review your deal and will take the time to read the intro deck, which is your goal.
Your referrer will then forward that to the VC along with your deck and check interest, and if the VC has interest, will introduce you to each other.
Some VC partners – a high percentage if you have done your homework well – will immediately reply “Sure please make an intro” and your referrer will do so. Any who reply “Sorry out of scope, we don’t do deals like that” is crossed off the list.
You may see some partners delegate the deck “Thanks I am forwarding this to our associate Paul who loves cars.” It is a great mistake to become arrogant and demand that you must speak with a partner! Do not try to dodge the associate – that will create ill will. Instead, take any meeting graciously and pitch your best.
You want the associate to become your ally and champion within the firm – someone who can help make sure you get onto the partner’s calendar and stay top of mind. Associates are plenty eager to find great deals to bring forward, so if you have any shot at all, they are certain to mention you to the partner, probably in a 3-minute exchange that sounds a lot like the blurb with added color. Partners also rely on associates to describe how you come across as a businessperson – do you feel likable, competent, and driven; or inarticulate, unprepared, or stubborn? A brief “forgettable” or “impressive” makes all the difference as to whether the partner will pursue. Finally, associates know the partners very well and if a partner seems disinterested, associates will know if another partner might fit better. Take these meetings seriously, and treat the associates with respect.
(NOTE: not all CEOs agree – those who do a lot of fundraising feel that associates are time-wasters. Sure, if you are a serial founder, you may have the reputation to let you skip associates and go straight to partners, but if that is not you, just do the work and take the extra meeting. It’s fine.)
Principals are between associates and partners. Some principals have the authority to lead a deal; some can follow but will not lead; some work closely with a particular partner as a force multiplier. The same can be said for Venture Partners. Again, place no importance on titles. Take any meeting offered to you seriously and treat everyone with respect regardless of title.
It sometimes happens that you are simultaneously introduced to two different people at the same firm. That’s OK but you should immediately alert both parties “P.S. just realized my network has passed this to both of you in parallel, so if this is of interest to Firm X, please let me know who is best to meet first.”
Confirm whether the VC fund is actively leading Seed rounds. Ask the person “What is the sweet spot investment for your firm?” and find out what kind of investing they typically do. Ask “what are the last three deals you did?” and see if they sound anything like your deal. If you discover they do NOT normally lead deals or invest in your area, then put off further meetings until after you find a more suitable lead.