The 9 Types of Startup Investors

Many first-time founders think that all investors have the same simple motivation: to make money. But veteran founders understand that there are different types of investors, each with their own motivations.

Believe it or not, there are at least 9 distinct types of startup investors:

1. Friends and Family

2. Angel Investors

3. Angel Groups

4. Family Offices (FOs)

5. Corporate VCs (CVCs)

6. Government VCs

7. Regional VCs

8. Power Law VCs

9. Multi-Stage Power Law VCs

Understanding the type of investor you’re pitching and their underlying motivations can help you to be more successful when fundraising and more discerning when choosing who to invite onto your cap table.

1. Friends and Family

Friends and Family investors are individual investors who knew you before you founded your company. Broadly speaking, they will invest in your startup because they believe in and are supporting you as an individual.

Despite the name “friends and family,” this investor category extends well beyond family members and personal friends. For most founders, the bulk of “friends and family” money comes from their professional networks, including former bosses, coworkers and others from their prior career.

When we raised DataHero’s initial round of funding, 4/6 individual investors were people that I had previously worked with at Aster Data.

In general, friends and family investors perform relatively little diligence, as their investment decision is driven primarily by their prior relationship with you. They also tend to have a lower expectation of financial returns relative to other categories of investors.

2. Angel Investors

Angel Investors are individual investors who did not know you before you founded your company. They will invest in your startup because they believe in your idea and the potential for you and your cofounders to execute on the promise of that idea.

There are two major subcategories of angel investors, with different motivations and objectives:

1. Professional Angels

   Professional angel investors are angel investors for whom investing is their primary means of generating income. While they likely have a reasonable amount of wealth already (since they need capital to invest), they generally take a serious/formal approach to the process of angel investing, often including extensive diligence. At times, their approach to diligence can be frustrating to founders (“Investor X is trying to do Series A diligence for a $25K check!”), but it stems from the fact that they are trying to generate predictable returns from their activity.
   

2. Operator Angels

Operator angels, on the other hand, are angel investors with a full-time job who are investing either to supplement their income or to simply “pay it forward” to their local startup ecosystem. Many of these individuals come from a startup background themselves and have had an exit or two in the past. In general, operator angels will do significantly less diligence than professional angels and will often commit to an investment after a single meeting.

In established tech hubs like Silicon Valley, the primary motivation for many operator angels has nothing to do with financial returns. For some, it’s driven by the social capital they obtain by virtue of being an active angel investor (you can think of this as being akin to the prestige people get in other circles for making contributions to charities, athletic groups or the arts). For others, the motivation comes from wanting to establish an investing track record as a first step into a future career in venture capital. For many, it’s simply a matter of wanting to “give back” and help the next generation of entrepreneurs.

DataHero’s Pre-Seed round included two angel investors: one professional angel (Jerry Neumann) and one operator angel (Mike Greenfield).

3. Angel Groups

Angel Groups (also known as angel syndicates) are organizations that bring a group of individual investors together in order to streamline investment decisions. The basic concept is that the group can perform a single round of diligence on a startup, which the individual investors can then leverage to decide whether or not to invest.

There are a variety of angel group models when it comes to investing. At one end of the spectrum, some angel groups see themselves primarily as facilitators, bringing together startups and investors for group pitches while leaving the diligence and decision making to the individual investors. On the other end, some groups not only manage the diligence, but issue term sheets and facilitate the investment as a syndicate.

Angel groups are often filled with “operators” (people for whom angel investing is not a full-time activity), however, those individuals tend to not come from a startup background themselves. For them, a strong motivation for joining angel groups is to learn angel investing while “outsourcing” the core diligence to the group. As a result, angel groups tend to have more significant diligence compared to individual angel investors.

Angel groups/syndicates are not the same as AngelList Syndicates, which are a particular mechanism for aggregating small checks from multiple individual investors into a single line item on the cap table.

As with many things in life, there is a wide spectrum of quality amongst angel groups and it is critical for founders to understand who they’re dealing with.

“Good” Angel Groups

In the best cases, angel groups fill an important role in local ecosystems by bringing together large numbers of founders and individual investors. They provide first-time founders, in particular, with a platform to speak to many investors at once. In smaller ecosystems, pitching angel groups can be crucial for securing a first round of funding.

In addition, many angel groups provide education and training to new investors, helping to increase the amount of capital and number of angel investors in their ecosystem.

Casey Lau (Web Summit) and I recently led an educational session on Web3 for angel investors from across Western Canada at an event hosted by Angel Forum

“Bad” Angel Groups

Unfortunately, some angel groups have developed practices that are extremely unfriendly – and in some cases, predatory – towards founders. They take advantage of naive, first-time founders, demanding unreasonable investment terms that ensure the investors make money but can often doom the company from the start.

Beware a wolf in “angel’s” clothing

Some of the most egregiously unethical term sheets I’ve ever seen have come from angel groups, with liquidation preferences, clawback provisions and control terms that would be unheard of from other investors. These groups typically gaslight founder concerns and justify their predatory practices using some variation of “we’re taking the most risk, so…”

The most exploitive angel groups charge founders for the “privilege” of pitching to them or insist on fees to “cover the preparation of diligence materials.”

📣 You should never, ever, ever pay anyone to pitch them. 📣

As a founder, the best thing you can do when it comes to angel groups is to source references and feedback from other founders who have pitched them. What was the process like? How were they treated? And, most importantly, did it lead to an investment?

(The second-best thing you can do is to read Venture Deals by Brad Feld and Jason Mendelson, which is the single best resource on the planet for understanding investment terms.)

4. Family Offices

Family Offices are small organizations that manage the investment activities of particularly wealthy families and individuals. A typical family office will employ one or more investment professionals to evaluate and make investments on behalf of the family.

A perfectly normal family of billionaires

In some cases, the family members get personally involved in investment decisions (in which case, the experience is similar to interacting with an angel investor). In others, the investment team performs all of the diligence and manages the investment. Family offices generally have limited experience investing in tech (as startup investing typically represents a small fraction of family office investment activity). As a result, it’s common for family offices to have higher levels of diligence when evaluating startups and less favorable terms when they lead investments.

5. Corporate VCs (CVCs)

Corporate VCs are investing entities that are fully-funded by a single corporation.

There are many different structures of corporate VCs. For example, some CVCs invest from a dedicated pool of money and operate similar to standalone VCs, while others invest directly off of the parent company’s balance sheet. Some CVCs are structured such that investing partners have full discretion to make investing decisions, while others require champions from within the business to support a deal.

Within the landscape of corporate VCs, there are two main categories, based on their primary motivation:

1. Strategically-Motivated CVCs

   Strategically-motivated CVCs, as the name suggests, are focused on making investments that support the strategic goals of the parent company (this is why they are often referred to as “strategic investors”). For these firms, the primary motivation isn’t to generate a financial return from their investment activity but, rather, to secure access to companies and technology that could provide a competitive advantage to the parent company.

   The process of engaging with a strategically-motivated CVC can often feel closer to working with corp dev / business development than trying to fundraise from a VC. There is typically extensive diligence — particularly on the product side — with non-investing leadership from within the parent company often involved.

   Raising money from a strategically-motivated CVC can potentially be advantageous from a sales perspective, however, there is an important drawback for founders to understand: raising money too early from a strategically-motivated corporate VC can potentially preclude any future investment from VCs.

   Why? Because fundraising agreements include clauses that require major investors to agree to any acquisition.

   When you raise money from investors who are financially-motivated, they will generally approve any acquisition that makes financial sense (regardless of who the acquirer is). Strategically-motivated CVCs, on the other hand, won’t approve all acquisitions, such as in cases where the acquirer is a competitor. As a result, taking investment from a strategically-motivated CVC can be seen by future investors as a signal that your value has been “capped” and will scare them away.

   The vast majority of CVCs are strategically motivated. Depending on the stage and industry, the degree of signalling risk varies. The best investors understand the perception that taking their investment can have on a startup and will openly discuss the pros and cons — don’t be afraid to ask!

2. Financially-Motivated CVCs

   Financially-motivated CVCs are corporate VCs whose primary motivation is to generate a return on investment. While they often leverage the parent company to their advantage (such as promising founders access to products and services offered by the corporate as a way of differentiating from other VCs), they are not focused specifically on identifying companies that can deliver a direct strategic advantage to the parent company.

   There are only a handful of financially-motived CVCs. Prominent ones include GV (Google), Salesforce Ventures, M12 (Microsoft) and Decibel (Cisco).

Teradata confidentially invested in Aster Data as part of our Series C, as a precursor to acquiring the company 6 months later.

6. Government VCs

Government VCs are organizations that invest in startups on behalf of government entities. The most prominent of these operate at a federal level (such as BDC in Canada or SNIB in Scotland), but many provinces/states and even some larger cities have VC arms.

Similar to strategically-motivated CVCs, government VCs have motivations that go beyond financial return. Some of these include:

• Economic development / job creation

• Industry support (such as investing in domestic defense companies or certain industries that the government wants to encourage growth in)

• Economic diversification

• Supporting ESG/DEI efforts

The strategic motivations of government VCs generally don’t conflict with or restrict the activities of the startups they invest in, so there’s rarely a risk that downstream investors will be “scared off”. In fact, some government funds can provide a significant boost to a company’s reputation.

There is a wide range of sophistication and experience when it comes to government VCs. The best are run by career investors who operate similar to traditional VCs. Some have easy-to-qualify investing criteria, such as matching programs that can significantly increase the size of a round led by a recognized VC firm with minimal additional effort on the part of the startup. On the other hand, many government VCs — particularly in smaller ecosystems — are operated by teams with relatively little professional investing experience. Such organizations often have overly laborious diligence processes and can also have investment terms that are less favorable for founders.

For early-stage startups, the best way to leverage government VCs tends to be as follow-on investors, with primary diligence and terms led by a financially-motivated investor.

7. Regional VCs

The first of three categories of financially-driven VCs (also known as “traditional VCs” or “institutional VCs”) are Regional VCs. These are venture capital firms for whom the majority of their deal flow comes from a relatively small region.

Regional VCs differ from power law VCs in that their investment strategy assumes that it is unlikely that they will invest in a billion-dollar company within any given fund. In the ecosystem where they invest, unicorns aren’t created with enough frequency or predictability to allow VCs to factor them into their fund model. As a result, they must construct an investment strategy that will generate a return for their investors without a single unicorn in their portfolio.

The most obvious distinction that founders will experience between regional VCs and power law VCs is that the former tends to do more extensive diligence on revenue, sales cycles and short-to-medium term business plans. Regional VCs tend not to focus much on high growth scenarios because they’re discounting the likelihood that it will occur. Instead, their diligence focuses on what they believe to be the more realistic/likely scenarios for the company (typically based on historical performance of companies from within the region). Interacting with regional VCs can sometimes be extremely frustrating for founders, particularly given that the experience can seem at odds with what they read about VCs and fundraising online.

The vast majority of regional VCs are extremely supportive, particularly when it comes to helping promising startups expand beyond their region. However, in small/emerging ecosystems — particularly ones with only one or two VCs — founders should be wary of the terms offered by regional VCs. Similar to “bad” angel groups, there are, unfortunately, “bad” regional VCs who are known to push terms that are extremely unfriendly to founders and would be out-of-market in larger ecosystems.

As with angel groups, the best thing you can do when it comes to regional VCs is to source references from other founders who have worked with them. In particular, find out how they behaved after the investment was made and whether they added or extracted value.

8. Power Law VCs

Power Law VCs are VCs whose investment thesis is strictly based on an assumption that returns in venture follow a power law distribution. These investors expect one or two companies to drive the returns of their fund, while the rest will provide a rounding error.

The majority of VCs in Silicon Valley are power law VCs, whereas the majority of investors in other ecosystems around the world are regional VCs.

Panache Ventures is one of only a handful of power law VCs in Canada. We invest exclusively in companies that we believe could reach a valuation in excess of $1B within 7 - 10 years.

In general, the diligence performed by power law VCs focuses on growth and growth potential. They dig deep into early traction in order to understand how “real” it is, while worrying less about short-term finances and profitability. Their goal is to figure out how big your company can be and how fast you can get there, in order to determine whether or not you are a fit for their investment thesis.

Power law VCs primarily operate in larger ecosystems that are highly-competitive amongst investors. As a result, they tend to offer “cleaner” term sheets with predominantly founder-friendly terms (since issuing non-market terms could cost them the deal in a competitive scenario).

It is important to understand that if you raise capital from a power law VC, you are committing to an objective of building a $1B+ company within 7 - 10 years. For many founders, that is not actually their goal (and that’s okay!). It’s important that you be clear about what type of company you want to build before accepting capital from a power law VC.

9. Multi-Stage Power Law VCs

Multi-Stage Power Law VCs, as the name suggests, are power law VCs who invest in companies at multiple stages (such as Seed, Series A and Series B). The largest and most prominent VC funds in the world are all multi-stage firms, including Sequoia, a16z and Tiger Global.

Aside from the obvious fact that multi-stage VCs have more money and resources than smaller VCs (so can write bigger checks and offer more services to founders), the main difference comes from the fact that they can lead multiple subsequent rounds in a company. It’s not uncommon for a multi-stage power law VC to lead 2 or even 3 rounds in a company they believe will be a winner within their portfolio.

One risk for founders to be aware of is multi-stage VCs investing “earlier” than they typically do.

For example, if Big Prominent VC™ is known to invest in Series A and Series B rounds, but offers to invest in (or lead) your Seed round, that can seem exciting (and in many cases, it is!). But it can also be the case that they’re simply investing a nominal amount of money (to them) so they can get an early look at your next round. This can post a risk to your ability to raise the next round, if Big Prominent VC™ declines to invest (leading other investors to presume that they saw something they didn’t like).

Another risk with taking investment “too early” from a multi-stage VC is that they might not actually be able to add value yet — or worse, could be counterproductive. Many larger funds are used to investing only after startups have product-market fit. If you’re a true Seed stage company that’s still trying to figure it out, you might benefit more from “stage-appropriate” investors who focus exclusively on helping startups attain it.

When diligencing multi-stage power law VCs, be sure to get references from companies that were your exact size and stage when the firm first invested in them.

