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Updated September 15, 2023You’re reading an excerpt of The Holloway Guide to Raising Venture Capital, a book by Andy Sparks and over 55 other contributors. A current and comprehensive resource for entrepreneurs, with technical detail, practical knowledge, real-world scenarios, and pitfalls to avoid. Purchase the book to support the author and the ad-free Holloway reading experience. You get instant digital access, over 770 links and references, commentary and future updates, and a high-quality PDF download.
For startup founders, the whole point of a first pitch meeting with venture capitalists is to secure a second one.Beck Bamberger, investor, Backstage Capital; founder, BAM Communications*
If you’re raising Series A or later, the process of meeting with investors and negotiating the terms of a deal are pretty well standardized. But for early-stage companies, it can be hard to know what to expect. A casual meeting with an investor might turn into a pitch meeting. You could meet with investors at one firm two or three times before making a formal pitch to the partners who guard the checkbook.
Once you’ve begun reaching out to investors with the goal of getting a meeting, things can move pretty quickly. Every founder–investor relationship is different, and early-stage investors can have wildly different approaches and practices when it comes to meeting with founders. This section is a general overview of what you can expect from your first few meetings with investors.
Seeing things from the VC side, too, can help you understand what it means to investors when you progress from first meetings to second and third meetings with partners at a firm. Sean Jacobsohn, now a partner at Norwest Venture Partners, wrote in 2014 that of 1,200 leads per year, his firm met with 500 founders.* Of those 500, Jacobsohn says that a mid-size firm will progress with 50 companies by performing due diligence. Out of that number, a mid-size firm will make about 10 investments. According to a Stanford study, VC firms on average consider 100 or more startups per single closed deal.* They meet with management of 28 (34 at early stage, 46 in California), conduct due diligence on 4–5, and offer a term sheet to 1 or 2.
So remember, a meeting with an investor is no guarantee of investment, whether it’s a first meeting or a fourth. Understanding what to expect from each meeting along the way will help you set yourself up for success and move you from a first meeting all the way to an offer.
You may already have a relationship with the first VCs you meet with, but chances are you’ve never met. The purpose of this meeting is to get to know each other. The investor goes into this meeting wanting the answers to these questions: Who are you? What are you working on? Is this interesting enough for me to meet with you again or introduce you to more people at my firm? The founder will go into this meeting for the chance to introduce themselves and their company, and to get to know the investor and learn what they’re interested in working on.
The first time you sit down with an investor can be intimidating! Especially if this is the first round of funding you’ve tried to secure. But don’t be worried. Think of this meeting as an opportunity for you to evaluate the investor as well. You both want to be able to walk away excited by the prospect of working with each other.
This will depend on the person you’re meeting with, but the first meeting is usually at a coffee shop or restaurant, though it may be at their firm. If you’re raising pre-seed, chances are you’ll be heading to neutral ground. (Angel investors and early-stage investment firms might not operate out of an official office space!) You’re likely to get an email that says, “I’m working out of Buck’s of Woodside today, why don’t you come meet me there.”
So be prepared to have a conversation anywhere, without access to some big presentation software. Remember, a formal pitch is not the purpose of this meeting!
Bring your laptop with your deck ready. This is not a formal pitch meeting, and you should not bring up your deck and start moving through your slides when you sit down. But you might have a statistic, picture of your app, or a graph or chart from your deck that you want to show the investor. Your deck should always be an aid, not a crutch. You should have practiced enough that you can picture your deck in your head to make sure your narrative stays strong, but you can still bring out your deck if a certain slide will be extra helpful for the investor to see.
At the meeting, ask the investor what you’re interested in learning more about. You’ve done your research, so you might have a list of a few questions about their background and interests. When you sit down, simply asking, “How’d you get into venture capital?” is usually a safe place to start.
