In the world of startup fundraising, mistakes are costly. While a mistake can look different for different investors, there are common threads in the VC industry.
In our latest episode for the Iterative Podcast, we got Kuo-Yi Lim from Monk's Hill Ventures, and Hsu Ken from Iterative to talk about the top mistakes founders often make when fundraising. But instead of the usual Q&A format, we got them to stackrank the top mistakes instead, so you get to hear the different opinions and why they ranked their list as such.
There were some key similarities (and differences!) between the two lists, so we've compiled them in this article.
The Top 5 Mistakes You're Probably Making When Fundraising
Mistake 5: Not Having Clarity
“It's worst when investors leave and the room and don't have a clear sense of exactly what was asked.” - Kuo Yi, Monk's Hill Ventures
Having clarity in fundraising means more than just listing down what you're going to do with the money, but also how you're going to hit your goals.
For Kuo Yi, being granular is key. What's the milestone you're trying to hit with fundraising - and how are you going to get there? “Are those list of things you want to build and raise money for, still relevant in this short time window? Is it to build for the long term or the short? Is this worth fundraising for? Is the market going to give you money for this? That level of granularity becomes more critical in this environment, as opposed to “we're going to raise 8 million, 10% goes to engineering, 20% goes to sales.”
Mistake 4: Not Understanding Venture Capital
“Venture capital is about the magnitude of wins, not the number of wins.” - Hsu Ken Ooi, Iterative
While money is important and necessary to grow your business, understanding the nature of the industry is just as crucial. In venture capital, “magnitude of win is actually a bigger deal than probability of win". If you're pitching your business as a sure thing (probability of win) and not how big it can be (magnitude of win), it might be tougher for you to raise capital from venture capitalists.
Mistake 3: Not Talking to Enough Investors
“Not all money is the same. Investments come with different strings.” - Hsu Ken Ooi, Iterative
Rejections are common, and more often than not, you'll get way more no's than yes's. But the good news is, “you only need one or at least a handful of yes". When Brian Ma raised for Divvy Homes (now a Unicorn company), he spoke to at least 50 investors before Andreessen Horowitz wanted to lead their round.
“So just because 30 or 40 investors have said no, it doesn't mean no good investors are gonna come in. You got to keep at it,” says Hsu Ken.
No's are also rarely personal. “It's just a question of fit,” says Kuo Yi. “A lot of the times it's on timing, and the fund may not be at the stage of investing what you're doing or what you want to do.”
The name of the game here is to cast a wider net (properly researched, of course) and stretch out to as many corners as you can - at the very least, founders should aim to talk to at least 30 investors. If you've talked to less than 10, you just haven't talked to enough.
*Bonus: Investors change their minds all the time as their worldview widens. Just because you receive a no, it doesn't mean it's a no forever. It's more than okay to do follow-ups and send updates.
Mistake 2: Being Overly Coy
“Overly protective about information makes me feel it isn't going to be a productive conversation.” - Kuo Yi, Monk's Hill Ventures
It's understandable for founders to feel like they have to conceal certain information in the name of privacy and data protection, but being overly protective can do more harm than good. For Kuo Yi, it's “difficult for investors to understand the state of the business and why someone would be excited.”
“In our experience, the people who are growing quickly will want to start the conversation with how fast they're growing,” says Hsu Ken. “So if you're hiding metrics because you're afraid other people might find them, remember that there's this hidden cost that everyone will assume the metrics are not that good.”
The best founders turn challenges into discussions. “They'll tell us we're struggling with X, Y, and Z - in that order. Here's what we're doing about them. Then they get us involved to weigh in. Brian and I always tell our companies, it'd like a judo move to pitch and get investors to work on your problems.”
The other side of the equation is that good VCs know that the main currency it has is its reputation. Both Hsu Ken and Kuo Yi agree that there are definitely sensitivities to sharing, but if VCs lose that trust, that reputation will likely spread to the rest of the community.
*Bonus: How you show metrics is equally important. A few tips:
- Don't show cumulative graphs - investors care about trajectory and it's easier to see in non-cumulative graphs. Sophisticated investors will know you're trying to hide something.
- Having projections in your traction is okay, but it's obvious if there's no real thought to the graph if it's the same percentage MoM. “How do you generate this? Are you hitting some inflection point?” asks Hsu Ken.
- There are different qualities to revenue. How much value are you capturing? “If you're showing a GV of 10 million,” says Kuo Yi, “and your cost is 9.9 million, that doesn't really matter.” What's more important is how to you build a sustainable way of capturing value that's defensible.
Mistake 1: Poor Preparation
“The only way to create FOMO is to talk to a lot of people in a short period of time. And in order to like do that, you have to be very organised.” - Hsu Ken, Iterative
This is the number one thing we cover in Iterative's fundraising bootcamp: we ask our companies to over-prepare. “You need to do a lot of prep work before you even talk to your first investor,” says Hsu Ken. “If you are gonna talk to about 50 or 70 people as investors, you need to come up with what that list is, and then you need to have a system and a CRM around how to do it, and then you need to qualify that list.”
It's loosely tied to mistake 5 on not having enough clarity - if you don't know who you're pitching to, chances are you, you're not going to get that yes. And poor preparation often leads to missed targets because it's not about showing up to the pitch and presenting, it's tailoring your deck and trying out different styles to find the right tone.
One way to do so is practice pitching to friendly investors. “You start expecting certain questions,” says Kuo Yi. “How high level, how low level you get from the conversation. So that takes a lot of practice and a lot of continual pitching.”
Nuance is Key
As we've mentioned earlier, not all mistakes look the same to every investor. The mistakes we've mentioned above may not be that big of a deal for other investors, and we may have omitted mistakes other investors would stackrank higher. The key here is to discern accordingly, and research the investors you'll be talking to.