There are many different types of investors, each with their own motivations, strengths and potential risks. The vast majority of investors genuinely want to support and help startups, but it’s essential that you do your research and always seek out founder references.

Do Your Own (Fundraising) Research

One of the most important steps in preparing for an effective fundraising process is building a fully-researched pipeline of target investors. Identifying and researching 80-100 target investors is tedious and time-consuming, but it’s essential for successful fundraising.

And it’s not something you can outsource.

Anyone you speak with about high-velocity fundraising will emphasize the importance of researching target investors. In our quarterly fundraising bootcamps, every single speaker — investor and founder alike — talks about it. We emphasize and re-emphasize how crucial this is to effective fundraising. Yet there are always founders who want an easy button.

Inevitably, our post-program surveys include at least one founder who submits some version of the following feedback:

I would like your help in identifying proactively who the right subsequent rounds' investors should be. I don’t have the time to list the investors that I would like to be connected to like Chris asks for. VCs know what firms are good for me and my industry, so I expect to get help in finding the right investors. The reality is I don’t have time to recreate that list they’ve done maybe times before.

The thing is…founders aren’t wrong to think this.

From a founder’s perspective, it seems reasonable to presume that their investors should know who the best downstream investors for them are. (Especially if their investor is a loud-mouthed VC who won’t get off his soapbox about how important it is to build relationships with Silicon Valley investors.)

Unfortunately, it doesn’t work that way.

Let’s Start with the Numbers

According to Crunchbase, there are currently 1,430 active Seed and Series A VCs in Silicon Valley.

According to LinkedIn, there are more than 4,000 individuals at VC firms in the San Francisco Bay Area with the title “Partner”. I’m personally connected to almost 200 of those individuals – which is both a lot but also barely scratches the surface.

Here’s the reality:

• In general, most investors only know one or two people at a given firm

• More often than not, the VCs they do know at other firms are the partners who focus on the same area of investment that they do (in my case, more than 50% of the partners I know personally at Silicon Valley VCs focus on enterprise software)

• In the vast majority of cases, two VCs who know each other personally have never actually done a deal together

What this means is that if one of your VCs happens to be an expert in your exact space, then they can potentially list off dozens of investors that would be a perfect fit for you.  Unfortunately, that’s almost never the case.

Take me for example: my background is in enterprise data and business intelligence software. Out of more than 110 portfolio companies across Canada, Panache Ventures has never invested in a single database or business intelligence company 😭😭😭.

Don’t look at me…

This reality has two important implications for founders:

1. While your investors may know a lot about your business, they likely don’t have the expertise to identify the firms that could be the best fit for you. In fact, they likely have never heard of many of the top VCs in your area.

2. While your investors may have developed relationships with 1 or 2 partners at a firm you want to target, they likely don’t know the specific partner you want to pitch. Moreover, they almost certainly have no idea who the best partner is for you at any given firm.

Going back to the example email, our hard-working founder hypothesizes:

VCs know what firms are good for me and my industry, so I expect to get help in finding the right investors. Reality is I don’t have time to recreate that list they’ve done maybe times before.

Unfortunately, this perfectly reasonable expectation is, in fact, completely unrealistic.

Unless you happen to be building enterprise data or business intelligence software, I don’t know which firms are a good fit for you nor do I know the names of specific partners who would be. I might be able to list off a few good guesses, but that’s about it.

Moreover, I promise you that I have never, ever created a list of target investors for anyone other than myself (and that list is now 10 years old!).

If You Can’t Do My Research, What Good are You?

As your investor, there are three things I can do to help you kick off your fundraise:

1.    Fill in the Blanks

While I might not know all of the firms investing in your area, there are likely firms that I have heard of that aren’t on your list. Often, I’m able to supplement a founder’s target list with lesser-known firms or generalist firms that are active in a given area but might not be known to them. If you have a strong, relevant investor syndicate, you could potentially “crowdsource” 30-50% of the names of target firms from your existing investors.

2.     Focusing your List

Almost every time a founder sends me their target list, I immediately see the names of investors that aren’t a fit. Funds that are too small (or too large), ones that aren’t actively writing checks, or ones that I strongly feel that the founder should avoid.

3.     Introduce You to Someone at a Fund

While I rarely know every single partner at a fund, I can usually help you get to someone at a fund through my personal connections. For example, my partners and I recently helped an AI-driven drug discovery company raise a Seed round by sending their (well-written) request-for-introduction emails to our contacts at a variety of Silicon Valley firms with a simple note:

I think this might be a fit for you guys – would you mind sharing with your partner X to see if he/she would like the introduction?

It’s worth noting that there is one important exception to everything I just wrote: if you raise money from a VC firm that is very narrowly focused on your industry, they likely have a more extensive (and more relevant) network of downstream investors. But for most founders — particularly at the Pre-Seed and Seed stage — that isn’t the case.

At the end of the day, fundraising takes a lot of work. And successful fundraising is built on the back of considerable planning and preparation. Identifying and researching your target investors is one of the most important parts of that and, unfortunately, it’s not something I — or any VC — can do for you.

WhatsApp: The Ultimate Fundraising Tool

Before starting a fundraising process, founders need to prepare. They need to create their pitch deck, setup a fundraising CRM and fill their investor funnel. But there’s a secret tool that the best founders use to supercharge their success. And it’s something everyone has on their phone: WhatsApp.

What do you mean Sequoia passed?

Anyone who’s ever tried to raise funding will tell you that it’s a manic process. If you’re doing high-velocity fundraising, you’re taking dozens of investor calls every week. It’s a non-stop roller coaster of pitches, questions, objections, and homework. Before long, the names and faces of the investors blur together and you’re mistaking Taylor from Sequoia with Sequoia Taylor.

When you barely have enough time to pee between pitches, how can you possibly keep track of everything?

WhatsApp 🤯

This WhatsApp thread ended with a $7.5M Seed round

One of the most important resources a founder has during fundraising is their support system. A small group of trusted investors, advisors and fellow founders committed to supporting them and helping them navigate the fundraising process. Their “pit crew.”

Pit crews aren’t just for race car drivers

During fundraising, most founders communicate with their support system infrequently. End-of-day or end-of-week emails, sporadic text messages and so on. But WhatsApp is an ideal platform to supercharge communications and maximize the leverage from your pit crew.

It’s simple:

Step 1: Create a WhatsApp group for your pit crew (make sure to have an awesome group profile photo)

Step 2: After every investor meeting, dictate a 1-2 min voice memo to the group that includes the following:

• High level summary of the meeting

• What questions were asked

• What parts of the pitch did the investor seem excited about

• What concerns / objections were raised

• What are the next steps (including both homework/action items for you and expectations of next steps from them)

Step 3: Profit!

Dictating a voice memo after every single meeting improves fundraising effectiveness in at least three ways:

1. It ensures you retain more details from each meeting, including critical follow-up actions

   Most founders try to write notes in-between meetings, but often don’t have enough time (particularly if a meeting runs late). As a result, notes get taken at the end of the day and details blur together or are lost.

2. Your pit crew can hear your reaction and emotions immediately after each meeting

   This provides an opportunity for your pit crew to cheer you up if a meeting goes poorly or warn you if you might be misinterpreting feedback before you head into the next call. It also helps them sense if you’re being overly optimistic or pessimistic as you move through your process.

3. You have more time between meetings to stretch and reset

   Instead of scrambling after each meeting to write down all of the take-aways, you can dictate a 1-2 minute voice memo while getting a drink, taking a bio break and getting set for the next one.

At the end of each day, you can transcribe the key details from each voice memo into your fundraising CRM. Doing so for all meetings in one sitting is not only more efficient, but it makes it more likely that you’ll surface patterns in the feedback as you reflect on multiple meetings and listen to your interpretations across the entire day.

This WhatsApp thread ended with 5 term sheets and an oversubscribed Seed round

Using WhatsApp to dictate voice memos to your pit crew is a simple yet powerful way to leverage your support system for maximum effect, while ensuring that key details don’t get lost in the blur of meetings.

Why I Won't Promise You an Intro

As an investor, I get asked for introductions all the time. From portfolio companies, from founders I meet day-to-day, and even from other investors. But no matter how much I may want to help someone, I never ever promise to make one.

Sounds like a bit of a jerk move, right? 🤡

To understand why, let’s start with a bit of history…

The Double Opt-In Introduction

In 2009, Fred Wilson proposed a simple yet powerful email etiquette practice which he called the “double opt-in introduction”:

The practice quickly gained adoption amongst VC circles. It wasn’t long before investors were insisting that all introductions be made through double opt-in.

Today, the use of double opt-in introductions in Silicon Valley is near-religious.

Its rapid adoption reflects the fact that the practice exists at the intersection of the two most prized resources amongst VCs: time and personal networks. Making an introduction without a double opt-in is now one of the biggest faux pas you can make amongst Silicon Valley investors.

This may seem silly (what’s the big deal? 🤷‍♂️), but the practice is now deeply ingrained in investor etiquette. The manner in which you communicate a request for introduction now carries a whole lot of weight and signalling.

Signalling Matters

How you communicate a request for introduction says a lot about you, whether you realize it or not.

If you forward someone an introduction request and ask them for a double opt-in, you’re signalling to the receiver that:

• I understand you’re busy

• I respect your time

• As someone in my personal network, I’m protective of access to you

On the other hand, if you make a direct introduction to someone without first getting their permission, you’re potentially sending the opposite signal:

• I don’t understand (or I don’t care) how busy you are

• I don’t respect your time

• I am not filtering access to you

(You may also be signalling “I’m an outsider,” in that you don’t understand the accepted etiquette.)

Why does this matter? Most people have far more emails in their inbox than hours in the day, so we naturally adjust our behavior over time to prioritize the people we want to respond to.

For example, if I receive an email with the subject line “FW: Request for Introduction to Chris @ Panache”, I’m far more likely to respond quickly if it were sent to me by someone who I know is respectful of my time and thoughtful about the types of introductions they send my way. On the other hand, if a person repeatedly makes direct intros to me without my opt-in or forwards me introductions that they know — or should know — aren’t a fit for me (e.g. sending me Series B companies as a Pre-Seed investor), then at best I’ll get around to reading their email later.

More likely, I won’t open the email at all.

Can I interest you in a late-stage growth round?

At first, this may seem silly, but it’s a reflection of the degree to which many investors prioritize and optimize their time. Most of us have long since come to terms with the fact that we’ll never “catch up” on our work (or our email), so we’re constantly looking for ways to improve our efficiency.

So No, I Won’t Promise You an Intro

At this point, it should be pretty obvious why I won’t ever promise someone an introduction. To maintain my personal relationships, I must give the other person the opportunity to opt-out. I need to demonstrate that I respect them and their time enough to allow them to politely decline the introduction (for whatever reason they may have — valid or otherwise).

Moreover, if I want to make the introduction happen, the best way for me to do so is to send a double opt-in email with an explanation of why the connection would be beneficial to the other person. In other words, lobby on your behalf.

How You Can Improve Your Chance of an Introduction

If you’re a founder looking to get an introduction, one of the best ways to increase your success rate is to signal that you understand the dynamics at play. That is, signal to the connector that you understand the importance of time and personal networks.

How do you do that?

By explicitly asking them to facilitate a double opt-in when requesting an introduction.

Arjun Dev Arora has a fantastic post on how to write a great email request for introduction, complete with examples of how to do this. At a high level, it’s actually quite simple:

• Demonstrate that you’ve done your research (show that there’s a specific reason why you’re asking for this particular introduction)

• Clarify why the introduction is of benefit to the recipient

• Explicitly reference double opt-in in your request (e.g. “I would really appreciate if you could forward this email to Sarah for double opt-in”)

As founders, you have to be comfortable with uncertainty, and the etiquette around investor introductions is a great example of that. I won’t ever be able to provide you the certainty of a guaranteed introduction, but if you send me a well-written request that shows you understand why double opt-in matters, I’ll almost certainly pass it along with my thumbs up.

It's Time for Canada to Play Offense

One of the first posts I wrote after launching this blog was a call-to-action for Canadian VCs to spend more time outside of Canada. I deeply believe that to succeed as an investor outside of Silicon Valley, it’s essential to spend time in the Bay Area. If you’re not regularly exposed to what’s happening at ground zero of the global tech ecosystem, you’ll always be at a disadvantage.

You’ll always be playing defense.

It’s a viewpoint shared by everyone at Panache Ventures. As one of only a handful of Canadian VCs founded by former entrepreneurs (we have more exits than we have partners), we deeply understand how important connections to Silicon Valley are when it comes to building global companies. Even in a post-Covid world.

That’s why this week, the full Panache team from across Canada descended on San Francisco.

Because with our new $100M Pre-Seed fund, we’re going on offense.

A Matter of Perspective

One of the biggest differences I’ve observed between Silicon Valley VCs and investors in other countries is the amount of time and effort investors spend building relationships with other firms. Part of this is simply the numbers: there aren’t that many VCs in Canada, so it doesn’t take all that much time to get to know them all. But part of this is also mentality: for many Canadian investors, relationship-building stops at the border.

The average Canadian VC knows at best a handful of US investors. In almost all cases, those relationships are the result of happenstance. They met at a conference, on a cap table, or because an American VC once flew up for CDL (seriously).

The result?

When Canadian founders ask their investors for introductions to Silicon Valley VCs, they either get blank stares or a random collection of unrelated partners that their investor happened to have met over the years.

We don’t think that’s good enough.

Prioritizing Outbound

Every VC firm has an outbound program for identifying promising founders. We’re building one to identify promising co-investors.

We believe that developing relationships with as many investors as possible is one of the biggest ways that we can help Canadian founders. It’s something that every top Silicon Valley VC does. It’s time Canadian investors follow suit.

That’s why I’m constantly traveling across the US.

That’s why the entire Panache team was in San Francisco this week to host an event for Silicon Valley VCs and meet investors one-on-one.

We’re putting in the work to develop relationships with Pre-Seed and Seed investors across North America so that we can rally the best co-investors for the rounds we lead.

We’re expanding our network of Series A and B investors so that when our founders are fundraising, we can open as many doors as possible.