At some point, the investor will say something like this (or exactly this): “So tell me what you’re working on.” You’ll start with your elevator pitch. From your first email, the investor will already know a little bit about your company. But remember, they meet with a lot of founders, so cut them some slack and reiterate the basics: what problem are you solving, and why your team is the one to solve it.
If the firm is thesis-driven (that is, they only invest in companies in a certain sector, companies solving a specific kind of problem, or companies with founders from certain demographics), you’ll want to make it clear why you and your company are a good fit for their vision. This should be clear enough in your first email, but hitting hard on fit in this meeting will also show the investor that you’ve done your research. You might say something like, “I’m excited to be meeting with you because it’s really important to my team that our investors and board members are as devoted to solving the climate crisis as we are. When looking at your portfolio, I saw that you didn’t yet have a team working on desertification. The technology we’re developing for remote communities to measure erosion would be the first of its kind and would have huge implications in this sector.”
important Pay attention to visual clues. The investor should be thoughtfully skeptical as they ask questions. That’s a good sign, not a bad sign. If they thought your idea had no merit, why would they bother asking anything? They might not ask anything too deep at this stage—the whole point is to get to know you—but make sure you’re prepared to answer questions about your market, distribution, and finances, in case the investor is really zealous.
Founders should be looking for verbal confirmation that the investor wants to meet again. If they’re interested, they’ll tell you. “I’d love to learn more, let’s meet again next week,” they might say. If it’s a pre-seed firm, it might be a really small team, and this is the only person you’ll be meeting with. But if they want to move forward, it’s likely that they will invite you to meet with more members of their team. They might ask to see your deck. “Hey, I’d love to learn more, can you send me the deck so I can dig in, and we’ll meet again next week?”
The investor could set a date with you for a second meeting right away, but they will likely keep the follow-up general.
The VC might do some basic digital research, some casual due diligence, on your background, the company, your industry, market, and competitors. This depends on how much they already know about these things; if they’ve worked with companies similar to yours in the past, they won’t have as much research to do. The VC might start to ask around, too. They might say to other investors, “Hey, have you heard of this company? Do you know anyone who’s worked with this founder?”
If they didn’t set a date with you for a second meeting while you were still at your first, you can expect an email within a few days. If they really love you, they might ask to meet you again the very next day. For most people who get a second meeting, it’ll be a week or so later.
The second meeting you have with an investor can have a few goals. This second meeting could be casual, or it could be around a conference table, where you’re repeating what you said in your first meeting to more people. An investor might be thinking, “I just want to know more so that if I do say no, I know I’ve done my research.” Or they might tell you, “I want you to come in and pitch this to four other people.” In the latter case, hopefully, the VC you’ve already met with becomes a kind of sponsor for you at the firm. The investor who’s sponsoring you will tell you what to expect. She might tell you a few things about the other people you’ll be meeting, like, “John’s enthusiastic, Ella is skeptical.” They will tell you to come in and pitch your deck or just to repeat what you said in the first meeting, and they’ll tell you how long the meeting will be.
If the investors want a third meeting, things are getting pretty serious. If you haven’t met with partners at the firm yet, you will now (these would be “partner meetings”). They’re thinking, “Alright, we’re really interested, we think we want to make a deal. We’ve done our research, and now we want some answers to a few questions we can’t answer on our own. Like, “How are you thinking about X company as a competitor? This is the issue that’s kind of outstanding for us.” Your job is to convince them you’ve thought of everything. If you’re coming in to the firm for a third meeting, your sponsoring investor will tell you what to expect. If you haven’t delivered a formal pitch yet, you will now.
At later stages, the nature of these meetings evolves. For a company raising Series B, the VCs are going to ask deeper questions focused on numbers, your business model, and economics. “We did some diligence on this and we want to dig into your financials and see how you’re calculating X.” But at earlier stages, VCs are just trying to figure out how you think problems through.
