What To Expect When You Meet With A VC Seed Fund

Date

September 7, 2017

HOW IT STARTS

Often the conversation starts with an introduction call or meeting. Even if the entrepreneur has known the investor for some time, there’s usually an initial meeting that will ensue once the entrepreneur is officially in “fundraising mode.” This means that they have an idea of how much money they want to raise, the use of that money, and have prepared the expected fundraising materials, most prominently a fundraising deck.

The caveats to this are: 1) when the founder is close enough to the investor that the investment is purely based on the belief in the entrepreneur and the materials may not be required and/or 2) when the entrepreneur’s round is in such high demand that investors may not be able to ask for the depth of diligence we normally would like to. I also find that there’s an inverse relationship between size of fund and rigor of diligence needed for the same check size, meaning a large fund will typically do less diligence for the same size check than a smaller fund. However, for the vast majority of situations, this process will apply.

THE FIRST MEETING

In the first meeting, the investor will usually introduce the firm and themselves briefly. It’s important at this time for the entrepreneur to ask key questions like: “What is your firm’s ownership target?” “What is your general check size?” and “What is your decision making process like?” Often times a firm will explain these points on their website, but if not, it’s always a good idea to ask so you have a clear understanding of what they’re looking for. This is also a good time for the investor to learn more about the entrepreneur’s background and vice versa. Usually investors care most that the entrepreneur’s background matches up with what they are building now — the more strategic the alignment, the better. If your last business was in new media and this one is in cybersecurity, it will be tougher to fundraise than if you build on your previous experience and stay in the same or a tangential industry.

Unless you have a direct relationship with a General Partner at a firm, this first meeting is often with a non-Partner level person. As a rule of thumb, the smaller the firm in headcount, the more influence the junior people will have. At some of the largest firms, associates (or the equivalent title) have little input in how investment decisions are made; however, they always have the respect and ear of the Partners so it’s worthwhile to be on their good side. That said, if you can start with a Partner-level meeting, it will always save you a bit of time.

The goal of the first meeting should be to get a second meeting. This means that you should be detailed enough to be interesting and substantial, but not so detailed that you cover all the bases and have no need for further discussion.

The initial conversation should cover the basics: your background, the history of the company, your product, go to market strategy, business model and competitive landscape. It usually doesn’t dig too deep into the financials other than maybe covering revenue, burn, and cash in bank if relevant. Generally, it’s a fine balance between sharing enough without sharing too much. Let the investor ask questions and answer as you go; don’t feel trapped to a playbook you may have rehearsed. Generally, if they’re asking you tough questions, that means they’re more engaged than if they’re on auto-pilot. Most importantly, do your research in advance to establish if the fund is even a fit for your sector and stage. There’s no quicker way to end a meeting than to pitch an investor on a sector or stage of business they explicitly do not invest in.

Another valuable skill is the ability to extract value from meeting one even if it isn’t a fit for the investor. Some of my favorite meetings have been where the entrepreneur calls out within 10–15 minutes that we may not be the right investor for them, but manages to extract value by having an open discussion for the rest of the time on key strategic questions, fundraising advice, or otherwise. Once “pitch mode” is dissolved, there’s a huge opportunity to have a candid discussion and get more intrinsic value if you’re willing to ask for it.

It’s critical to adroitly handle your first meeting, no matter how challenging. (Credit: Christophe Archambault: Getty Images)

THE FOLLOW UP

All too often I see entrepreneurs lose interest from investors by waiting too long to follow up. Generally, after the first meeting, the investor will ask for follow up materials from you if they are interested. Anything longer than 1–2 days is too long and the investor will often already be thinking about the next deal. Similarly, with question and answer via email, it’s important to respond promptly (within 1–2 days) and with answers that are descriptive enough to answer the question but not saga-length pieces (remember to leave them wanting more).

The second meeting is always a bit more in depth. Here you’ll often jump into a product demo, financial model, or answer deeper questions around unit economics, customer acquisition cost (CAC), lifetime value (LTV), expansion, and more. I find that the second meeting is actually harder to prepare for as an entrepreneur because the investor will often ask random questions that pique their interest. As an investor, the second meeting is actually my favorite because we can dig into the nitty gritty of the business and really understand how it runs. It’s our chance to learn more, and through which, we ultimately shine light onto how well you know the different variables surrounding your business. If an investor asks a question you don’t know the answer to, it’s always better to confidently suggest that you’ll follow up on that versus trying to fake an answer on the spot. We can tell when you’re making something up and it won’t end well. ‘Hand-waving’ is a surefire way to lose the trust of the investor, and much of fundraising is about building up trust.

DILIGENCE

The usual diligence process includes 2–3 meetings, a few sets of question & answer via either phone calls or emails, a product demo if applicable, looking into the financials, and reference checking. When it comes to product demos, I find that it’s best to keep it short and sweet. Most investors want to see a product just to visualize what we’ve been talking about, but they don’t need to spend hours getting the full rundown. I find it best to walk through one or two use cases in 5–10 minutes and then give the investor a demo login so they can go in and poke around on their own later.