We’re championing Canadian startups across the spectrum (not just the ones we invested in) and encouraging our US friends to look north of the border, to help attract more risk-taking capital into our ecosystem.

Everyone loves gifts (in this case, small batch, limited edition maple syrup bitters)

We’re Just Getting Started

This is just the beginning.

In the coming months, we’re going to roll out even more activities across Canada and the US.

You’ll see us in every major city in North America building relationships that support not only Panache portfolio companies, but startups across Canada.

And we hope that our fellow investors will follow suit.

Because if we all go on offense — if we all look up and out more often — the entire Canadian ecosystem will benefit.

Let’s go Canada!

🇨🇦🚀🔥

Sorry, You Can't Sneak in the Side Door

One of the more common misconceptions founders have is that after being rejected by a VC, it’s possible to get a different outcome by talking to someone else at the firm. That it’s possible to find a “side door” into the VC.

I see this play out quite frequently: 

• Three weeks ago, I shared the “Pitch Me!” button on my personal blog. 10% of the submissions were from founders who had already pitched someone else at Panache.

• Two weeks ago, a trusted friend facilitated a warm introduction for a founder. The founder who requested the introduction didn’t tell my friend that they had already pitched Panache (twice).

• After we announced Panache’s new $100M fund, multiple founders reached out to me who had previously spoken to at least one other person at Panache.

All of these outreaches had two things in common:

1. The founder had previously received a ‘no’ from someone else at Panache

2. The founder made no mention of this fact when they reached out to me

Look, I get it. As a former founder, I completely understand and empathize with the desire to approach an investor from multiple angles when fundraising. In fact, at some point I probably did the same thing.

But it’s not going to work. Let me explain why…

It’s Dishonest

I’m going to start by being very blunt: this approach is dishonest.

It may not seem that bad. In fact, it probably seems like good ol’ fashioned persistence. But inherent in this is an intentional attempt to “trick” the investor. In this fantasy world, the new partner meets you and gets swept off their feet before ever realizing that you’ve spoken to someone else at the firm.

But that’s not how it works.

Have you heard of a CRM? VCs have them too. 😉

The very first thing I do when I receive an introduction to a new founder is look in our CRM. Is the company on our radar? Do we have any information about them? Has anyone at the firm spoken to them before?

If I find prior communication between one of my teammates and the founder – especially if it was recent – then that founder is likely in the hole with me. Why? Because they tried to mislead me in our very first interaction.

Partnerships are Based on Trust

If the person you spoke to previously was an analyst or associate, there is actually a chance you could get a do-over (I’ll get to that later), but if you already spoke with another partner, the result will likely be the same.

Why? Because partnerships are based on trust.

In order for a VC (or any other partnership) to function, the partners have to implicitly trust each other’s decision-making. If a startup was already evaluated by one of my partners, I presume that they were thoughtful in their analysis. Moreover, I trust that if my partner had wanted my input on the decision, then they would have asked me for it. So I’m going to presume that my partner’s decision was the correct one.

That doesn’t mean partners always make the right decision, but trusting in their decision-making is essential to the success of the firm. If partners were to start second-guessing each others decisions, then trust would be lost and the partnership would struggle to function.

No Doesn’t Always Mean No

The flip side of the coin is that not all “no”s are equal.

You might have been rejected very early on, before your value proposition was clear. Your company might have since pivoted, secured a big-name customer or discovered an amazing insight.

Or the rejection might have been from a junior associate or analyst who just didn’t “get it.”

It’s possible to get a second chance, but you have to do it the right way:

1. Go Back to the Original Partner

If your prior interaction was with a partner, then your best bet is to re-approach them with a specific, intentional update that answers the question: “what has fundamentally changed since last time we spoke?”

• If they rejected you because the market was too small, how/why is that no longer the case?

• If they rejected you because you were too early, explain the progress you’ve made and how that de-risks the company

• If they rejected you because of concerns over the product or technology, explain how you’ve overcome those concerns

Of course, certain things aren’t going to change (at least, not from the investor’s perspective). If a VC turned you down because they don’t invest in your space, don’t believe in your thesis or have a competitive investment, absent a hard pivot you’re not to get a different response.

2. Go Back to the Original Analyst/Associate

If your prior interaction was with an analyst/associate and you believe that their concerns were valid, then going back to that person in a similar manner is likely the best approach. They already know you and re-approaching them shows respect for them and their position within the firm.

3. Approach a New Partner

If your prior interaction was with an analyst/associate and you believe that their concerns were not valid (or their understanding of your business was off), then it’s possible to re-approach the firm via a new person, but it has to be done carefully.

First off, if you’re going to approach a new person, it should be someone more senior. Approaching a second analyst/associate is unlikely to change the outcome, for the same reason why switching partners doesn’t work.

Secondly, you cannot (and should not) presume that the analyst/associate’s decision was made in a vacuum. In fact, it’s quite likely that a partner was involved. At most firms, junior team members regularly walk through their deals with a partner in order to get feedback and learn. So while your rejection may have come from the analyst/associate, the actual decision might have been made or influenced by someone else.

Finally, you need to be transparent when approaching the partner that you have already spoken to someone at the firm. If someone in your network is facilitating a warm intro, ask them to telegraph the fact that you spoke with a junior person awhile ago and think that they might have missed something. (Ideally, the partner you’re approaching is an expert in your space, so you can naturally appeal to their expertise and ego.) If you’re approaching the partner via a cold email or other means, be up front about why you were rejected and what’s changed (or what you feel was missed).

VCs Love Second Chances

As investors, a big part of our job is making decisions based on very limited information. And we often get it wrong.

Which is why so many VCs clamor for lines instead of dots.

So if you’ve previously been rejected by an investor and have addressed their concerns, don’t be afraid to circle back with them.

If you think they made a mistake, there’s still a possibility of an investment, but you have to tread carefully and understand that everyone in the firm is on the same team.

Things That Make You Go Hmmm...

I was at the crib
Sittin' by the fireplace
Drinkin' cocoa on the bear skin rug
Gmail rang - who could it be?
Looked at the deck then started to shrug

There are a lot of hidden “traps” that founders can fall into when fundraising. There are phrases that come across differently to founders and VCs, missteps that can lose you credibility with potential investors and phrases that immediately tell an American VC that you’re “not from around these parts.”

And then, there are the things that make investors go “hmmm…”.

These are things that won’t outright kill a fundraise, but can cause enough potential investors to pause that they can meaningfully hurt your fundraising funnel. They can cause VCs to turn down introductions they might otherwise have taken, to slow down their diligence process, or to archive your intro email intending to revisit it…but never doing so.

Here are 5 things that make VCs go hmmm…

1. A founding team with no connection to the industry

One of the most significant questions for investors is “why are you the one to solve this problem?” That isn’t just a question about capabilities, but also one of motivation. Why are you doing this? Why will you commit to spending the next 7-10 years on this problem above all else?

Often the answer is obvious (e.g. from reading the founding teams bios). In other cases, the framing of the problem tells the story (“for the last 10 years, I was frustrated by X…”). But if nothing in the deck links the founding team to the industry in which the problem exists, it can cause investors to go hmmm…

2. Founders who aren’t full-time

When one or more founders aren’t full-time, it almost always causes investors to go hmmm…

To be clear, I’m not talking about situations where founders legitimately don’t have the financial resources to go full-time. I’m talking about cases where one or more key founders with (apparent) resources are hedging their bets.

A non-technical CEO with a CTO who will join “as soon as the money is raised?” Three well-paid cofounders who are “looking forward to going full-time” once the money’s in the bank? Building startups is hard (really hard) and you’re going to have a tough time convincing potential investors to buy-in if your entire founding team hasn’t.

3. No screenshots

Many founders get carried away with pitch deck design. It’s easy to spend so much time trying to make the deck look perfect that you forget to include screenshots of the actual product.

Here’s the thing: if I read a pitch deck start to finish and don’t see a single image of what you’re selling, I assume that it doesn’t exist. My conclusion (right or wrong) is that your product is still a figment of your imagination and that no human being has actually seen it, much less used it.

4. No numbers

A common misconception amongst founders is that it’s possible to fundraise off of nothing other than a “vision.” The myth of the “back-of-the-napkin” fundraise continues to permeate, despite the fact that it’s little more than an urban legend.

No matter how early your company is, it’s essential that there are hard numbers in your pitch deck. If you have 100 beta users, what are some statistics you can show about how they’ve been using the product and what you’ve learned from them? If you’ve made $1,000 in revenue, what are some of the way-too-early metrics around it? Sign up stats, retention rates, unit economics…all of these are fair game to include in a pitch deck, even at a very early stage.

Why?

Because it shows that you’re building something real and that you’re paying attention to what matters.

No numbers in a deck? That definitely makes investors go hmmm…

5. A screwed up cap table

Unfortunately, this is one that hurts a lot of first-time founders.

When investors come across a screwed up cap table (that is, one in which the founding team owns far less of the company than they typically should at a given stage), it definitely makes them go hmmm…

There are a variety of reasons why a cap table can end up “upside down,” but most often it comes down to to angel investors, venture studios and other early investors who believe they should own far more of the company than they have any legitimate right to (at least, if they hope that the company will attract new investors). VCs are genuinely concerned about founder motivation over time — if the founders don’t own enough of the company, are they going to stick around in 5 or 7 years when things get really, really tough?

For a Pre-Seed / Seed VC like me, the question I ask myself when I see a messed up cap table is: do I want to put in hours upon hours of work to help this founder fix it?

And honestly…a lot of the time I don’t.

So remember…try not to give investors unnecessary reasons to go “hmmm…”.

Are You a Line or a Dot?

In 2010, prolific investor Mark Suster wrote a blog post titled “Invest in Lines, Not Dots.” It was a response to the rapidly increasing pace of VC deals being done as the world emerged from the 2008 financial crisis.

The premise was simple: each time an investor and founder meets is a dot. If an investor has only a single data point about you (one ‘dot’), it’s difficult for them to gain conviction on your ability to execute. The implication: if investors only meet you once (during your fundraise), they’re unlikely to invest in you. Therefore, you should meet investors early and often to provide them with additional dots.

Invest in Lines, Not Dots - Mark Suster, Both Sides of the Table

If that sounds like a one-sided argument, it’s because in many ways it was. Back in those days, most VCs were really uncomfortable making fast investment decisions. Investors had historically held all of the power in the fundraising dance and were used to being able to perform weeks or months of diligence before making a commitment.

But times were changing.

Accelerators like Y Combinator and Techstars had come on the scene and were pulling back the curtain on the mystique of VC. More significantly, they were creating fundraising playbooks for founders that were slowly but surely shifting power from investors to founders.

Y Combinator Batch #1

VCs the world over latched onto Mark’s post. “We invest in lines, not dots” became a rallying cry for investors desperate to maintain control over the fundraising process. Almost in unison, investors parroted a powerful warning at founders: “Investor-founder relationships last longer than most marriages. Having a bad investor could ruin your company, so you need to get to know us over time!”

The idea of a bad investor taking down a startup is the stuff of founder nightmares.

Now to be clear, when Mark wrote his original post, there was absolutely merit to this argument.

With the torrent of startup activity following the financial crisis, investors and founders alike were making rushed decisions. There were plenty of cautionary tales from both sides, but the damage was always felt more by founders who had the misfortune of dealing with bad investors (or investors with bad behavior). As a result, investor warnings were largely heeded.

But that was then, and this is now.

Evolve or Die

Over the past 10 years, the power dynamic has shifted more than ever towards founders. And in many respects, it’s a byproduct of the success of VC.

Since 2010, the number of VC firms has exploded, with over 1,000 early-stage firms in Silicon Valley alone. The result has been cut-throat competition, with founders the primary beneficiary. Investors in competitive ecosystems have had no choice but to improve, with speed of diligence the number one priority for top firms. The best VCs can now perform extensive diligence on a startup in a matter of days.

VC competition over a recent YC graduate

Twelve years later, you’ll rarely hear investors in Silicon Valley reference the need for “lines, not dots.”

Why not? Because today, it’s the closest thing you can get to an investor telling a founder outright, “You need to operate on my schedule, not yours.” And that’s not great for competitive positioning.

But outside of Silicon Valley…

If you’re an international founder, however, your pattern-matching radar should be going off 🚨. When you read or hear about ”lines, not dots” today, it’s almost exclusively from investors based outside of the US.

Why? Because of a lack of competition. Absent the level of cut-throat competition present in Silicon Valley, the vast majority of international investors haven’t developed the skillset necessary to perform adequate diligence and reach conviction quickly. Many simply aren’t equipped to make decisions in a rush and are willing to miss out on deals instead (which, to be clear, is the prudent thing to do for a good investor).

Founders Unite

Increasing competition amongst VCs isn’t the only reason why founders today are in a better position than in 2010. A significant change in the dynamic amongst founders has given them a major advantage over investors in one crucial area: references.

Historically, VCs have always had the advantage in this regard. Investors can rely on back-channel references from robust personal and professional networks when making investment decisions. Those reference calls still painted an incomplete picture (especially for investors diligencing first-time founders), but it was generally much better than what founders had: nothing.

Up until recently, when bad investor behavior occurred, founders were reticent to share the details publicly, lest they get blacklisted and their future career ruined. As a result, it was almost impossible for first-time founders with limited networks to reference-check potential investors. Thus, they had no choice but to buy into the argument that they should meet investors multiple times to get to know them.

But that was then…

The Little Black Book

Beyond the fundraising playbooks developed by Y Combinator, Techstars and others, the most significant shift in founder-investor power dynamics has come from the VC equivalent of a “little black book”: Crunchbase.

Imagine that you were thinking about getting married and had a list of every single ex that the other person had. That’s what Crunchbase is to founders.

The other thing today’s founder have? Peers who are willing to spill the beans.

All founders deeply understand the asymmetry that exists in fundraising. Most founders will only ever raise capital once or twice, while investors do this week in and week out.  As such, members of the fellowship of founders are overwhelmingly willing to help each other out — especially when it comes to understanding investors.

To this day, I still get emails from founders titled “Founder Reference for X at Y Firm” in regards to investors in my prior company.

And I respond to every. single. one.

