Last week I was talking with a founder who was getting ready to raise money for the first time. During the course of our conversation it occurred to me that he's thinking the thoughts that all founders think before fundraising for the first time...
"Investors are going to meet me and hear my idea and in short order write me a check"
To kick off the conversation he sent me a deck that was the first version of his pitch. It was a pretty impressive narrative of the current landscape of his space and his big vision.
Then he asked for feedback.
In order to walk him through my thinking, I drew this on the whiteboard in my office...
(white board was a gift from my friend @gtryan btw)
After we talked through this he mentioned that this context was helpful, so I wanted to expand on it more as a blog post.
When I was about to start raising money for the first time, an experienced startup attorney told me "expect every financing to take six months." Like all delusional founders, I didn't believe him. $8M (of raised capital) later over many rounds, my advice to founders is now...
Raising money takes 6-9 months
So why does such a seemingly simple process take so long?
I believe that founders who've never raised capital themselves before go through three main phases (each with two sub-phases)...
PHASE #1 - VISION. Your startup was begun for a reason. This has evolved over time. There's a lot of stuff in your head and happening in the world. What's your big vision (independent of business model)? It often takes a surprisingly long time to get all the stuff out of the founders' heads and into something that is clear to other people.
How most founders begin this phase (Month 1)...
Very few founders enjoy raising capital. What they usually love is their vision, their product and their customers. This causes many founders to spend too much time laying-out their big vision and narrative of the marketplace and their product. This process is important, but has to be balance with what investors want to see (Phase #2).
Some of this phase is also new founders learning about all the great investors that are out there (regardless of whether or not there's a good fit). Some good examples include them, them & them (and so many more). Researching all the firms while wallowing in your big vision can be intoxicating. But don't worry...this always happens.
Then you get tight towards the end of this phase (Month 2)...
After a few weeks have passed, most founders realize that investors aren't just going to write a check based on a big vision. If nothing else, warm introductions are needed, so they begin to investigate what investors actually want to see from potential investments.
PHASE #2 - PITCH. There's a pretty standard 10-slide pitch for startups. You don't have to follow this format exactly, but you can't totally avoid it either. So you better understand the reason behind each slide (even if you ignore it). It takes 1-3 months for most founders to realize that their narrative alone isn't enough...a real investor pitch is needed.
How most founders begin this phase (Month 3)...
There's an endless amount of information out there about investor pitches (some of my favorites are here, here & here). It takes a few weeks for most founders to sort through all of it and eventually get in front of founders who have raised before (for advice). Most founders also don't like actually pitching investors because it's a very hat-in-hand sales exercise. So many founders wallow in research for too long.
Then you get tight towards the end of this phase (Month 4)...
Eventually founders figure-out the best way to marry their big vision (Phase 1) to investor pitches (Phase 2) in a way that rolls off the tongue. This really shouldn't take 4 months, but I rarely ever see it take less than 2 months...if for no other reason, the founder/CEO is also important to the day-to-day running of the business, so they aren't dedicating more than 50% of their time to raising money yet.
PHASE #3 - MEETINGS. Meeting (multiple times) with potential investors is required to raise money. It often takes founders (at least) a few months to realize that investors won't beat a path to their door.
How most founders begin this phase (Month 5)...
When most founder being to schedule meetings, they aren't thinking much about the investor...phase, check size, areas of interest, etc. A meeting with a local angel is cool. A meeting with a fund nearby works just fine. And man...wouldn't it be great to get a meeting with a top tier firm in the Bay Area.
Every investor wants to make money, right? My startup is gonna be huge, right? So what's the problem with meeting with everyone???
BTW I had never heard this statistic, but this podcast says that 87% of startups never raise money past friends & family. In Atlanta (my hometown) I often see founders try to skip this stage and it's rarely is a good idea.
What also occurs to most founders around this time is that it just takes time to get meetings scheduled. If I fell in love with a founder today and wanted to introduce them to a specific local angel investor, it might take weeks for them to have a face-to-face meeting. And this is just one of many meetings necessary for a single investor to make a decision.
Then you get tight towards the end of this phase (Months 6-9)...
If a founder is fortunate enough to be able to meet with lots of investors they will eventually realize that they need to focus on the right investors.
At this point most founders have everything in place...their big vision is clear & compelling, their investor pitch is tight, they know which investors are most likely to invest and they've learn how to move along a good fundraising process.
There are lots of exceptions to the path and timeline that I've laid out here, but this is (generally) why it takes 6-9 months to raise capital.
I sometimes think of this process like a job search. Most people I know are very easy-going when a job search starts. They are picky. Their schedule isn't too filled. Then, over time as they get better at the process and tighter, a job comes through...often at the peak of their job-searching abilities. You can't attribute specific results (eg an interview) to specific activities (eg a general networking meeting), but peak activity often correlates to peak results.
This podcast caught my attention because it's a good rundown of the various types and stages of financing rounds (from friends & family to pre-IPO).
Sidenote: If you enjoyed this post, you might like this one as well.
Get Right to the Lesson
I’d recommend listening to the entire thing, but to get right to the point go to minute 2:44 of this podcast/video.
Thanks to these folks for helping us all learn faster
Jalak Jobanputra (@jalak), founder of Future Perfect VC (@futurepvc)
This Week In Startups (@TWistartups )
Jason Calacanis (@jason)
Jacqui Deegan (@jacqKD)
Jacob Beemer (@jacobbeemer)
Please let me and others know what you think about this topic
Email me privately at email@example.com or let's discuss publicly at @davempayne.