If your business is too early for a product demo, then don’t show one. Generally speaking I think it’s best to show mock ups and screenshots if a product demo isn’t fully functioning yet. Investors judge a lot based off a first impression so you don’t want to underwhelm them with a barely-functioning MVP if it’s not ready to share. This varies by investor as some have more product imagination than others, so I’d follow along with what their preference seems to be and don’t be afraid to ask what their preferred approach to this is.

When it comes to reference checks, investors will often try to source their own references on founders. This is usually through LinkedIn or Facebook with people that you used to work for or do business with. Usually the investor will source these independently but they will also ask you for 1–3 customer introductions. As investors we’re aware that customers usually will give positive feedback (they’re paying you, after all), but it allows us to learn more about your value proposition. We’ll ask your customers things like, “How did you discover the company?” “Did you evaluate any other competitors before deciding on this product?” “What do you use the product for?” “How much would you be willing to pay for something like this?” etc. As a seed investor, asking for more than 3 customer introductions feels like an imposition; I find that 1–2 customer references should suffice and not strain the company too much. If the investor is asking for intros to customers and you feel that it’s too soon for that, don’t hesitate to tell the investor that. In the earliest stages, the relationship between you and the customer is more important than the expectation to satisfy potential investor diligence.

Most importantly, while a potential lead investor is doing their reference checks on you and your business, you should also be doing reference checks on them. We encourage potential investment founders to reach out to mutual connections and reference us, as well. We’re also happy to introduce them to our existing portfolio company founders. Taking on a new lead investor is the beginning of a very long relationship and you want to make sure you know what you’re getting yourself into before you sign that term sheet.

RED FLAGS | PRO TIPS

A few common mistakes I’ve seen entrepreneurs make:

Didn’t research the firm — venture capital firms go out of their way now to be transparent and vocal about their focus areas and theses, so one of the best ways to decrease interest from an investor is to show up not knowing anything about them. Similarly, we try to show up to pitch meetings with a basic understanding of the company and a few informed questions to make the conversation more meaningful, so when the entrepreneur doesn’t know anything about us, it ends up stagnating the discussion.
Rambling — it’s always in the best interest of the entrepreneur to be cognizant of the meeting length. Investors often have short attention spans, so going on long tangents or straying from the point can be a quick way to lose their focus and interest. If a meeting is scheduled to be 30 minutes, don’t expect to spend 20 minutes talking about the weather and then run 15 minutes over to get to your business. It’s not a good use of either person’s time and makes most investors question your ability to execute. Of course, if the investor your pitching seems to enjoy talking at length about frivolous topics, that might be a good strategy to close them, but generally speaking, keeping succinct is in your best interest, especially in the first meeting.
Doesn’t “release the agenda” — as mentioned above, it’s a bad look when an entrepreneur can’t break from their rehearsed pitch or jump around their slide deck. The best pitches are not pitches; they are conversations. If an investor asks a question, the worst answer to give is “I’ll get to that on slide 10” — all you’ve done is deflated their excitement and they’ll likely be distracted until you finally answer their question in 10 slides.
Avoids questions or exaggerates numbers — back to before, even if you don’t know the answer to a question, it’s better to own up to it than to try to lie through it or change the subject. Fundraising is all about building trust and respect — avoiding questions or giving hyperbolic answers helps you do neither, even if it feels like it’ll be less of a letdown. I always respect an entrepreneur even more when they tell me “that’s a great question, let me look into it and circle back with you later” and it gives them a good reason to re-engage the discussion in 1–2 days.

And some best practices to keep in mind:

Materials — in addition to a straightforward and well-formatted deck and financial model, prepare a longer deck that has an appendix that may cover some of the more in-depth discussion items and also a FAQ document where you save great answers to your most commonly asked questions by investors. It will save you a bunch of time and also show the investor that you’ve thought through this before. In these materials, include the amount of money you are looking to raise, the terms of the raise if you know them, and what the anticipated use of funds is. Sequoia has a great outline of business plans that can also be applied to pitch decks here.Another nitty-gritty protip: share your deck as either a PDF (not too large of a file) or as a DocSend (can track analytics that way) and your financial model as an Excel (not as a PDF or PowerPoint)
Confident, not arrogant — this one is a fine line to balance, but the best meetings are with entrepreneurs who come across confident without seeming arrogant. The ones where the success of their business seems inevitable because of a combined knowledge and passion for their vision. This doesn’t mean being aggressive, it just means believing in yourself and knowing the answers to why you’re doing what you’re doing.
Create FOMO — perhaps the most controversial of all, investors generally make quicker decisions and more exceptions when they feel a deal is closing soon. While I’d never recommend stretching the truth (investors all talk to each other), if you’re in a position where there’s a lot of investor interest in your round, you can use that to your advantage by giving investors hard deadlines and pushing them to explain how they can add value in your round if you make room for them.

With all the moving pieces, it’s clear now why fundraising is more art than it is science. It’s a skill set that can help make or break your business that many entrepreneurs fear, but the process can be made a lot easier by doing your research, being diligent on who you’re reaching out to and why, and by being overly prepared. Keep in mind that as investors, our jobs are to find great entrepreneurs and enable them with capital. While it may seem that the investor sits in the power seat, if you’re a startup that fits squarely within our wheelhouse, we’re just as happy to meet you as you are to meet us.

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