Today, it’s possible for founders to get an incredibly complete picture of a potential investor, including how they acted in both good and challenging situations. With a reasonably amount of work, founders can identify companies that succeeded, failed, blew up, and everything in between on a given investor’s watch. And in most cases, they can reach out to the founders for their side of the story.

So while it’s not possible to completely eliminate bad investor risk, with a reasonable amount of homework founders can bring almost to zero the risk of a surprise bad actor on the cap table.

That’s power.

The result? Notwithstanding trying to figure out whether or not you connect with a potential investor on a personal level (which is still really, really important), there’s virtually zero credibility to the argument that meeting an investor multiple times helps founders to avoid bad investor behavior.

Should You be a Line or a Dot?

At this point, you’re probably expecting me to tell you unequivocally that every startup should be a “dot”.

Not so fast.

If you’re in a position to run a high-velocity fundraising process, then presenting yourself as a dot (a single data point during fundraising), is likely to be the best approach for many founders.

But not every founder can do that.

There are situations where it is in your best interest as a founder to present investors with multiple data points so that they can build a line over time. These include:

• Founders raising Pre-Seed or Seed funding in smaller ecosystems (where you have fewer investor options and most investors aren’t comfortable making fast decisions with limited information)

• First-time founders without strong networks and/or prior experience working at a startup (in this case, meeting investors early can help you understand what they’re looking for at the same time it’s helping them get to know you)

• Larger fundraises (once you get to a certain dollar amount, very few investors will make decisions off of a single dot)

There are other cases where I personally believe that presenting investors with a single dot is the best strategy.  These include:

• Founders raising a Pre-Seed or Seed round in Silicon Valley

• Founders raising a round on a SAFE or similar instrument with no board seat or other terms involved (thus, minimizing the potential impact of bad investor behavior)

But there’s a third option which I believe provides a best-of-both-worlds approach for many founders: the dotted line.

Invest in…Dotted Lines?

Simply put, a dotted line is a hybrid fundraising strategy wherein most investors are presented with a dot while a select few get the benefit of a line.

How to Create a Dotted Line

Six months or more before your next fundraise, identify 5 – 10 target investors that would be your ideal lead. Reach out to them for an initial meeting (this is similar to Y Combinator’s coffee meeting strategy).  Your goal as a founder for this meeting is to get input as to where you need to be when you kick off your fundraise to gain their interest.  In return, you present them with a dot.

Over the next 6 months, touch base with them periodically. Share an update on your progress and ask if their expectations / benchmarks have changed.

By the time you’re ready to fundraise, three things should be true:

1. Assuming you’ve executed against the benchmarks shared by the investors, you should enter your fundraising process with confidence as to where you are in terms of investor expectations

2. Some number of your “preferred” investors have seen you execute over time (they have their “line”) and, if interested, will be able to move quickly with conviction

3. The majority of investors in your fully-research investor pipeline will have limited information about you, putting you at the advantage

From there, you can execute a high-velocity fundraising process with confidence.

Who Should Use a Dotted Line?

For founders trying to raise a Seed or Series A in Silicon Valley — particularly international founders who have previously not raised in the US - I believe that presenting a dotted line is the best approach for fundraising. It provides the confidence of knowing what VCs expect, while ensuring that you have the information advantage with the majority of potential investors.

One important caveat: if, in your early research, it becomes apparent that your metrics aren’t within the “strike zone” of what investors are looking for, you’ll likely want to revert to a line approach to increase your odds of investors building conviction.

At the end of the day, there’s a human element of fundraising that should not be overlooked: nobody likes to make a rushed decision (even if they’re capable of it).

Can You Beat My Friends?

Investors have many different frameworks for evaluating startups. Some focus on the 3 Ts (Team, TAM and Traction), others look for the 3 Hs (the Hacker, the Hustler and the Hipster) while others ask the 3 Why’s (Why this? Why you? Why now?).

Whenever I meet a promising Canadian startup, I focus on a single question: can you beat my friends?

Aster Data, circa 2006

Let me explain.

In 2006, I signed on as employee #1 of a new startup called Aster Data Systems, founded by three friends of mine from Stanford. It’s very likely you’ve never heard of Aster Data, but once upon a time we had a small but significant impact on the tech world: we helped to invent big data.

As fondly as I remember those days, when I think about the many friends I made at Aster Data, I rarely think about what we did back then. More likely, I’m thinking about what they’ve created since. In the 10 years since Aster Data was acquired, our small group of alumni have gone on to found some of the most impactful (and valuable) companies in enterprise software.

And in Silicon Valley, that story isn’t anything unusual. In fact, it’s not even the only time it happened to me.

Meet some of my friends

To give you a sense of what I mean, here are just a few of the people I’ve had the privilege of working with:

If you’re in IT or chatbots, can you beat my friend Vaibhav, who cofounded the conversational AI platform Moveworks (valued at $2.1B)?

If you’re in cloud storage, can you beat Dheeraj, who cofounded Nutanix (NTNX, valued at $4.1B)?

If you’re in data management, can you beat Mohit, who cofounded Cohesity (valued at $3.7B)?

If you’re in business intelligence, can you beat Ajeet, who cofounded ThoughtSpot (valued at $4.2B)?

If you’re in banking-as-a-service, can you beat Itai, who cofounded Unit (valued at $1.2B)?

If you’re in customer data and personalization, can you beat Tasso, who cofounded ActionIQ ($145M raised)?

What’s your point?

Believe it or not, I’m not dropping names for the sake of dropping names.

My goal here is to highlight a simple but important point: if your aim is to be the best in the world, your competition isn’t in Canada.

The Startup Olympics

In a winner-take-all / winner-take-most market, there are generally 3-5 “finalists” once the market matures.

Now, try to think of a global winner-take-all / winner-take-most market where more than one “finalist” was based in Canada.

I’ll wait.

The reality is that tech is a lot like the olympics. Sure, there are plenty of companies founded all over the world, but once everything is said and done, the podium often looks like this:

As a result, whenever I meet a promising Canadian startup, one of the earliest warning flags for me is if they show me a competitive slide with other Canadian companies.

Why?

Because unless they’re building X for Canada, then there isn’t a single other company in Canada that matters.

At least not if their goal is global supremacy.

How good are you?

When I meet your founding team, I’m not comparing you to anyone else in Canada. Instead, I’m assuming that you’re the best in Canada and I’m comparing you to all of my friends in the states. I know how they work and I know what it took for each of them to be successful.

When I’m talking to you, I’m envisioning the founders in your industry who are just like my friends and asking myself:

• Do you have their hustle?

• Do you have their determination?

• Do you have their passion?

• Do you have their storytelling ability?

• Do you have their resilience?

• Can you recruit the absolute best engineers, designers, product managers, marketers and salespeople in the world?

• Can you inspire investors and customers like they can?

• Will you do whatever it takes and go wherever you must go to win?

Because that’s what you’re up against. Not the other founders in your local coworking space. Not the “competitors” in your city, province or even country.

The numbers tell us that in any given tech market, at best one global competitor will come from Canada.

So if you really, truly are aiming to be the best in the world,

…you need to beat my friends.

Game on.

High-Velocity Fundraising

In last week’s post, I described how to build a robust funnel of qualified target investors for a fundraising round.

In this post, I’ll introduce the concept of “high-velocity” fundraising: what is it and why is it the best approach for most early-stage founders?

What is “High-Velocity” Fundraising?

The goal of an effective fundraising process is to move as many investors as you possibly can through your funnel at roughly the same pace.

High-velocity fundraising takes this a step further. In a high-velocity fundraising process, you’re trying to move as many investors as you possibly can through your funnel at roughly the same pace and as quickly as you reasonably can.

Why Does Speed Matter?

When thinking about running a “fast” fundraising process, a lot of founders incorrectly believe that the goal of this is to deprive VCs of the time to do their diligence. Implicit in this line of thinking is a misguided belief that founders can somehow “trick” investors or pull a fast one - getting multiple term sheets and closing a round before they can discover the skeletons in the startup’s closet.

That’s not the point at all. In fact, I promise you that VCs don’t skip diligence.

The reason to run a high-velocity fundraising process is threefold:

1. Your Time is Valuable

As a founder, every minute you spend fundraising is a minute you’re not spending building your business.

2. Speed = Density (of Data)

Imagine you have 40 investors to pitch. If you meet with them over three months, you’re averaging 3-4 meetings per week, which is less than one per day. Your interactions will be few and far between, making it more difficult to recognize patterns in the feedback (or even remember what the feedback was).

Compare that with a 3-week process, which would average 3-4 meetings per day for the same 40 investors. At such a high volume, you’ll quickly recognize repeated feedback or objections. Not only does this allow you to adjust your pitch more confidently, it makes it possible to identify in a matter of weeks if there is something fundamentally preventing you from closing the round.

The latter can literally mean the difference between life and death for startups (How many founders do you know who fundraised for months on end before ultimately failing? Could the outcome have been different if they knew why fundraising wasn’t working and still had 6 months of runway…?).

3. Creating a Sense of Urgency

This is the most important reason to do high-velocity fundraising.

If investors don’t perceive a sense of urgency in your fundraising process, then they’ll naturally deprioritize it relative to other deals they’re working on. This is what drives FOMO amongst investors — literally, a fear or missing out (on your deal).

FOMO is not something you can fake but it is something you can manufacture. By running a high-velocity fundraising process, you are ensuring that investors will perceive a credible chance that they will miss out on your deal if they don’t pay attention. This happens for two reasons:

1. The numbers game — If your pipeline is large enough and you’re running an effective process, then you should get a term sheet in a number of weeks. Investors understand this, along with the implication that if they don’t lean in then they likely will miss out on your company.

2. Investors talk — The VC community is small and investors really do talk to each other. They ask each other in casual conversation about companies they’ve met recently and make suggestions about companies they’ve heard are fundraising. If you’re speaking with dozens of investors and your name keeps coming up, the perceived urgency of your deal (and the FOMO around it) will be amplified.

The Basics of High-Velocity Fundraising

Running a high-velocity fundraising process requires four things:

1. Preparation — You must have a fully-researched pipeline of qualified target investors before you start. If you don’t have a sufficiently sized list of target investors with introductions lined up beforehand, you will not be able to sustain the pace of meetings necessary for this to work.

2. Discipline — With so many variables involved, it’s easy to get pulled in different directions. You’ll naturally get excited when an investor leans in (particularly one you think highly of) and discouraged each time you get rejected. Some investors will want to go faster while others will try to slow you down. Maintaining your discipline throughout the process and forcing investors to stay on your schedule is key to being successful at high-velocity fundraising.

3. Endurance — High-velocity fundraising is physically and mentally exhausting. If you’re doing it right, you’re taking 5 or more meetings every single day for three weeks or more. It’s important that you’re well-rested and mentally prepared for a month (or more) of long, intense days.

4. Support System — Your trusted network of friends, colleagues, advisors and investors. Your professional network (your pit crew) will help you navigate the rollercoaster of feedback as you go through your fundraise, while your personal support system (friends and loved ones) will help you keep going when things get tough (and they will).

The Schedule is Key

After preparation, the most important part of high-velocity fundraising is an effective schedule.

Your schedule must be tight enough to infuse a sense of urgency into the process but flexible enough to account for the (genuinely) busy schedules of investors. You must account for time zones and travel times (to the extent that you plan to fundraise in person), while also leaving room for the inevitable last-minute reschedulings.

Most of all, you must be confident enough in your process to both communicate the schedule in advance and stick to it once you start the ball rolling. Investors can smell a fundraising process going sideways a mile away. If they believe that your process is going off the rails, the dynamics change completely and you’re likely to lose control.

A typical schedule for a high-velocity fundraising process looks like this:

Week 1	Week 2	Week 3	Week 4	Week 5	Week 6	Week 7	Week 8	Week 9	Week 10
Initial Meetings
	Follow-Up Meetings
	Term Sheets
	Legal Diligence and Closing

Broken down in detail:

• Initial Meetings: 3 weeks + 1 week overflow (for late introductions, rescheduled meetings, etc.)

• Follow-Up Meetings: 3 weeks, typically starting in Week 3 (though some may start as early as Week 2)

• Term Sheets: For a well-run process, you can expect to receive your first term sheet between Weeks 4 and 5. Once you’ve got a term sheet in hand, you’ll typically give other investors 3 - 7 days to join the competition or bow out.

• Legal Diligence and Closing: After you’ve selected your lead and signed a term sheet, you can expect 4 - 6 weeks of legal diligence and paperwork leading up to closing (though this can take longer for international companies or non-standard situations).

Does this seem short? It absolutely is.

And that’s the point.

Moreover, it’s 100% achievable. If you prepare.

When I think back to all of the companies I’ve helped raise funding, almost all of the founders who went into their process with a solid company, a thoughtful, well-prepared pitch and a fully-researched pipeline of target investors received their first term sheet in 4 - 5 weeks (4.5 weeks from meeting #1 being the average).

Others companies who took this approach reached conviction in less than a month that fundraising wasn’t going to work for them (and understood why), allowing them to shut it down and refocus their efforts.

When Does High-Velocity Fundraising Not Work?

As appealing as this model is, it’s not always possible to fundraise in this manner. High-velocity fundraising does not work when the pool of potential investors is not large enough to sustain a consistent rate of progress (lots of meetings with consistent forward progress).

For example, if you’re fundraising in an ecosystem where there simply isn’t a large enough pool of investors (which is often the case for international startups at Pre-Seed), this approach will not work. You certainly can (and should) try to shepherd investors through a structured process on your preferred timeline, but the reality is that in smaller ecosystems the investors know that they’re in control of the schedule.

This approach also does not work in cases where the business and/or fundraising target does not match the thesis of a large number of investors. This includes companies that are inherently capital intensive (i.e. companies that need to raise larger amounts at each round than a “typical” startup), companies that operate in unusual or unpopular verticals, and many later-stage companies.

In my experience, Pre-Seed, Seed and Series A are the best fits for high-velocity fundraising.

Filling Your Fundraising Funnel

In last week’s post, I shared a template for setting up the perfect fundraising CRM.

This week, I’ll walk through how to fill your fundraising funnel and put yourself in the best starting position for success.