At some point around the second or third meeting, the VCs will start doing more serious reference checks. Usually they’ll ask you, “Who should we talk to who can give us an honest take on your work?” Have these names in mind, and make sure you’ve reached out to these people to make sure they’d be willing to receive a call or email from the firm you’ve been meeting with. They could be past coworkers, past investors if you’ve already raised a round, or mentors. They should not be college roommates (unless you started a company with that person!) or family members.
Investors’ due diligence can also include talking with a few of your company’s customers, if you have any.
important Remember, investors have limited time. They’re meeting with dozens of founders every week. Having an investor ask for references can be frightening, but keep in mind that this is a good sign. Whatever time they spend checking your references, they’re not spending researching other companies to invest in. The more time they’re willing to invest in you, the more serious they are about turning that time into money.
Once you get to your third meeting, you’re going to have a sense of whether it’s going well. Your first task is to get the firm sold on working with you. Once you feel like you’re there, this is your opportunity to ask a lot of questions from the firm.
Some founders feel more comfortable saving all their questions for a third meeting. Others might wait until the investors have offered a term sheet, and respond with something like, “Cool, I have a few questions. Can we hop on the phone?” You want to make sure investors are excited about your company before you bombard them with details, but you should also feel free to ask questions at every meeting you take. It’ll show you know what you’re doing! Whatever your style, the most important thing is that you feel you’ve gotten all your questions answered. Before you meet with anyone, it’s wise to have a list of questions you want answered from every firm, and check them off as you go along.
Some of these questions fall under the category of due diligence, focused questions about what it would be like to work with this firm. “What would happen in the case that one of the partners I’d be working with who’d be on my board leaves the company?” “How do you make a decision on a deal? Consensus from the team, or one person?” Run through a whole set of questions. Not only will this educate you, but it’ll show the firm that you’re thoughtful, reasonable, and serious.
Here’s helpful phrasing for a couple of common questions you might ask:
When you want to test a VC’s interest to determine where to put your energy, you don’t want to sound desperate or pushy: “I know that you’re not likely to give me a strong indication at this meeting, but I’d love to know if this is the sort of opportunity you could imagine taking. I’ll happily put in the work to persuade you over time! But would I be better off focusing my attention on other VCs?”*
“Are you planning on investing in this space any time soon?” This is a favorite tip from startup consultant Eric Friedman, who reminds us that this usually yields a good discussion about who the investors have seen in the space, and might lead naturally into whether they are interested in this very meeting.
contribute We will add more helpful phrasing for challenging moments in investor meetings. Are there questions you’ve faced that you didn’t quite know how to answer? Let us know in a comment here.
As always, we recommend being nice. There are VCs out there who respond well to bravado, to founders who ask questions like, “Why should I let you in my round?” Some might see this as confident, others will think, “I don’t want to work with this person.” There are other ways to build a sense of scarcity.
If the investors haven’t brought up any numbers by the third meeting, you should ask, “Hey, I feel like we’re getting pretty far along. Can we talk about price so we make sure we’re on the same page?” Before a firm makes a deal, you should have discussed what a good deal would look like to you and what you’re expecting with regard to valuation.
controversy There is some disagreement on whether to ask for a specific number, or a range, when it comes to the investment dollars you want.
One side says to avoid giving a desired valuation because you’ll end up having to back that up, or maybe an investor will decide too early that they’re not interested. If you were to go this route and avoid specifics (something Rob Go of NextView Ventures advises, as does Paul Graham in his (somewhat outdated) 2013 piece “How to Raise Money”) and an investor pushes the point, you can say something like, “I’m not really focused on valuation. I’m more interested in finding the right fit in a partner.”
important We strongly believe that if you cannot back up your desired valuation you simply aren’t ready to raise money. Here’s our take:
Pick the number you think you need and be able to articulate a strong, rational case for why that number is right. You might go up by a million, you might take a little extra. But know in your head what valuation you’re expecting, because that affects how much money you’ll take. Is the amount connected to reality? Ask your lawyer what they’re seeing for seed deals like yours. Ask around for what’s “market” for a company at your stage (for example, for a company with a product, with customers and revenue, or a company that’s reached product-market fit). When you’re raising a later round, investors you already have who are unable to lead your next round can give you good advice about what to ask for.
