How Should Founders Approach VCs for Funding?
Thoughts on Raising Capital Without Having a Big Investor Network
Having been both a founder who has raised seed stage venture funding, as well as a VC who funds very young startup companies, I am tuned in to the challenges and sensitivities of raising capital from investors who are not the “3 F’s” (family, friends, and fools). One of the biggest hurdles for not just first-time founders, but even many repeat entrepreneurs, is to convince serious investors to lay down their dollars to support a new venture that comes with an extraordinary level of risk that the cash could all disappear in no time flat.
At Alumni Ventures, I focus on pre-seed and seed investing, which results in an avalanche of pitch decks that show up cold in my email or LinkedIn inbox. Candidly, it is a bit of a dilemma how to manage these.
On the one hand, I respect anyone who is willing to take an entrepreneurial path. Whether motivated by the potential to accumulate wealth or have an impact on addressing a market need, I tend to revere entrepreneurs as society’s innovators and problem solvers. I hate to automatically dismiss a founder just because we haven’t met or they are not coming on referral from someone I know. Excluding founders that I don’t know feels a little bit unfair and even in some ways lends itself to exacerbate inequality for those who don’t have the privilege of coming with an elite, well connected network.
The flip side, however, is that most VCs will tell you that they are completely inundated with cold inbound approaches and it is simply not feasible to vet every opportunity that comes in. It takes real time and effort to form conviction around an opportunity, and investors, like anyone, need to prioritize and focus on founders and ideas that they are already familiar with. Some VCs actively invite cold applications for funding and explicitly state that they will carefully review all deals that are submitted, but the truth is that many firms are not so explicitly generous with their time.
While getting connected with an angel or VC investor is most effective when it comes via a “warm” introduction, that is not always available to every entrepreneur. Here are some strategies for founders who do wish to approach an investor with whom they are not yet personally acquainted:
Start by making a list of target investors. Take a list and filter by sector, stage of company, and geography, and identify which investors are a fit across the Venn diagram of those dimensions. If unsure where to begin in finding and sorting those, start with ChatGPT or other LLM tools to specify the criteria, but always cross-reference with investor websites, Crunchbase, or LinkedIn, to ensure that the AI is doing its job as a matchmaker.
For a more comprehensive, industry-focused search, take a look at Pitchbook. Unfortunately, a subscription to Pitchbook can be cost prohibitive for a bootstrapped startup. However, there may be public or university libraries that subscribe and provide access, as well as investors and other financial professionals who can help by running a simple query or two on your behalf to help identify the right firms and investors to approach.
It is helpful to find investors who have already put money into a company within the same space. It is often a matter of luck to find an investor who shares the founder’s exact thesis and immediately gets interested in your startup idea. However, by knowing that an investor has previously spent time analyzing the space, they are more likely to be interested in hearing your story. In some cases, an idea may be too close or competitive with an existing portfolio company, but investors may be interested in placing more than one bet, especially if they take a sector-focused approach or are driven by a hypothesis that lends itself to multiple investments within the same sandbox.
Try any way possible to get a warm introduction. Leverage LinkedIn to find mutual connections with the relevant investors that you wish to target. As an investor, I will always take extra time to review an opportunity that is shared by someone I know. In my experience, some people are very responsive and helpful with requests for introductions. Perhaps not every mutual connection is able or willing to assist, but there is little to lose in asking. Founders don’t get ahead by being shrinking violets, after all.
If there is simply no viable route to a warm introduction, then the best approach is to send a customized email or LinkedIn message to the investor you are trying to reach. The approach needs to be very succinct, but should ideally reference relevant past deals that the investor has participated in. Another trick is to find a common interest beyond work, whether it be a particular sport, hobby, affinity group, etc. Demonstrate that you have taken the time to understand what drives that investor as a person and write a bespoke message to try and form a quick bond.
Whenever you do make a pitch to an investor, particularly if they are noncommittal, be sure to ask if they know of other investors you should be speaking with. When I was raising seed capital for my startup TravelPerk, I often got the feedback that while the idea and team were compelling, we were simply too early for them. A few VCs that we pitched early on and passed nevertheless referred angel investors to us who did end up participating in the round. Never let an opportunity go by to ask for suggestions or referrals.
When you do find interest among the investor that you’re pitching, create a sense of urgency. Many investors will take a “wait and see” approach. They want to know if you have the wherewithal to raise the capital that you are seeking from either well-established institutional investors or a wide breadth of angel investors, VCs, or family offices. Setting a deadline will force the investor to make a decision and demonstrate their true level of interest. Investors want to be in on hot opportunities. As Groucho Marx once quipped, “I don't want to belong to any club that will accept me as a member.” Investors similarly will fight to get into those deals that appear likely to be oversubscribed.
Building a strong network is essential for founders who are seeking to raise equity capital to grow their venture. However, this doesn’t happen overnight and takes a commitment to spending time pitching smart, connected individuals on your idea. While this translates to time away from developing other aspects of the business, it is fundamental to developing a highly scalable venture that will rely on outside capital in order to build and grow. As with anything in life, building a business is about execution and grit, and for venture scale businesses, successful fundraising is a critical piece of the puzzle that founders should work to master if they expect to achieve their dreams.