The Basics of Herding Cats VCs

Fundraising is far more of a science than many people realize. It’s been nearly 20 years since the tech accelerator went mainstream — first with Y Combinator and then Techstars a year later. Today, we have nearly two decades of data and iteration around fundraising best practices. While there may be slight nuances between different approaches (e.g. YC’s emphasis on “the coffee meeting”), by-and-large the process for raising major VC funding rounds is well understood.

The objective of fundraising is (obviously) to raise capital. But taking it a level deeper, the goal as a founder is to run an effective, efficient fundraising process. Get the money in the bank and get back to work.

What does that mean in practice?

It means that you’re trying to move as many investors as you possibly can through your funnel at roughly the same pace.

Believe it or not, if your company is compelling to investors* and you run a strong process, you should expect to receive multiple term sheets (the famous “over-subscribed round”). And if your company isn’t compelling to investors — for whatever reason — having more investors in the mix means more feedback (more data points). Getting more feedback in a shorter timespan makes it easier for you to identify what the issues are and course-correct.

* Note: I will not dive into what makes a company compelling to investors in this post

I’ve personally helped hundreds of founders raise Pre-Seed, Seed, Series A and Series B rounds (plus raised a few myself) and it’s not actually that difficult for founders of strong startups to solicit multiple competing term sheets. The difference between a strong finish and limping along usually boils down to how much preparation they did before taking their first meeting.

In fact, whenever I meet a founder who is struggling with their fundraising process, the root cause is almost always a lack of preparation.

What Does it Mean to Prepare?

When getting ready to fundraise, the majority of founders focus their efforts almost exclusively on their pitch.

Don’t get me wrong, that’s absolutely essential. In fact, in my experience it takes 2 - 3 months of iteration for most founders to get their story straight (but I’ll leave that for future blog post). The problem is, many founders dedicate an incredible amount of effort to perfecting their pitch and almost none to identifying potential investors.

What good is a perfect pitch if you have no one to deliver it to?

Let’s start with some rules of thumb:

Before you send a single email or take your first call, you should have a fully-researched pipeline CRM with a minimum number of qualified target investors:

• Pre-Seed: 100 – 150 qualified target investors (a mix of angel investors and VCs) 

• Seed: 80 – 100 qualified target investors (mostly VCs) 

• Series A: 60 – 80 qualified target investors (all VCs)

• Series B: 40 – 60 qualified target investors (all VCs)

What is a “qualified target investor”?

I can’t tell you how many times a founder has shared their target pipeline with me and it’s been immediately apparent that 50% or more of the investors they’ve listed don’t invest at their stage.

For first-time founders (particularly those without prior experience in startups), it can be incredibly difficult to figure out which VCs are appropriate for them — especially with multi-stage funds moving towards earlier stages. As a result, many just head to Crunchbase and download a list of the “top” investors and throw them into their spreadsheet (kind of like when high school students apply to college based entirely on those annual “top school” rankings).

Aside from wasting time on meetings that will never go anywhere, once all of the “not qualified” investors are removed from the pipeline, the result is a funnel that’s way too small. For example, if you’re trying to raise a Seed round and 40 of the 80 investors in your CRM only invest at Series B or later, you’ll quickly find that you’re not talking to enough investors. This will leave you scrambling to fill the funnel mid-process, causing you to lose momentum.

Qualified Target Investor = an investor who has previously invested in companies of your (i) stage, (ii) industry and (iii) geography

What is a “fully-researched pipeline”?

The template I shared last week for the perfect fundraising CRM?

You need to fill in every single column (except for typical check size) for every single qualified target investor before you send your first outreach email.

The data you fill in will inform your fundraising strategy from the moment you start, so it’s essential that you do this work beforehand. Here are some sources you can use:

• Investor website: location, target partner, similar investments, competitive investments, investment stage, typical check size (sometimes), fund size

• Crunchbase: location, investment stage, fund size

• LinkedIn: target partner (VCs will often list the deals they led on their LinkedIn profile), potential introducers (mutual connections)

If you’re doing this right, you can expect to spend 10-20 minutes per firm on research, which means 10 – 20 hours (or more) to populate your fully-researched pipeline.

That’s a lot of time. I know.

But I promise you that it will pay dividends when it comes to running a high velocity fundraising process (which is what you want to do).

The secret? You don’t have to wait until just before you start your fundraising to do this. Create your CRM early and fill in the names of potential investors as you learn about them. (You can also have someone junior help with the research, though in my experience there’s value in the founders doing it themselves.)

Do I really need that many target investors?

For 99% of startups, yes.

Just like with first dates, most investor interactions will end after the first meeting. Not because of anything inherently bad, but because it’s just not a match. The investor might not like the space, they might have already made a similar or competing investment (or have been burned by one in the past), or they might simply (and unfortunately) be distracted that day.

Fundraising is a numbers game. If you assume — without judgement — that the majority of investor meetings will end in a “no”, then you should understand why it’s essential to fill your funnel to the brim: in order to stack the odds in your favor.

(One thing worth noting is that it’s common to have an increase of 30% or more to your funnel after you start your process. Some investors who aren’t a fit will introduce you to other investors. VCs who heard about you through the grapevine and reach out cold (really!). But you can’t count on that to reach capacity — you need to make sure your funnel is adequate from the start.)

How Do You Actually Fill Your Funnel?

If you haven’t done it before, it can seem daunting to come up with 100+ qualified target investors.  But it’s actually not that difficult.

Here’s an easy process to build up your pipeline:

1.Start with Your Dream Investors

This is the easy one. Start with all of the names of investors that you dream about having on your cap table. We all have them (just make sure they actually invest at your stage).

2. Look at Companies You Admire

Next, look at all of the companies you look up to. They could be products you use, founders you follow on social media or companies like yours from previous generations. Figure out who their investors are by looking up funding announcements they made in the past and add them to the list.

3. Add Lesser-Known Funds

Many founders stop after the first two steps, but in reality you should just be getting started.

Today, there are more than 1,000 early-stage VCs in Silicon Valley alone – the vast majority of which you’ve likely never heard of. These include solo GPs, operator angels, micro VCs and rolling funds. They might not be household names, but many of them are incredible investors who deliver significant value-add.

Shai Goldman maintains an excellent list with over 700 VCs whose funds are less than $200M. Crunchbase is another great source for target funds.

4. Ask Your Network for Suggestions

Finally, ask your network (existing investors, trusted advisors, etc.) for their suggestions. This can add a number of high-quality targets, many of which will come with strong introductions from the person who made the suggestion.

Activating Your Network

The last step in preparing your pipeline is the first step in leveraging your network: figuring out who can introduce you to your target investors.

This is another step that too many founders leave until the last moment.

What’s the problem with that?  Simple: if you don’t have any obvious introducers, you haven’t left yourself any time to find one.

(Aside: I won’t go into the debate around the appropriateness of warm introductions, other than to say that they make a meaningful difference in fundraising success, so you should do everything in your power to secure them.)

Here’s how you do it:

1. Share your CRM with your Trusted Network

Share your full CRM with your trusted network of investors, advisors and fellow founders. Ask each of them to fill in their name beside any investors they can introduce you to (along with some context of how they know them).

As part of this outreach, ask them to fill in names of investors that aren’t on your list (step 4 from above).

2. Decide who the “Best” Introducer Is

Look through your spreadsheet and decide who should make the introduction for each firm.

In some cases, it’s really obvious (e.g. if you have one superstar angel investor who can get into every door). In others, you’ll need to decide. In all cases, make sure that there is exactly one introducer (to an investor, it looks spammy if multiple people send you a similar outreach).

3. Fill in the Blanks

Most founders will find that their network is able to provide introductions to 40 - 60% of the the qualified target investors they’ve identified.

Once your network has filled in everyone they know, it’s time to think about how you can get to the rest.

In many cases, you can find potential introducers using LinkedIn. In others, you’ll have to get creative (building relationships with founders in their portfolio, reaching out over social media, etc.). The further in advance of your fundraise you do this, the more time you leave yourself to find paths to your target investors.

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And with that, you should have a robust pipeline of fully-researched, qualified target investors.

Next up: an introduction to high-velocity fundraising.

How to Setup the Perfect Fundraising CRM

In order to run an effective fundraising process, you need to have a solid CRM. Having a system that can track 100 or more potential investors in your pipeline in a lightweight yet effective manner can make the difference between an oversubscribed round and struggling to make sense of the tea leaves.

Here’s how to setup the perfect CRM for your next fundraising round:

The Software

Fundraising CRMs don’t need to be overly-complicated. In fact, simplicity is a feature when it comes to this.

While many founders implement a full-fledged CRM like HubSpot or Pipedrive, the majority actually use a simple spreadsheet, like Google Sheets or Airtable.

A fundraising CRM has only three requirements:

1. It can store structured data (every spreadsheet or CRM does this)

2. It’s easy to use

3. It allows for collaboration (this is essential for leveraging your network)

My personal recommendation: Google Sheets.

What Do You need to Track?

Here are the fields that you need in your fundraising CRM:

🌐 Name, Website

Let’s start with the basics: who is the firm? Be sure to include a link to their website because you’ll click on it. A lot.

🌎 Location

Why does location matter in a world of Zoom?

Because investors in different geographies behave differently. Canadian investors will often focus on different aspects of your business than American investors will. New York VCs ask different questions than Silicon Valley VCs do. Tracking this will provide an important lens through which to interpret feedback, questions and objections.

🎯 Target Partner

It’s not sufficient to simply identify the firms that you want to raise from. You need to do the homework to identify who your ideal partner is at each firm is. This is important when asking for introductions.

👋 Similar Investments

What investments has the firm made that are similar to your company? Identifying related portfolio companies will be helpful for writing personalized outreach emails and preparing talking points for meetings.

❌ Competitive Investments

You should never, ever, ever, ever, ever pitch a VC that has a competitive investment (unless that company has already exited). I won’t go into all of the reasons why. Suffice to say, you should put any competitive portfolio companies into your spreadsheet and use that as justification to not pitch that investor (no matter how much you may like them).

📚 Investment Stage

What stage(s) does the firm invest in?

A firm that invests in Pre-Seed and Seed has different motivations and provides different value-add at the Seed stage than one who invests in Seed, A and B. Understanding where they’re coming from will help you interpret the questions and objections you receive and give you food-for-thought when comparing term sheets down the road.

💵 Typical Check Size

This column will usually get filled in after your initial meeting (when you ask the question 😉). What is the range or typical investment amount that the firm does at your stage? As your process progresses, this will help you think through the different combinations of investors that could fill your round.

💰 Assets Under Management (AUM) / Fund Size

How large is the fund from which the firm invests? Fund size and total AUM (the total of all of the firm’s funds) influence a firm’s behaviour – both in terms of the initial investment and their ability to make subsequent investments in your company.

🤔 Tier / Preference

How badly do you want this investor? Typically, this is a simple scale (e.g. 1, 2 or 3) that varies for different founders. Some people want big brands, some people want technical VCs who understand their space. There’s no right or wrong answer.

Tiering the investors beforehand is important as you plan your outreach strategy.

👋 Prior Relationship

Have you had any prior dealings with anyone at the firm?  Briefly describe any interactions so that everyone knows what you’re starting with.

🤝 Who Can Make the Intro?

Does anyone in your network have a relationship with the firm (ideally the target partner)?  Start by going through LinkedIn to see if anyone you know has a connection and list them here. Later, you’ll ask your trusted network to fill in their names where they can help.

☎️ Who Will Make the Intro?

Once you’ve identified everyone who can help with an introduction, you’ll need to decide on the one person who should do it.

✅ Pipeline Stage

Where are you currently with this investor? There are lots of different ways you can think about the stages of a fundraising process. A typical list might include: 

• Competitive Investment (Do Not Pitch)

• New

• Introduction Sent (or Cold Outreach Sent, in cases where you couldn’t find an introduction)

• Introduction Made

• First Call Scheduled

• Second Call Scheduled

• … and so on

📋 Notes

The catch all for everything else. If you’re using a proper CRM, there’s likely a structured way for you to track detailed notes. But this can also be a simple freeform column in a spreadsheet.

Get the Template

To help you get started, download/copy the Google Sheets template described above.

How to Stick the Landing

One of the hardest parts in aerial sports — whether gymnastics, skiing or snowboarding — is sticking the landing. Yet it’s arguably the most important part of the routine. You can have 60 seconds of perfection, but if you don’t stick the landing none of it matters.

In fundraising, the “landing” is the final slide in your deck – the “ask” slide.

It acts as the climax of your pitch, highlighting how much you’re raising, why you’re raising and what you’re going to do with the money.

The “ask” slide is simple in concept, yet 90% of founders get it wrong.

Here are 5 “do’s” and “don’ts” of the “ask” slide to help you stick the landing:

1. DO Ask for Money

This seems obvious, but a surprising number of pitch decks don’t include it.

I’m always caught off guard when a founder sends me a pitch deck that doesn’t include an explicit ask for funding. In most cases, it leaves me with a negative impression: has this founder actually thought about what they need?

If you’re trying to raise money, you absolutely must include an "ask” — and be specific in the amount of money you’re trying to raise. You might have a range in your head, but you need to present investors with a single number and a plan that backs it up. This is a financial transaction, after all.

2. DON’T Present a Detailed Spending Breakdown

More than half of the “ask” slides I see use the majority of the slide real estate to present a spending plan.

This is important, but it belongs in an appendix and isn’t core to “the ask”

Guess what? I already know what you’re going to spend the money on. If you’re a SaaS business, it’s developers, marketing and sales. If you’re hardware, we can throw in some inventory. Deep tech? Probably some researchers and other R&D costs.

Yes, I’m going to eventually want to see a budget. But that’s primarily to facilitate a discussion on how you’re going to get there. It’s something that belongs squarely in an appendix slide.

When reading an “ask” slide I don’t care how you’re going to spend the money. I want to understand what you’re going to achieve with it…

3. DO Tell Me What You’re Going to Achieve

The minute that money lands in your bank account, the clock starts ticking.

For VC-backed companies, you’ll almost certainly need to raise more capital in your quest to win the world. The most important question I’m asking when I read the “ask” slide is: what are they trying to achieve with this chunk of money?