If you want some wiggle room or are reluctant to get too specific with investors, giving them a lower number than what you need can be a smart move. Among other reasons, a lower number makes you appear closer to your goal, which will increase the investor’s confidence in you and their urgency to invest in your company.
Finally, don’t expect a sky-high valuation. The odds of your company reaching a billion dollar valuation—so-called unicorn status—are less than one in a hundred according to a CB Insights study of a thousand companies that raised seed rounds between 2008 and 2010.*
important In any case, valuation shouldn’t be your main focus. Look for investors you can trust, who offer terms that won’t destroy your business and your personal finances if times get rough. The right investor may be worth compromising on valuation or even the amount of money you raise. You want to like the VC that invests in you.* It may even be worth it to raise less money if you’re raising it from someone you like. Remember, you could be in a relationship with a firm and even a particular partner for 11 years or more before IPO!
For a lot more information on how to set a valuation, visit our section Determining How Much To Raise.
So you made it into the room. The room where decisions happen. Where financing is secured. Careers are made. Legacies begin. Wait, this is that room, right?
Not quite.
By the second or third meeting with investors from a firm, you’re going to a conference room, where a few people are going to sit around a table and welcome you to speak to them for a few minutes of your life. Your job is to show them that your company has a great story and the substance to back that story up.
Getting your pitch deck and pitching skills in great shape takes a lot of time, a lot of effort, and a lot of free beer or pizza for the friends who were kind enough to listen to you practice and give you feedback. We discussed designing your pitch deck and practicing your presentation earlier; this section will cover what you need to know about delivering the pitch in a meeting with investors, including some details about what to expect in the room, how to respond to investor questions, and some pitfalls and red flags to avoid.
Schedule to meet investors in person. Though technology allows founders to meet with investors over video (and this is a good thing!), if it is possible for you to meet investors in person, do so. Certain things are easier to communicate when you’re all in one room, and your physical presence can make you human to them.
Pick the right time. Your audience will have the most attention and energy in the morning, within the first hour or so of the workday. Whenever possible, schedule your presentation in that time slot. Avoid presenting directly after lunch or in the last hour of the day.
Bring the right team. For an early meeting with one investor, only one person (the CEO) from your team should attend. At later meetings, have two or three people attend so that one can deliver the spoken presentation and one can operate the technology in the demo. This will also help show potential investors that you have an ability to build a strong and complementary founding team.
controversy Opinions differ as to whether you should switch speaking roles among multiple members of your team. If you can do so smoothly and logically, switching off gives everyone a chance to contribute equally and can make a favorable impression on your audience.
Dress appropriately. There are no hard and fast rules here, but remember that the entire purpose of this meeting is for you to be judged, so dress like it. You’d have to wear something outrageous for this to make or break a deal, but get points wherever you can. A suit would be overkill, but dress like this matters to you.
Be on time. Be 15 minutes early.
Get set up correctly. Getting there early means you can connect to Wifi and make sure you’ve turned off all notifications* on your laptop before you connect it to the projector.
Sit, don’t stand. If all of your investors are sitting down, then the most powerful position in the room is the one at their level.
If possible, sit to the right (the viewer’s left) of your presentation. Because people read left to right, they’re going to look from you to the deck and not the other way around. In this way, you are in control of the narrative, rather than the deck being in control of you.
Say yes to a drink. When they offer you water or a drink, say yes. Having something to hold can stem your nerves, and you can take a brief break for a sip if you get flustered.
Don’t panic. Do not expect that you’re going to get through everything you’ve prepared. Investors are going to interrupt you with questions, and you may end up spending more time on one or two of their concerns or interests than you had prepared. But that’s why you prepared. Remember, whatever you don’t get to you can send them in a follow-up email.
