Last updated: 28 October 2024.
Venture capitalists (VCs) are pivotal to the global startup ecosystem. But, getting on the radar of VCs and securing funding is challenging. The money is there, but so is the competition.
In this article, we'll discuss the right and wrong ways to approach VCs based on the views of VCs themselves.
The first debate we must confront is when to approach VCs, and there’s no real consensus (that would be boring, right?).
Maor Fridman from F2 Venture Capital says that any time is the right time. They love meeting founders who aren’t 100% sure whether they’re ready so they can advise and guide them. Others are stricter.
For example, Russ Wilcox at Pillar VC says VCs are sixth in line on a startup’s ‘to-do list’ and should be contacted after receiving investment interest from 2 to 3 angels. He argues that jumping the gun undermines credibility.
Generally speaking, VCs do need to see a few stars aligning before considering investment, such as...
Before approaching VCs, it's crucial to have a validated product or service with demonstrated traction in the market. This includes a growing user base, revenue, or other key performance indicators (KPIs) that showcase the startup's potential.
Some level of revenue is essential, and profit is nice-to-have but not mandatory.
A strong startup team is everything. We know the value of a dedicated team, which is why we built a platform to help startups share ownership and incentivise team members towards growth.
The team should possess the skills, industry knowledge, and commitment to achieve the startup’s goals.
A well-defined business plan that outlines your startup's vision, value proposition, target market, competition, revenue model, and go-to-market strategy is essential. Pitch decks are incredibly valuable to attach to cold emails.
The startup should have the potential for rapid growth and scalability. VCs are typically looking for high-growth ventures that can generate substantial returns in a relatively short space of time before any competitors catch up.
Determine funding needs and how you plan to use the investment. It's essential to have a solid understanding of financial projections.
Fundamentally, VCs are taking on risk. But that’s not to say VCs don’t want to be exposed to risk – they need risk to make money.
“If your business had no risk, you could go get a bank loan and call it a day. VCs like risks – without them, venture capital wouldn’t exist", says Jose Ferreira, businessman and entrepreneur.
With those points in mind, let’s discuss the best practices for approaching VCs.
VC outreach can be a nerve-wracking process.
Invest too much time and resources, and you risk demoralisation if you’re pushed back and get nothing. But spend too little time researching different VCs, their theses and portfolios, and the chances of a reply are vastly reduced.
Rather than just speculating, what better way to understand this conundrum than through the views of VCs themselves?
Let’s pull out some of the core themes in this Twitter thread kicked off by Ileana González.
One of the most common mistakes founders make when contacting VCs is failing to align proposals with the VC's investment thesis.
A VC investment thesis is a written set of guidelines that VC firms use to identify and evaluate potential investments.
Josefa Marzo Pons from Kalonia Venture Partners says, “If they have researched what kind of investments we make and it is a match it's a welcomed email”.
Kate Brodock from Switch Futures says, “You’d be shocked how many cold outreaches I get that are so clearly outside our thesis”.
It's crucial to understand the VC's thesis and investment focus and tailor the pitch accordingly.
Research the VC's portfolio and investment strategy before reaching out. This will help determine if they're a solid fit for the startup and increase the chances of a response.
However, it’s worth noting that not all VCs are laser-focused on one industry or market segment.
For example, Charles Hudson, a partner at SoftTech VC, said, “I want to be decidedly generalist." They invest in startups across the technology industry, with no definitive market segment in mind. So it still depends on the VC in question.
When reaching out to VCs, highlight all relevant positive signals.
For instance, if you’re a founder who has previously exited, mention that. If you’ve secured contracts with major vendors, highlight them.
Any committed capital? Make that clear. Products are generating revenue and profit? Point it out early in the email. Add this critical information in bullet points with reference to numbers and figures.
VCs want figures – a “good detailed description of the business, which includes numbers and a deck, and the email doesn’t look like it was sent to 1,000 VCs at once”, says Elena Mazhuha from Flyer One Ventures.
With that said, if you’re not confident about ticking all the boxes, don’t worry.
As mentioned, it’s clear that some VCs are more than happy to receive emails from less experienced founders or those earlier in their funding journeys. Ultimately, all VCs have a slightly different modus operandi.
The good news is cold emails are widely accepted, and many VCs go to great lengths to reply. For example, Elizabeth Yin from Hustle Fund said she reads and responds to all cold emails.
This is great news for founders. It means some VCs will give your proposal a chance, so don't waste those chances with avoidable mistakes.
According to VCs, there is an art to sending cold emails.
Instead, focus on crafting a short, impactful email that grabs the recipient's attention.
Cold outreach can definitely work, but fostering relationships is always valuable. Not all VCs are entirely open to cold outreach.
It’s a mixed bag. For example, Debrup B from Ingress Ventures says, “Love cold outreach & the random possibility of connecting with some amazing founders. Cold outreach is taking initiative.”
Conversely, Xandra Laskowski from OSEA says, “I receive 20 to 30 cold outreach requests a week and I delete every single one.”
Don't make the mistake of only reaching out to VCs only when you're in desperate need of capital. Instead, focus on cultivating relationships over time.
Get your house in order before contacting VCs, more specifically your cap table.
Vestd’s digital cap table updates automatically to provide an accurate reflection of your company’s ownership. All plans include this as standard, but you can try it out for free.
What’s more, if you wish to, you can share your cap table with investors and invite them to have a nosey around your data room (where you'll store your critical business docs).
On a related note, investors can also use Vestd to monitor their portfolios.
In short, there's no singular convention for approaching VCs. As long as you approach VCs with the information they’re looking for, you have a solid chance of success!