The corollary is even more important to investors: if they achieve their short-term goals, will they be able to raise the next round? Will they have de-risked the business enough that the investor who comes after me will get excited?

An effective “ask” slide is concrete:

Increase sales —> Achieve $2M in ARR

Add new users —> Add 250K new users in H2 2022 and 1M more by the end of 2023

Sign new enterprise customers —> Sign 10 new F500 companies worth at least $1M in revenue

This allows us to have a discussion on whether the goals you’re setting are the “right” ones and provides context for us to dive into your plan to achieve them.

4. DON’T Include Sales Projections

Too many “ask” slides include sales projection graphs and other business details from elsewhere in the deck. This usually happens when founders treat the “ask” slide as a conclusion and try to cram a full recap of the pitch deck into it.

It’s great if you want to have a recap slide, but it shouldn’t be combined with the “ask.”

Just like the stillness of a gymnast after sticking the perfect landing, allow the “ask” to stand on its own.

5. DO Tell Me How Much Runway this Gives You

A small but crucial detail that’s missing in a lot of “ask” slides: how long will this funding give you to achieve your goals?

As a VC, I’m working backwards and assuming you’ll need 12-18 months to reach your objectives, 6 months to do your subsequent fundraise and a quarter or two of buffer. That means you should be looking at 24 months or more of runway. (In years flush with cash, founders would often plan for 18 - 24 months of runway — but even then, the response from investors would often be: “perhaps you should raise a little more?”)

This is another one of those small bits of information that can lead to incredibly insightful conversations between founders and investors, so don’t be afraid to include it. I’m guaranteed to ask you!

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Want to see a really bad example of an “ask” slide? Check out the one I made for DataHero once upon a time…

Canada Needs to Stop Competing With Itself

Last week, investors and founders from across Canada descended on Montreal for Startupfest, the city’s annual celebration of Canadian startups. As always, there were startups and supporters from across the country (Calgary pancake breakfast, anyone? 😋).

The full Panache partnership from across Canada together in Montreal for Startupfest

On my way back to Vancouver — while still basking in the glow of my week in Montreal — I spent part of my flight responding to a journalist’s inquiries for a soon-to-be-released report on the health of the BC tech ecosystem relative to the rest of Canada. Which made me think: why do Canadians spend so much time comparing themselves to each other?

In all my time living in the US, I never heard anyone from the Bay Area worrying about whether a company was based in San Francisco, Oakland, San Jose or Palo Alto. Same thing in New York. I promise you that no one there cares how many startups are in Brooklyn, Mid-Town or the Lower East Side. They’re all just repping NYC. And while certain VCs in Miami are desperate for attention, the rest of America’s tech ecosystems broadly speak as one.

But in Canada? We’re obsessed with local attribution and comparison. Is a company from Vancouver or Victoria? Toronto or Waterloo? Western Canada or Eastern Canada? We endlessly chase our tails worried about how we’re doing relative to each other. And it drags us all down.

A really good Canadian song

We obviously need to track and discuss economic progress at different levels of the country. Cities, regions and provinces each have their own economic and political realities and are accountable to their local constituencies.

But beyond that, who the hell cares?

When something amazing happens in Quebec, we should all celebrate. 🎉

A big Series A in Newfoundland?  Amazing! 🙌

IPO in Alberta? Pop open the bubbly. 🍾

That’s what other countries do. But in Canada, great achievements are inevitably followed by a wave of local media decrying the fact that province X is moving further ahead than province Y, cynical social media posts filled with doom and gloom, and complaints that someone’s city, region or province isn’t getting their “fair share.”

“I’m leaving you Vancouver. I’ve fallen in love with the economic development org in Brampton.” 🤦‍♂️

I’m over it. And you should be too.

Canada has the lowest GDP in the G7, yet instead of focusing on growing as a country, we argue over local attribution and incessantly compare our cities and provinces. (I can’t tell you how many hours of my life I’ve lost in conversations with Vancouverites comparing themselves to Toronto.)

“The East-Coast media doesn’t care about us. All they care about is Toronto…”

But it doesn’t have to be that way.

Instead of worrying about which province is ahead this week, or which city ranks higher in some arbitrary list put together by the marketing department of a second-tier publication, let’s figure out ways to work better together. Let’s celebrate the unique accomplishments of each city, region and province, while increasing collaboration across all stages and sectors of the tech economy.

Let’s stop treating tech in Canada as a zero-sum game.

I, for one, am cheering for every single entrepreneur and investor across Canada to win. And it’s not just me. The entire Panache team is unabashedly “Team Canada,” as are many others in our country's tech community.

When any company, city or province wins, we all do. 🇨🇦

How to Lose Credibility in 5 Easy Steps

Meeting an investor for the first time is a lot like going on a first date. Both founder and investor are trying to get to know each other and see if they are compatible.

As a VC, one of the characteristics I’m most focused on during that first meeting is trustworthiness. In order to invest in you, I have to believe that you’ll be honest and truthful with me. That means I’m paying a lot of attention to how you present yourself, your business and your backstory. I fully expect that you’ll position everything in the best possible light — you’re selling, after all — but there’s a line you must be careful not to cross.

Here are 5 ways founders can lose credibility with potential investors the first time they meet:

1.     Misrepresent Revenue

Too many founders misrepresent key metrics like revenue in their initial pitch.

And I say misrepresent because it is always intentional (I was a first-time founder once – I knew exactly what each number in my deck meant). Examples include:

• Showing GMV instead of revenue (but implying that it’s company revenue)

• Showing registrations (signups) instead of actual users

• Using non-standard time periods (e.g. quarterly recurring revenue instead of monthly recurring revenue)

In all my years, I have never seen a founder do any of these as an “honest mistake.” It is always a case of someone trying to make the numbers look better than they actually are — and it’s blatantly obvious to any experienced investor.

2.     Claim Credit for Something You Didn’t Do

When talking about your past experience, don’t claim credit for something you didn’t do.

“I led project X” vs. “I was part of the team on project X”

“I sold a $500,000 contract to Y” vs. “I was the sales engineer on key deals, including a $500,000 contract with Y"

…and so on.

“…and then Steve asked me to personally oversee the “iPhone” project.”

Investors – particularly Pre-Seed and Seed VCs – are betting on the team. So you can be guaranteed we’re going to fact-check. And we are very good at finding back-channel references. When I call your ex-boss or ex-coworker, will they corroborate what you told me?

3.     Namedrop Someone You Barely Know

This is annoying in any situation.

“I was hanging out with X the other day and they loooove what we’re doing."

“So, I was talking to Elon the other day…”

Guess what? That person you name-dropped? There’s a good chance I actually know them (or know someone who does).

And the minute we get done our first call, I’m texting them to find out what they really think of you.

There’s zero reason to ever do this with an investor. It’s certainly not going to impress us or help you close the raise. Instead, it’s a unnecessary reason for us to potentially say no.

4.     Claim Someone is Investing When they Haven’t Committed

This one usually isn’t intentional, but it can be just as damaging.

Far too many founders name drop angel investors or VCs that haven’t actually committed to the round.

In the best case, you will come across as naïve and inexperienced (which still isn’t great), but you can also come across as a liar.

Again, it’s very easy for potential investors to fact-check this. And we will.

5.     List Logos of Companies that aren’t Customers

This is another case where “rounding up” can hurt your credibility.

I’ve seen too many slides with logos of companies “we’re talking to” that are presented as if they’re customers. Or companies with free users presented as though they’re paying.

Guess what? I made this mistake once. And I got called out on it.

Every. Single. Time.

At the time we were fundraising, our revenue numbers weren’t great (we were still trying to figure out our business model) — but we had an amazing list of companies on our free product. Instead of owning the fact that we had a strong top-of-funnel, we tried to round up. It cost us credibility with a number of investors we met (you can read more about the mistakes we made in that fundraising deck here).

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Meeting an investor for the first time can come with a lot of pressure. You want to put your best foot forward, but you must be cautious not to trip over the line between enthusiasm and embellishment. Just like on a first date, investors are watching for potential red flags.

If I think you’re exaggerating, misrepresenting yourself or lying, chances are we’re not going on a second date.

Is Your Revenue Real?

When Canadian founders ask investors what they must achieve to raise their next round, the advice often starts and ends with revenue:

“You need to get at least $25K in MRR”

“You need a minimum of 4 new clients and $100K+ in bookings”

“You need more than $250K/month in GMV"

But when it comes to raising from top Silicon Valley VCs, top-line revenue is just the tip of the iceberg.

A captivating picture of an iceberg from a management consulting deck

The best investors, particularly at Seed and Series A, focus on growth and growth potential when making investments decisions. They’re looking for early evidence of product-market fit and indications that the founders understand the needs of their customers. They want to know that if they invest, they’re adding fuel to a rocket that’s heading in the right direction 🚀

In order to do that, they need to understand how “real” your revenue is.

What Does that Even Mean?

Many first-time founders (and, sadly, more than a few investors) believe that reaching a certain level of revenue will instantly unlock the next round of funding. They expect to succeed at fundraising the same way they did at school: get the “correct” answers on the test and you pass.

When I grow up, I’m going to be a VC! 💪

Accelerators and startup personalities have compounded this misconception with overly simplistic concepts like “one metric that matters.” These approaches encourage founders to focus on a single metric (typically revenue) to the detriment of all others.

In theory, having the entire company focus on revenue is a great idea, but in practice it’s easy to get caught up in growth practices that are unsustainable. The top-line numbers look great, but they’re built on a house of cards.

Good investors understand this, which is why they dig deep.

Here’s what they’re looking for:

Let’s Start with the Basics

Note: The examples and definitions in this article are of SaaS businesses with monthly revenue, but the concepts apply to all startups.

Evaluating revenue starts with two metrics: the actual (current) revenue and the rate at which it is growing.

Revenue

Starting at the Seed stage, VCs almost always want to see a minimum level of revenue — whether they admit it or not. Depending on your business, that might be represented as MRR, GMV, bookings or something else, but every investor has a number in mind.

Paradoxically, the important part isn’t the revenue number itself — it’s the number of customers it represents. At each stage, investors are looking at how many people/businesses need your product badly enough that they’re willing to pay for it. Yes, the actual amount of revenue you’re generating from each customer is important (and we’ll get to that later) but investors first and foremost want to see evidence of product-market fit.

Revenue = objective evidence that you’re solving a problem that matters to someone

Revenue Growth Rate

The next thing investors want to understand is how fast your revenue is growing. Silicon Valley VCs are strictly in the business of “unicorn hunting” — investing in companies that can exceed a valuation of $1B in 7-10 years — and growth rate is key to achieving that goal.

In fact, having a numeric goal allows us to reverse engineer the rate of growth required to get there…

Let’s get out the calculator

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Assume that your startup currently has $25K in MRR. You are trying to raise a Seed round from an investor who expects a valuation of $1B in 7 years. Let’s further assume that to achieve this valuation you’ll need to reach $100M/year in revenue. In order to do this, you must have an average monthly growth rate of:

$25,000 MRR x X^(12 months/year x 7 years) = $100,000,000 / 12 months

X^84 = 333.3333

X = 1.072 —> 7.2% MoM growth

This means you need to increase revenue 7.2% every single month for 84 months straight to reach your goal. 😅

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The practical takeaway from this example is that top investors will typically want to see consistent double-digit MoM growth from early-stage startups. They understand that growth rate will ebb and flow (it’s okay to have off months while you’re fixing bugs and getting the product right), but the potential needs to be there.

Revenue Growth Rate = objective evidence that you’re solving a problem that matters to many people

So your current revenue is healthy and you’ve got consistent 20% MoM growth. Fundraising will be a slam dunk, right?

Not quite…

The Leaky Bucket Problem

Imagine you’re trying to carry water back-and-forth in a bucket with holes in it. You fill the bucket to the top each trip, but by the time you get to your destination only part of it is still there. That’s what happens with your revenue.

Something’s wrong here…

Each month, your team works hard to acquire new customers, only to find out that by the end of the month, some of your existing customers have churned. In the early days, this is a constant battle that highlights the evolution of three core functions:

• Marketing - identifies potential customers (leads) and brings them in with the promise of a solution to their problem

• Sales - converts them into paying customers

• Product - fulfills their needs and keeps them happy

Revenue and revenue growth rate only prove the effectiveness of a company’s sales and marketing efforts. They demonstrate that the company has identified a meaningful problem (one that users/businesses are willing to pay to solve) and has figured out how to attract and convert customers. But without supporting evidence, they don’t prove that the company is actually solving the problem.

In fact, a poor product can be hidden for months — even years — by an effective sales and marketing function. As long as sales and marketing can bring in new customers faster than existing ones are churning, from the outside things look good.

Experienced investors have seen this many times, which is why they’ll dig into your churn next.

Customer Churn Rate

The first thing investors will look at is the customer churn rate — what percentage of existing customers are you losing each month?

At scale, your churn rate should only be one or two percent. For Seed and Series A startups, investors understand and expect it to be much higher. After all, the product is still really early. It’s likely missing key features and those that do exist are held together by duct tape.

The key question investors will ask: is the churn rate getting better?

Churn rate is a proxy for the quality of a product and its ability to solve customers’ problems. A decreasing churn rate demonstrates that you understand why customers are churning and are able to address those issues.

Customer Churn Rate = the percentage of customers who realize that your product doesn’t actually solve their problem

Revenue Churn Rate

Churn rate can also be calculated from a revenue perspective — what percentage of existing revenue are you losing each month?

This is a particularly insightful calculation when customers can generate different amounts of revenue (e.g. when a product has different pricing tiers, business customers can purchase multiple licenses, etc.).

The calculation for revenue churn rate is as follows:

X = MRR at start of month

Y = New monthly revenue from existing customers (upsells)

Z = Lost monthly revenue (from customers who downgraded and/or churned)

Revenue Churn Rate = ( Z - Y ) / X

Revenue Churn Rate = how happy are the customers who stayed relative to those who left?

Negative Churn (a revenue churn rate < 0) indicates that you are upselling enough to compensate for all revenue loss. In other words, your revenue is increasing even before you take into account new customers!