If something goes wrong technically, fill the time with some prepared anecdotes or use the gap to ask questions. Don’t apologize or talk off the top of your head to fill the space.
Be energetic and real. As mentioned earlier, emotion is a key component of connecting with your audience. While the content of your story plays a large part in establishing emotion, an enthusiastic, sincere delivery matters just as much.
Be confident. That’s kind of terrible advice, right? Let’s rephrase: Read our section on displaying confidence for tips on your pitch performance. Confidence may be the single most important factor in the pitch meeting at the early stages. Investors are measuring whether you have the faith in your ability and the leadership skills it takes to attract talent, build a customer base, appeal to the general population, and, in general, succeed. If your confidence is starting to crack, those tips will help.
Be memorable. There are a number of ways to keep your presentation in your listeners’ minds after you leave, as we discussed in Designing Your Pitch. Don’t forget to start and end strong, and repeat key phrases about your product, throwing in a soundbite or two.
Believe what you’re saying. You can’t genuinely convince someone of the value of your product if you don’t believe in it yourself. Before you go in, repeat your secret to yourself. Remember that you’re the person best positioned to solve the problem you’ve chosen.
Gauge the reaction of your audience. One of the most important reasons to look up while speaking is to read signals from your audience that indicate how you’re doing.
Look for nods, smiles, note-taking, eyes drifting toward the clock, and other visual cues. You can use these cues in the meeting to shift attention or emphasis, and after the meeting as feedback on how to improve or where to expand.
Make it a conversation. Occasionally—or more often, depending on how your audience is responding—take a break from your deck to ask questions, solicit feedback, and get your listeners involved.
Every question is an opportunity to share your knowledge. Investors do not want you to fail; they’re asking questions that they’re interested in, or because they want to give you a chance to show them what you know. If they didn’t care about your company, they wouldn’t engage with you at all. Remember, no one is trying to frazzle you on purpose. That’s an urban legend. But there are VCs who are extremely assertive, and they do this every day, and it’s probably pitch day, so they’re seeing two or three companies come through, and they just want the information to make a decision. They’re not trying to trick you; they’re trying to get down to businesses.
important When investors interrupt you to ask questions, smile and say, “I’m so glad you asked that.” Having this line in your pocket makes you look flexible and prepared for anything, and it also gives you a little time to think about what you’re going to say.
You practiced as much as you did so that you won’t get thrown off topic when someone interrupts you to ask something that’s a few slides away, or maybe that’s not in your deck at all. If this does frazzle you (“Let me get through this one thing!”), they’re going to judge you negatively. Don’t say, “You’ll see” or “I’m getting there.” Answer their questions when they ask. If there is a slide that is deeply correspondent to the question, like, “Who’s the team that’s building this?,” you can skip forward to that slide (if you know exactly where it is). But otherwise, just answer their question directly, and if you have rehearsed, you won’t get lost. You’ll know what you still have to share and how it connects to what you’ve been forced to share maybe a little earlier than you thought you would.
If you’ve done your homework, you should be well-prepared for uncomfortable questions or critiques regarding your numbers or methodology. When you practiced your pitch, we had you approach every claim you made with the most common investor question: “How do you know that?” If you did the work to answer every “How do you know that?”, you have nothing to fear from investors poking holes in your pitch.
danger If, despite your best efforts, you end up faced with a comment or question for which you’re not prepared—something you don’t know or that could put your company in a negative light—don’t lie. (And do not say, “No comment.”) Your story needs to stay authentic to be credible. If you don’t know the answer to a question, own up to it, but be sure to follow up with an answer over email. Remember, no one is expecting you to have all the answers at the early stages. Telling an investor how you might go about gathering the data or research necessary to answer their question can be among the most impressive things you do in a pitch meeting.
If you simply need more time to answer a question, take a sip of the water you accepted when you got there. Even if you heard clearly, you can ask them to repeat the question just to give you more time to think.
Don’t leave things open-ended.
It’s very likely that the investor will say something like, “How can we be helpful?” You should be prepared to respond to this with something other than, “By leading our round.” Let them know that you’re trying to fill a position, you need office space in whatever part of town, or you could use an introduction to a possible mentor. Get the investor to do some work for you.
You might not want to ask, “Are you ready to invest?” You want some time to think through the meeting and figure out whether you want to work with them, and being too direct might put some investors off. Instead, ask something like, “What’s your process for making an investment decision, and when can we expect to hear from you?” Or, “Are there any red flags that are causing you to hesitate about investing? If so, I’d love a shot at explaining how we think about them before you make a decision, whether that’s here or after you’ve had some time to discuss and think about it.”
dangerMuch like your initial outreach to investors, pitching can be a minefield. Here are a number of scenarios you’ll want to avoid:
NDAs. If you’re going in for a meeting in a seed round, don’t ask for a non-disclosure agreement before you pitch. Doing so is generally seen as a sign of naivety and is not likely to reflect positively. Seed funding backs an idea. You don’t have anything of real value to protect at this point. If you’re new to the startup world or Silicon Valley, you might be scratching your head right now saying, “Ideas do have real value; that’s why intellectual property exists as a concept!“ While that sounds right on the surface, it is common knowledge among technologists that it is the execution of an idea that is the hard part. Two teams with the exact same idea are likely to produce two very different products.
Naming other investors. Don’t share names of other investors or firms you’re pitching to. When an investor asks what other investors have shown interest in your company, don’t tell them. If they call those investors and find out they plan to pass, it makes you look bad. If everyone decides they’re interested, they might work together to make you a less significant offer than you otherwise could get.
When discussing other investors, you can refer to “people interested in my space,” or, as Rob Go advises in “Sneaky Questions Early-Stage VCs Ask Founders,” say “the usual suspects.”
Overcommitting on timing. When an investor asks you about your timeline, you don’t want to commit yourself to a specific deadline. Focus on creating a sense of scarcity by phrasing your answer generally, as Chris Dixon advises: “We’d like to wrap this up in the next few weeks.”
Lying. Don’t lie. And don’t slip into weaker deceptions like misleading statements or key omissions. You don’t want to set expectations that you may not be able to fulfill. Hype is good, but lying isn’t, and exaggerations can make you look unprofessional.
Ignoring feedback. Do your best to evaluate the validity of feedback from investors. Don’t interrupt or talk over investors or critics. Don’t be so dogmatic about your product or vision that you won’t consider the views of others.
Getting trapped. Investors should push you with thoughtful questions, but if they’re asking a long series of “gotchas” or trying to trap you, something’s not right. The best investors are asking questions to clarify their understanding and help make sure you’ve told them everything you know. They expect and want you to have the answers. If someone in a meeting is aggressively pushing you to fail, that is not normal and you probably won’t want to pursue that relationship. (Don’t worry! This probably won’t happen!)
importantIf investors are disengaged, looking at their phones, or whispering to each other while you’re talking, they’re not respecting you or your time and you probably won’t want to work with them.
When a firm is ready to make a deal, the next steps can range. In the second or third meeting, you delivered your formal pitch. You’ve asked questions, and so have they. You’ve told them what you’re expecting on a good deal and what you want for a valuation. You could get an email summarizing these numbers, with a few bullet points and a simple message, “If you guys are in, let’s add lawyers.” Usually, though, you’ll get a call. If things have been going really well, it could be 30 minutes after the partner meeting. “Hey, it’s us, we’ve decided we want to invest. We’re going to send you a term sheet. We think we’ll do $3M on a $12M pre. Once your lawyers check out what we send, let’s schedule a time to go through it.”