Net Revenue Retention (NRR)

Net revenue retention (NRR) inverts revenue churn rate. Instead of looking at the percentage of revenue you lost, it highlights the percentage that you kept — are you getting more new revenue from existing customers than you’re losing each month?

The calculation for net revenue retention is:

X = MRR at start of the month

Y = New monthly revenue from existing customers (upsells)

Z = Lost monthly revenue (from customers who downgraded and/or churned)

NRR = (X + Y - Z ) / X

If NRR > 100%, then you’re adding more revenue each month from existing customers than you’re losing (woo hoo!).

But wait…

Startups will often point to strong NRR as proof that they’ve got everything figured out, but it doesn’t actually do that. NRR > 100% is a great thing, but it can also be misleading, particularly in the early days when numbers are small, pricing models are changing, etc. It’s a start, but there’s more to dig into.

Net Revenue Retention = how leaky is your revenue bucket?

So How Real is Your Revenue?

After looking at churn, investors will turn their attention to the customers who stayed and the revenue they’re generating. How solid is that revenue?

Customer Lifetime

The first thing investors want to understand is how long, on average, are customers sticking around?

For an early startup, this isn’t an easy question to answer. It’s likely that a number of the customers who signed up in the first few months still haven’t left. That’s awesome, but it makes measuring customer lifetime quite challenging (and has led many a founder to overestimate how good their product is).

I find it helpful to think about three distinct cohorts:

1. New customers who fail to onboard or quickly realize that the product isn’t for them

2. Customers who stay for more than one renewal period and then churn

3. Customers who haven’t yet churned

Customers in category (1) consist of two main groups:

1. Customers for whom the product didn’t match marketing (they came because the marketing spoke to them, but the actual product didn’t solve their problem)

2. Customers who churned during — or shortly after — onboarding (they failed to complete the tasks needed to become an “active customer”)

Most investors will look at churn rate for this group but not include them in lifetime calculations — as they were never really customers. As a subset of churn analysis, understanding this particular cohort provides an indication of how effective onboarding is (including the initial impression new users/customers have of the product) and how aligned product and marketing are.

New User/Customer Churn = how good is your onboarding and does product deliver on marketing’s promise?

The second category (customers who renewed at least once and later churned) is the next step after NRR for analyzing progress towards product-market fit. How long did customers stay on average? Is that period getting longer over time? When customers do leave, why did they churn (and how easily can the underlying reasons be addressed)?

Customer Lifetime = how long before customers reach the limit of your product?

As founders, the more you understand this category, the better. During fundraising, presenting exit interviews/surveys, cohort analysis and other supporting evidence can go a long way to convincing investors that you’re on the right path, even if the numbers aren’t great.

Average Revenue Per User (ARPU) / Average Revenue Per Customer (ARPC)

The next piece of the puzzle is how much revenue are you generating per customer (user, business, etc.)?

The calculation here is fairly straight-forward:

For B2C SaaS businesses: ARPU = MRR / number of individual customers

For B2B SaaS businesses: ARPC = MRR / number of business customers

Average Revenue Per User/Customer = how much will customers pay you each month to solve their problem?

Lifetime Value (LTV)

The lifetime value of a customer (LTV) is how investors evaluate product from a revenue perspective. How much revenue, on average, is generated from each customer before they churn?

The basic calculation for lifetime value is as follows:

LTV = ARPU (or ARPC) × Customer Lifetime

But since we don’t actually know customer lifetime yet, we can approximated by inverting the customer churn rate:

LTV = ARPU (or ARPC) / Customer Churn Rate

Customer Lifetime Value = how much do customers value your product as a solution to their problem?

Is it Sustainable?

The final question on the minds of investors digging into revenue is one that is often misunderstood: is it sustainable?

As a founder, the mere existence of this question might seem preposterous — the success of startups is very much predicated on their ability to do things that don’t scale. But when it comes to revenue, long-term sustainability is crucial.

Returning to our leaky bucket analogy, investors ultimately want to know whether or not your ongoing efforts to “fill the bucket” can lead to long-term success. Given sufficient time and resources, can this business become a billion-dollar company?

This boils down to three questions:

1. Is there enough water to continue filling the bucket (is the market big enough)?

2. Can you make the bucket better (by improving the product and achieving product-market fit)?

3. Can you repeatedly fill the bucket in a sustainable way (is the business model long-term profitable)?

The answer to this final question is often the difference between an oversubscribed round from top VCs and struggling to raise anything.

Cost of Acquiring Customers (CAC)

The first metric investors will focus on is your cost to acquire new customers (CAC). This is the average cost to acquire each new customer, inclusive of both sales and marketing.

Customer acquisition cost is calculated each month, as follows:

CAC = (total sales costs for the month + total marketing costs for the month) / number of new customers for the month

For purely self-service SaaS businesses, there may not be significant sales costs. However, if anyone in your company (other than customer support) is actively talking to leads as part of the sales process, you need to include those costs in your calculation.

Cost of Acquiring Customers = how must do you spend to acquire each new customer?

LTV / CAC: The Ultimate SaaS Metric

Dave Kellogg once described the ratio of Customer Lifetime Value to Cost of Acquisition as The Ultimate SaaS Metric, and in many respects it is. This ratio tells us how profitable each customer is:

---

Assume that the cost to acquire each new customer is $100 and that the lifetime value for each customer is $500. This means that every new customer is worth $400 in gross profit!

LTV / CAC = $500 / $100 = 5

---

In the early days of most startups, LTV/CAC is less than 1. This reflects both a high churn rate (since the product is still very early) and a high cost of acquisition (having neither zeroed in on the target customer nor figured out how to acquire them cheaply).

Over time, investors will expect to see this ratio improve — however, this isn’t a case where bigger is always better. An LTV/CAC ratio of 3 is considered good. Too much higher and investors will worry that you’re being too cautious in your growth (once you reach a certain level, a portion of your marketing spend should always be directed at discovering new markets, which will increase your average CAC).

Putting it all Together

By now, you should have a sense of just how deep top investors will go to understand how “real” your revenue is. They want to understand:

• How fast is top-line revenue growing

• How “leaky” is your revenue bucket

• Is your understanding of your customers improving

• Is your ability to solve their core problems Improving (is product getting better?)

• Is the problem you’re solving important enough that customers will pay a meaningful amount to solve it

• Is your business model long-term sustainable

Investors don’t expect you to have it all figured out, but they absolutely expect you to understand and be able to articulate your progress on each of these questions. That means that you — the founder — need to deeply understand your revenue and business model, even if the numbers are still small.

Far too many founders think it inappropriate that early-stage VCs dig into revenue numbers in such detail. Hopefully, this post helps you to understand that it isn’t so much the revenue that’s important to investors, but what it represents:

Objective evidence that you might actually be able to pull it off.

Canadian Founders Need to Get Out of Canada

Before moving back to Canada in 2020, I spent 5 years immersed in emerging startup ecosystems around the world. From Japan to Oman, Scotland to Egypt, I had the privilege of collaborating with founders, investors and other supporters of dozens of up-and-coming tech hubs.

Launching the first ever tech accelerator in Muscat, Oman

Beyond access to capital, the most impactful thing I saw move the needle in every one of these communities was access to knowledge, networks and best practices from more advanced ecosystems.

Silicon Valley founders have long come to terms with the idea that if you ask 10 different people for advice, you’ll get 10 contrasting opinions. Not so much in emerging ecosystems. In fact, the experience for many founders in smaller tech hubs is the exact opposite: ask 10 people for advice and you’ll get the same opinion 10 times. Sometimes that advice will be good and sometimes it won’t – but without any diversity of perspective, you simply can’t tell.

For founders, investors and supporters of emerging ecosystems — and, yes, Canada is still very much an emerging ecosystem — getting access to diverse perspectives from outside of your “bubble” is one of the most powerful things you can do. At the recent CDL Super Session, Rhiannon Davies, Founding and Managing Partner of Halifax-based Sandpiper Ventures, eloquently summed this up:

We know that diversity of thought is important and that cross-fertilization of ideas breeds innovation.

Thinking outside of the box is easier when not everyone comes from the same box.

Thinking outside of the box?

I’ve previously written about why “getting out of Canada” is important for investors, so now I’ll take the founder’s viewpoint.

Why Does It Matter?

When you’re first getting started as a founder, supporters in your local ecosystem mean everything. They help you get off the ground, can provide you with advice, anecdotes and direction, not to mention a shoulder to cry on should things go sideways (and they will). But their experience and advice can also be limiting, as it’s frequently through the lens of a very local experience.

If you never went away for college, then your opinions on schools in other cities are just that: opinions. Same thing in business. Unfortunately, far too many people pass off personal opinions as fact (with their conviction generally increasing with age and personal success). In tech, this often means loud declarations of “advice” based in large part on Twitter and TechCrunch.

Founders, particularly first-timers, rarely question the perspectives that come from older and more experienced founders, investors and others in their ecosystem. Even well-meaning advice (which, to be clear, the vast majority is), it can lead founders down the wrong path if they don't take into account the local context from which it stems.

Canadian founders, in particular, seem prone to this.

Here’s the thing: it’s actually not that hard to get outside perspectives. You just have to know where to look.

A Tale of Two Conferences

A few years ago, I spoke at RiseUp Summit, one of the leading early-stage startup conferences in the Middle East (think Montreal Startupfest but in Cairo).

It was really, really hot that day…

After walking off stage, my good friend and host, Sharif El-Badawi, suggested we head to the nearby food trucks to grab lunch (yes, even Egyptian conferences have food trucks). But he warned me: it would take us about an hour to get there. I was utterly confused because I could see the food trucks from where I was standing — they couldn’t have been more than 200 ft. from the stage. Sharif must have seen my perplexed look, because he chuckled and said, “You’ll see.”

A moment later, we stepped off of the stage and were immediately swarmed by dozens of onlookers from the crowd. I prepared myself to be pitched on mass by founders hoping for an investment from a Silicon Valley VC. But that wasn’t what they wanted.

Patiently, politely — but insistently — the founders one-by-one asked for my advice.

“We’re a food delivery business. For the first year, we were growing 10% MoM, but lately it’s stalled. What should we look at?”

“We’re trying to decide whether we should expand into other countries in the MENA region or if we should start looking at Europe. What would you do?”

“We’re finding it really hard to raise pre-seed funding from local investors. Can you give us advice on where we should look or what we could do differently?”

And so on.

True to Sharif’s prediction, we spent nearly an hour standing there answering questions. The founders were all profusely thankful for our time (and many made sure to track us down to ask follow-up questions during the event).

To these founders, each speaker was a resource that could potentially help them take their business further. And every single one took advantage of the opportunity.

The main stage audience at RiseUp Summit

By contrast, last week I spent three days in Toronto for Collision, the massive startup conference which this year boasted more than 35,000 attendees (including over 1,500 startups). Despite walking around with a very large, very loud “Investor” badge around my neck, only two founders approached me the entire time — both to pitch me for funding.

At this point, a bunch of Canadians will smugly respond by pointing out how great it is that we don’t interrupt people in public (inevitably followed by some anecdote involving a big Hollywood star who got to eat dinner at Cafe X without being harassed). That’s not what I’m talking about here. By all means, let Bobby Superstar enjoy his triple shot decaf oat milk latte in peace.

What I’m talking about is your business. And when it comes to your business, the best founders take advantage of every opportunity presented to them.

Get Out of Canada without Leaving Canada

Startup conferences are just one example of ways that you can get outside perspectives on your business. The internet is even better.

In a world of social networks and Zoom, you don’t actually have to leave Canada to “get out of Canada.” Heck, you don’t even have to leave your house. Today, the barrier to reaching out to people around the world, getting global perspectives and accessing global networks is almost zero.

Here are some ways that you can virtually “get out of Canada”:

• Reach out on LinkedIn to founders of similar companies in other cities and swap experiences

• Follow investors and advisors you look up to on Twitter, interact with their posts and slide into their DMs

• Ask for introductions to investors you’d like to raise from in a year but, instead of pitching, ask for 15 minutes of their time to get feedback on your business and benchmarks for your next fundraise

• Build your own audience by posting about your experiences and interact with your followers (you’ll be surprised how many people they resonate with)

• If you’re a technical founder, contributing to open source projects and getting to know other contributors is a great way to build a global network

• If you’re in Web3, join a relevant DAO and get to know other members

• If you’re part of a global accelerator, like Creative Destruction Lab or Techstars, reach out (or ask for introductions) to mentors and founders in other cities

• Ask your investors if there’s anyone they can introduce you to in other cities that could provide a new perspective on your business

The goal here is to get out of your local feedback bubble, physically or virtually. As founders, you should strive to seek out opinions, advice and benchmarks from other ecosystems. If you’re in Atlantic Canada, reach out to folks in Vancouver. If you’re in Vancouver, reach out to folks in San Francisco. And if you’re in Toronto…

…nevermind, we all know that Toronto is the center of the universe (j/k! 🤣)

You Keep Using that Word...

This year marks the 35th anniversary of The Princess Bride, one of the funniest movies of all time.  The most memorable line in the movie – which has spawned countless memes – comes from Inigo Montoya, who after hearing his boss Vizzini exclaim “inconceivable!” for the seventh or eighth time, declares:

I can’t help but hear Mandy Patinkin’s voice in my head when some founders pitch me their startups.  Not because of mistakes in language or grammar, but because many founders misunderstand how certain words and phrases are interpreted by investors.

Here are 5 of the of the most common phrases that founders and investors interpret differently:

1. We Haven’t Spent Any Money on Marketing

See also: “All of our user acquisition is organic”

What Founders Think:

Our product is so great that users/customers are flocking to us.  We haven’t had to spend any money on marketing…just imagine how awesome it will be when we do!

What Investors Hear:

We haven’t given a single thought to how we’re going to acquire users/customers outside of our personal networks.

If You Build It, They Will Come…

How To Do It better:

We haven’t done any paid marketing yet, because we were focused on building our MVP and had enough users in our [waiting list / referral list / etc.] to allow us to get meaningful user feedback.  Once we finish fundraising, our #1 priority will be developing our go-to-market plan and user acquisition channels.  In our early testing, the product has really resonated with [x, y and z personas].  We think we can acquire more users like that using [a, b and c strategies].  What do you think?