If you’ve been performing strongly and have received a few term sheets or have had serious meetings with a few competitive firms, you’ll want to say something like, “I’m expecting to hear back from Greylock in the next few days, so when I get word I’ll be ready to go through everything.” When you get a term sheet from a competitive investor, you can go back to other firms you met with, whether or not they have offered you a term sheet yet, and start to generate some leverage for negotiations through FOMO: “Greylock just sent me a term sheet.” Now the investors are going to be clamoring to make you a good offer.
“No” is something you’re going to hear a lot. Investors can lack imagination, operate with bias, and be flat-out wrong (just read the emails from investors who passed on Airbnb). But try to consider every rejection as an opportunity for improvement. It’s possible that your pitching style, demeanor, attitude, or research strategy needs work. It’s possible you’re pitching the wrong people and need to revisit your target list. Whatever your situation, stagnant founders who blame a series of “nos” on anyone and everyone around them are not likely getting closer to a “yes.”
Rejection is general feedback—investors rarely share the exact reason they passed. It’s commonly seen as more work than it’s worth to provide detailed feedback to every founder that walks out the door. (Enough founders made a habit of rebutting investors’ feedback point-by-point despite investors’ mind having been made up.) On the other hand, some investors don’t know why they’re passing beyond having a bad feeling about a company. Know that investors probably aren’t trying to be malicious or deceitful when withholding a firm reason, they’re just people trying to do their jobs without creating more work for themselves.
When an investor says, “I want to invest in you, but I won’t lead,” it means they do not have enough conviction in your company to take a big risk. Another way of phrasing this is, “No, except yes if you turn out to be a hot deal,” as Paul Graham describes in his post, “How to Raise Money.” A reasonable follow-up question in this case would be, “Do you generally not lead deals as a policy, or you’re choosing not to lead this deal?” Put these investors at lowest priority, and if you choose to still pursue them, wait until you already have someone leading your round.
Unless an investor has harassed or abused you, be gracious toward any investor who gives you their time. You may encounter them again or work with any number of their colleagues or friends.
Rejection can be the beginning of a relationship. Fundraising is about more than securing money, so stay in touch with investors who say no. They have learned about your business and can still offer you advice and connect you with others who may say yes. Keep your company’s name and your face in front of your investors by occasionally using rooms at their firms for your meetings. You’ll want their support in later rounds.*
Successful fundraising boils down to setting reasonable expectations. Investors tend to appear more interested in a startup than they really are. Meeting with a partner in no way guarantees your company will receive funding. Having multiple meetings with that partner, and presenting to fellow partners at that firm, are good indications that things are going well, but there is never a guarantee before signing. Investors sometimes pull out of a deal late in negotiations, even when a term sheet has already been drawn up. In short, don’t count on getting money until you actually have the money in hand.
Just because a lot of VC money is floating around doesn’t mean the market is not competitive.* There are also a lot of people looking for VC money,* and VCs will meet with a lot of those other prospective investments, making investments in only a few of them.*
Handling rejection can be highly emotional for founders who have put so much of themselves into their company. You should not let rejection stop you—again, investors make mistakes all the time. They are not magicians. But if you’re starting to feel beat down, take this as an opportunity to reflect on what it is you want. Are you upset that you didn’t get a deal from an investor you really wanted to work with, or are there other things going on right now that you need to address? Think about what’s working well—is your team in sync, are you getting good feedback from customers, are you proud to be working toward your company’s mission? These things can be large or they can be really small. The important thing is that you ask yourself why those things are going well. Work from that space.
If you are consistently not meeting your expectations with investors, you might be acting on some assumptions that aren’t true. As much as imposter syndrome and a dearth of confidence plague the founder community, arrogance and egotism are rabid as well. Fear alone can lead us to lie to ourselves, meaning the two sides of this confidence coin can both be at play. In any case, it is a common tendency to overvalue one’s own capabilities—called the Lake Wobegon effect. Bill Trenchard and Brett Berson at First Round Capital have been helping founders fundraise for more than ten years, and summarized many of the insights that have helped their companies raise more than $18B in First Round Review. Trenchard notes, “There are two approaches: one for the top 10% of startups and one for the other 90%…everyone thinks that they’re in the top 10% until they realize they’re not.”
Berson calls attention to five common ways founders mislead themselves into believing they have more leverage than they do. Though a few of these apply only to founders who have already raised capital, we believe that first-time early-stage founders should anticipate these warning signs:
The good news? Few founders get all of this right the first time. Listen to the feedback you’re getting, do your research, make sure you’re approaching fundraising in the right way, look again at your company plan and financials and make sure you should definitely be pursuing venture capital in the first place, triple check that this is exactly what you want to do, and then try, and then try again.
Peter Thiel advises founders to make sure they have “a secret”—that they know something about their product or market that no one else does. Reid Hoffman discusses the idea of “the secret” with founders a lot on his podcast, Masters of Scale. In one episode, for example, Tristan Walker talks about fundraising for his company, Walker & Co. Walker knew that razors on the market caused a lot of problems for men of color, but all the white VCs he was pitching didn’t understand this pain point. He quotes the VCs, who would say to him, “I don’t know. It’s niche. I don’t think it’s scalable.” Of course, Walker knew his customers because he was one, and he knew a lot more about the market than the investors he was pitching to did. Walker says, “So it wasn’t that it was a bad idea, or not as important—it’s just that that person was unwilling to acquire the context necessary to understand what we’re working on. That’s just laziness—and at that point, I can’t fix that. So I just move on until I find somebody who understood it.”
And he did. Walker harnessed the power of his secret to keep moving through rejection: “My experience of not having products that worked for me. My ability to potentially raise money for that thing—I don’t think there’s anyone better on the planet to do this one thing than I. And the day I came [to] that realization, it was the most freeing moment for me, and I didn’t care about hearing the ‘no’s anymore, because I knew that we had something.” Walker ultimately raised $33M, and his company was acquired by Proctor & Gamble in 2018.*
On Twitter, Twitch co-founder Justin Kan expressed the idea of the founder’s secret well: “[At] the same time we were able to get offers to acquire Twitch for ~1B, we couldn’t raise money from VCs at half the valuation. Founders: investors don’t always know everything about markets and trends.”*
Kan and the team at Twitch were repeatedly underestimated because investors and other startup operators didn’t understand video games. The key here is that, despite so many other intelligent people looking at Kan’s company, Kan wasn’t wrong. He was right—he ended up selling his company to Amazon for $1B.* Sometimes, when you have a genuine secret, you have to be willing to meet with a lot of investors until you find one who speaks the language your secret is told in.
As we discuss in Bias and Discrimination in Fundraising and as is evident in Tristan Walker’s story above, VCs who ignore great ideas often do so out of their reliance on pattern matching. Knowing your secret is the best way to keep yourself motivated throughout this process, and can be the foundation of the story you tell.
So, you got the call. Or an email. Or you were chased down the street. A firm wants to invest in your company, and they’ve drawn up some stuff they need you to look at. “Talk to your lawyer and get back to us ASAP.” What you have is called a term sheet, one of the most exhilarating components of raising venture capital, and one of the most intimidating.
Definition A term sheet is a written summary of the proposed key terms of an investment. The terms must be negotiated and agreed upon by both the investing party and the company seeking investment. After agreement on the terms has been reached and formalized in a signed term sheet, legal documents (commonly called “long-form docs” or “final docs”) are prepared, reviewed, and executed to finalize the investment. In itself, a term sheet is not a legally binding document, but its conditions of exclusivity and confidentiality are legally binding.
Many of the important terms you’ll see in your term sheet have already been discussed in detail in this guide. We link to the relevant sections so you can easily access all the information you need.