2. Our Pricing is Low Enough to Avoid Procurement

What B2B Founders Think:

Look how smart we are!  We’re getting the most revenue possible while keeping sales cycles short.  This is awesome!

What Investors Hear:

We’ve completely avoided going after bigger contracts that involve a procurement process / multiple decision makers / complex sales (in other words, we’ve been avoiding “real” enterprise sales).

This has two possible interpretations, neither of which is positive:

1. We still have to learn how to do enterprise sales, which is going to take time

2. We’re too scared to try “real” enterprise sales (which is going to cap our ACV)

How To Do It Better:

So far, we’ve intentionally priced our product below the procurement threshold so that we could gain a foothold with our target customers and prove out our MVP.  We believe that there’s the potential for $x/year in revenue from some of these customers, which will obviously push us into longer and more complex sales cycles.

Coming out of this raise, our goal is to expand within those early customers while also targeting larger initial ACVs, both of which will require us to develop our “enterprise sales” muscle.  What are some of the ways you’ve seen first-time founders accelerate their learnings around how to sell larger contracts into enterprises?

3. We Haven’t Started Monetizing Yet

What Founders Think:

A lot of founders seem to think that this is a “Get Out of Jail Free” card that lets them avoid any questions about revenue. If anything, it does the opposite. Unlike 5-10 years ago, today’s investors expect founders to start testing monetization strategies far earlier in their journey, particularly for B2B startups.

What Investors Hear:

We’re avoiding putting ourselves out there and finding out if we’ve actually built something people want to pay for.  (This is akin to hanging out for weeks with someone you want to date, without ever getting the courage to ask if they want to go out with you.).

Some companies have valid reasons to not monetize by the time of their fundraise (e.g. products that are sufficiently complicated that a user wouldn’t reasonably be expected to pay at that point, consumer apps where monetization where network effects are key and scale is expected before monetization, etc.), but if you’re presenting a product that “solves” a customer need, complete with case studies, it’s hard to justify not charging at least some of them.

How To Do It Better:

Unless you’re just getting started, you should aim to start experimenting with monetization at least 3-6 months before your next fundraise. Even if the price is low, being able to demonstrate that someone (anyone) is willing to pay for your product is significant market validation for investors. You’ll also learn a lot about the difference between free users/companies and customers — data that can be included in your fundraising materials. For SaaS products, this can be as simple as switching from free to a 14-day trial. For enterprise customers, it means trying to go from free to paid pilots.

It’s scary, but at some point you have to put yourself and your product out there (and investors want to know that you’re willing to).

4. We Have No Competition

What Founders Think:

We’re the first ones doing this.  Our product is so new/special/awesome that there’s literally no one in the world doing this!

What Investors Hear:

We don’t understand the market or our target customers.  We’re not thinking seriously about the alternatives for what we do and are naively assuming that our product is magically going to win.

How To Do It Better:

In order to solve this problem today, users/businesses have to do [x, y and z], which has [a, b and c problems/drawbacks/costs].  We believe that we’re the first company to take our approach to solving this problem, but there are likely other startups looking at the same opportunity.  Have you come across any others?

5. We’re Co-CEOs

This one isn’t very common, but when it hits it’s a doozy.

What Founders Think:

We work together so well as a team that we don’t need to assign labels to roles. We’re hitting all of our goals and this is awesome!  We’ll figure it out later and it won’t be a big deal.

What Investors Hear:

We’re avoiding having the really hard founder conversations. (If as founders you can’t have the conversation about who’s the CEO, what else are you avoiding…?)

Note: In later-stage companies, co-CEOs isn’t entirely unusual. This works because roles and responsibilities can be clearly defined in mature organizations, which isn’t the case in startups. In early-stage startup, investors want to know who the “buck stops with.”

How To Do It Better:

Sorry to be the bearer of bad news, but on this one you have to put on your big kid pants, have those really, really hard conversations with your cofounder(s) and make a decision.

A handful of investors are okay with co-CEOs, but for the vast majority (particularly at the early stages), it’s a deal-breaker.

Take a deep breath and go for it…

Can Vancouver be the Next Austin?

Last week, I hosted the June edition of Webcouv3r, Vancouver’s monthly Web3 event.  Following an engaging panel on the future of DAOs, no fewer than five people asked me some variation of the following question:

“How are we narrowing the gap between Vancouver and San Francisco?”

Since moving back to Vancouver, I’ve heard countless takes on this question and its naval-gazing cousins, “How can we get Toronto media to pay more attention to Vancouver?”, “How can we reverse Vancouver’s brain drain?” and “Why aren’t there more unicorns in Vancouver?”

Look at my belly button!

The next day, I flew down to Austin, Texas.  Austin is famous the world over for music, BBQ and football.

It also happens to have a pretty good tech scene.

Downtown Austin

You know it doesn’t have?  People constantly comparing Austin to other cities.

You don’t hear Austinites whining that New York doesn’t pay enough attention to them, that the government doesn’t give them enough money or that they don’t have as many unicorns as other cities.  They know what makes Austin special and they’re unapologetically proud of it.  When they talk about their city, they focus on what makes it unique, not what it lacks.

Brunch and blues

Imagine if Vancouverites could do the same thing.

Imagine if we stopped worrying about what people in Toronto think (or don’t think, because let’s be honest -- most people in Toronto spend precisely zero time thinking about Vancouver).

Imagine if we stopped complaining about a lack of government support.

Imagine if we stopped comparing.

Complaining about the government is the second most popular sport in Vancouver.

After complaining about gas prices.

That’s not to say that the there aren’t opportunities for improvement — there always are.

But Vancouver is the most beautiful city on the planet.  You can ski the best slopes in the world, mountain bike in a near-mythical rainforest and swim in the Pacific Ocean. On the same day.

Are you kidding me?!?

Vancouver is also a small city. As such, it will never be the primary driver of the country’s economy, tech or otherwise. The first thought when you mention “Vancouver” to anyone around the world will never be “tech.”

And that’s okay.

You know what other city you can say that about?  Austin.

The difference?  People who live in Austin aren’t worried about it. They know know that when people think of their city, they think first and foremost about music, BBQ, festivals and all of the other weird and wonderful things that make Austin special.  And if those people happen to be in tech, they’ll know it’s also a bad-ass tech city.

Kayakers on the Colorado River in downtown Austin

Vancouver has a fantastic tech scene and I genuinely believe that it has the potential to be a global leader in Web3.  Some of the most consequential companies of this generation are already being built here.  But even if that happens, when people around the world think about Vancouver, they’ll think first and foremost about its natural resources and lifestyle — skiing, hiking, mountain biking and all of the other wonderful things that make Vancouver special.

And that’s okay.

You can’t do this after school in San Francisco

People in tech don’t move to Austin because of its tech scene.  They move there because it’s an amazing city and it has a great tech scene.

Similarly, nobody is ever going to move to Vancouver only because of its tech scene (and this is coming from someone who moved back to Vancouver after 18 years in San Francisco).  People move here because it’s one of the best cities in the world to live and it has a great tech scene.

Let’s embrace that energy.

Let’s proudly make Vancouver the next Austin Vancouver.

By the Numbers

	Austin	Vancouver
Population	2.29 million	2.46 million
Employees in Tech	79,230 (7.5% of jobs)	91,200 (8.0% of jobs)
Big Name Tech Conference	SXSW	TED
OG Tech Company	Texas Instruments	PMC-Sierra
New Hotness	ICON	Dapper Labs
Hometown Band Locals Would Rather You Forget	N/A (It's Austin)	Nickelback

…oh, and it case you’d like to know my answers to the questions at the top of this article:

“How are we narrowing the gap between Vancouver and San Francisco?”

 We aren’t.  And we never will.  (And that’s okay.)

“How can we get Toronto media to pay more attention to Vancouver?”

Do something amazing that they can’t ignore.

Or, you know, stop worrying about it. 🤷‍♂️

“How can we reverse Vancouver’s brain drain?”

We shouldn’t try to.

It’s a great thing that ambitious young women and men are going abroad to learn and experience the world and do amazing things.  Some number of them will come back (like I did) and they’ll bring with them all of that knowledge and experience that they never would have gained if they stayed here.

“Why aren’t there more unicorns in Vancouver?”

Because Vancouver is a small city.

At the end of the day, most startups fail and only a tiny fraction of them will become unicorns. Vancouver will have more unicorns, but they will always be few and far between.  That’s not a critique or criticism of our local entrepreneurs or tech scene.  It’s just the numbers.

And that’s okay.

Do You Still ❤️ Me?

When times are good and term sheets are flowing, founders don’t think a lot about whether or not their investors will follow-on in the future.  But in times like these, when the pace of deals is slowing, it’s essential that founders know where they stand with their investors.  And most don’t have a clue.

For many founders, asking an existing investor if they’re willing to follow-on is as intimidating and awkward as asking a partner if they still love you.

What if they say no…?

For others, the need to ask at all seems preposterous.

Of course, they still love me!  Of course, they’ll follow-on…

As with any relationship, it’s important to check with your investors in on a regular basis.  Unfortunately, the topic of follow-on investment rarely comes up during founder-investor check-ins.  Only a handful of founders I’ve ever worked with have asked me about follow-on investment outside of an active fundraising process.

In startups, as in life, we usually don’t talk about money until we need more.

Let’s have “The Talk”

For each investor on the cap table, founders should know the answer to two questions:

1. What is your follow-on policy?  (Under what conditions, if any, would you consider a follow-on investment -- and how much would that investment be?)

2. Where do I currently stand with you?  (If I were to raise money today, would you invest?)

The answers to both of these questions can change over time — so you should check in on this periodically.  VCs will generally have a consistent policy, but where you stand with them may ebb and flow.  Angel investors, on the other hand, can vary wildly. Most don’t have a firm “policy” and where you stand can change both as a result of your progress and their personal financial situation.

Here are some questions that you can use as the basis for “the talk”:

• Can you tell me what your follow-on policy is?

• When we raise our next round, will you follow-on?

• Under what conditions would you consider following on?

• If we needed an injection of capital today, would you participate?

• What percentage of companies do you follow-on with, and under what conditions?

• Will you lead or participate in a bridge round?

If you haven’t explicitly asked your investors some variation of the above questions, consider doing so next time you speak with them (and not just with VCs, but all of your investors).  Ideally, you should maintain a tally of where you stand with each investor and the total amount of capital available from existing investors under various scenarios.

The Answer Is Probably “No”

Here’s the tough part: for the vast majority of startups, under most scenarios the answer to these questions will be “no.”

The reality is that most angel investors don’t follow-on.  Many VCs only follow-on when there’s a new lead investor. And even investors who do follow-on can’t do so with all of their investments.

This can seem really unfair.  As founders, we long to believe that our investors will “have our backs” no matter what, but the reality is that very few investors (VCs or angels) have the ability to do that financially.  Part of this is limited resources.  Part of this is investment strategy.

A typical VC investment strategy

For VCs, in particular, follow-on decisions are driven in large part by a formal investment strategy that was decided long before they met you.  Sometimes that strategy involves multiple rounds of investment, but frequently it doesn’t.  And even when it does, it’s often only in the case of “up rounds” (rounds led at a higher valuation, typically by a new investor). So don’t be surprised if you check in with an investor, only to be told “we don’t do follow-on investments” or “we don’t do bridge rounds.” A lot of investors don’t.

For those who do, they generally only follow-on with a subset of their portfolio. A Seed VC’s investment strategy might look like this:

We will invest in 20 Seed-stage companies over three years. Of those companies, we will set aside funds to do our Series A pro rata in 10 companies and participate in extensions / bridges for up to 3.

What this means is that if more companies need bridges/extensions than the investor has the capacity for (which is often the case), the founders are competing with other companies in the portfolio for that follow-on investment.

What are you Really Saying?

When an investor with the ability to follow-on chooses not to, it means one of three things:

1. They have lost confidence in the company

2. They have not lost confidence in the company, but they don’t believe that further investment will change the outcome

3. They have not lost confidence in the company, but they believe that they will generate better returns by allocating the follow-on capital to a different company

If an investor tells you that they’re not (currently) willing to invest further, don’t be afraid to ask for an explanation.  It’s likely to be an awkward conversation, but if done in a professional manner, it can lead to some potentially impactful insights

At one point when I was running DataHero, I spoke with our lead investor (Ryan McIntyre from Foundry Group) about their feelings on the company.  He admitted that they were mixed.  What followed was a very honest – and difficult – conversation, in which he shared that he did not have full confidence in me as a CEO, due in large part to how I managed board meetings.  This caused me to re-evaluate certain aspects of my communication style and how I ran board meetings.

Ultimately, Foundry led both our Seed and Series A rounds.

Most investors are more than willing to explain in detail their follow-on policy and where you currently stand -- but they generally won’t unless asked.  As a founder, this is crucial information and I encourage you to ask these questions of all of your investors.

We Won’t Follow-on Does Not Mean We Don’t Love You

This is a really, really important point.

Far too many founders, when told by an investor that they won’t follow-on, react with anger or frustration.  Being told by an investor that they won’t invest further can feel like rejection.

You don’t love me anymore!

This is the point at which cynics react with arguments about VCs “showing their true stripes,” only investing when times are good, etc.  I find this to be an incredibly unhelpful perspective, because it only reinforces the anger and resentment felt by founders going through tough times. While a “no” can certainly represent a loss of confidence by the investor in some cases, oftentimes a follow-on investment was never actually in the cards.

Regardless, an investor telling you that they won’t follow-on with additional funding does not mean that they’re abandoning you.

Investors want you to succeed – their returns depend on it.  Whatever resources they were providing you before “the talk” (time, mentorship, introductions, etc.) are still available after. I’ve seen far too many founders react to the perceived slight of an investor saying no by turning away completely from the investor.  That’s generally not the best course of action.

None of this is Easy

Let’s be clear – nothing about this is easy.  It’s a difficult topic that strikes at the heart of the often-significant gap between the expectations of founders and investors.  But it doesn’t need to be that way.  Knowledge is power and, in my humble opinion, you’re far better off knowing where your investors stand in terms of follow-on investing long before you need the money.

So if you haven’t already, reach out to your investors (all of them!) and ask where they stand.