by Lu Zhang, founder and managing partner of Fusion Fund
In the startup world, opportunities are fleeting, and obstacles are ubiquitous. Competition from other startups and established incumbents, constraints on time and capital, and limited access to talent and technology resources are just a few of the hurdles nearly every first-time founder faces while trying to build a business.
Your entrepreneurial success will ultimately hinge on your ability to take advantage of the opportunities you do get, despite the enormous challenges in your way. Among these opportunities, the chance to pitch an investor and secure funding is perhaps the greatest of all — at least in the early stages of your startup career — as it can ultimately determine the long-term fate of your company.
I’ve been fortunate enough to be on both sides of the table, as an entrepreneur and a VC, and I’ve observed that most investors look for the same things I do when deciding whether to invest in a company. They want to see that you have some unique advantage that differentiates your company from others in your industry, and they’d prefer that you have some experience in that industry, which gives you legitimate insight into the problem you’re attempting to solve. They also want to see that you’ve assembled a collaborative team, capable of delivering your solution to the market.
If you can check these boxes and convince venture capitalists that you’ve achieved product fit in a market with plenty of room for growth, you have a real shot at securing funding. On the other hand, if you arrive at a VC pitch without a comprehensive understanding of the industry you’re hoping to compete in, or without a clear path to profitability or a thoughtful product-development road map, you’ll likely leave empty-handed. Poor founder dynamics or a focus on small or shrinking markets can also sink your chances.
Investors want to feel confident that they’ll see a return on their investment. You may have a thoughtful business plan, a proven team, and a great product, but if the market isn’t big enough to present them with an outsized opportunity to make money, they’ll pass. You may be able to generate revenue, but VCs want exponential growth. Like you, they’re looking for opportunity.
Be ready when it counts.
When I started my last company, we were focused on developing technology to lower the cost of detecting and diagnosing Type 2 diabetes. The market for our product was global, and we had unique advantages in terms of our product and how we distributed it to customers. Ultimately, these advantages helped us secure the funding we needed. But I also faced some significant hurdles.
As an immigrant founder, I didn’t have the industry connections that entrepreneurs often rely on to be successful. I knew no one, which meant I had to spend a lot of time meeting people and developing relationships. Looking back, I realize that may actually have been a good thing. Like many other immigrant founders — or entrepreneurs who are women, people of color, or from disadvantaged backgrounds — I felt like I had something to prove. That motivated me to work extremely hard, which gave investors confidence in me.
All entrepreneurs must face adversity, no matter their background. If you’ve successfully overcome challenges in the past, VCs will view that as evidence of your ability to do so in the future, so don’t worry about where you come from. Instead, focus on the opportunities ahead.
If you’re in a position to seek VC funding, you have an amazing opportunity directly in front of you. Here are 10 things you can do to ensure you make the most of it:
1. Identify and fix your red flags.
Prior to meeting with any investors, make an honest assessment of your weaknesses as a founder and a team. Do you lack the skills needed to develop a viable product? Do you have glaring cash-flow problems? Is your team disorganized (or dysfunctional)?
Each of your weaknesses represents a risk that investors will have to take on if they choose to back you, so minimize them as best you can. Above all, you’ll need to be able to demonstrate that there is a large market for your product and enough opportunity to make the risks worth taking.
2. Prepare to prove your worth.
VCs want to see that there’s a demand for your product and that you’re able to meet that demand. You don’t have to have hundreds of thousands of paying customers, but you should have at least some traction, whether in the form of a pilot program with early-stage customers or a partnership with a well-known, established company.
Moreover, be ready to show how you plan to scale, and be precise about the numbers you’ll need to hit to reach profitability. The more you can show VCs that you’ve already done a lot of their thinking for them, the more confident they’ll be in your ability to deliver.
3. Do your research before reaching out to investors.
Most funds have a relatively narrow investment focus. You could have a compelling pitch and a proven track record of success, but if you’re an agtech startup and the VCs you’re talking to specialize in healthcare, you won’t get anywhere.
Before sending an email to potential investors, take a look at their website and see what types of companies they’ve already invested in. If the companies in their portfolio don’t have much in common with yours, it’s usually better to look elsewhere.
4. Draw upon connections to help get an audience.
A warm introduction from a mutual connection is always the best way to meet an investor, which is why it pays to build bridges and expand your network as an entrepreneur. Sometimes founders feel that a proper intro should always come from another investor, but that’s not actually the case.
In fact, a referral from another successful founder is even better. At my firm, we strongly believe that good founders are the best at recognizing other founders with potential. You don’t have to have a mutual connection in order to get an opportunity to pitch, but it can certainly help.
5. Be precise and concise with your outreach.
If you don’t have connections that can make an introduction, don’t be afraid to send an unsolicited email. At my firm, we try to reply to most cold outreach attempts, but there’s simply not enough time to get to all of them. Keep your emails short and to the point. Include a sentence or bullet point about your background and education, a bit about the traction you’ve achieved so far, a brief description of the market you’re focusing on, and the potential for growth.
Don’t try to set up an hour-long meeting in your first email. Instead, just ask if the investor has time for a 10- or 15-minute phone call to hear about what you’re doing. Not all VCs will give you a response, but some will. Also, avoid sending the same email to everyone in the firm. Do your research and identify the one person you think makes the most sense to reach out to.
6. Be ready to ask questions.
Prior to pitching, it’s a good idea to ask VCs some general questions (about their check size, their stage, their level of activity in the sector you’re in, etc.) and give them the opportunity to ask you some questions as well. At the end of the pitch, ask them about their time frame for completing due diligence and their decision-making process.
Sometimes, you can even ask for help or recommendations as to who else you should talk to moving forward. Lots of VCs are willing to help founders — and not just founders they want to invest in. If investors are willing to offer you advice, it’s intended to help you. If you take their advice, you may even get another shot at pitching them.
7. Always bring a pitch deck.
Don’t go to a meeting without a deck. Investors meet hundreds, sometimes thousands, of other companies each year. Your pitch deck gives them something tangible to link to your meeting. As you develop it, consider it from the VC’s perspective. Lots of founders get caught up in highlighting the product features they’re excited about. You’ll certainly want to be clear about your unique differentiators, but VCs also want to see numbers and metrics, along with well-thought-out plans for how you’ll meet those metrics.
8. Tailor your pitch deck.
Just as you would craft and tweak your résumé for each new job opportunity you might apply for, so too should you refine your pitch deck based on the VCs you’ll be meeting. Make sure you have the right people listed in the deck, and make sure it’s tailored to the specific situation you’re walking into. If you only have a couple minutes for an introductory meeting, your deck should be short enough to get through in that time frame.
On the other hand, if you’re having an in-depth, pre-due diligence, hour-long meeting, you should include as much detail as possible in your deck. Situational awareness is key when deciding how to equip yourself for the meeting. Make sure you’re clear about the purpose of the discussion and prepare accordingly.
9. Be able to show how you’re different.
A vital component of your pitch deck will be a competitive analysis, showing VCs how you’re different from everyone else in the industry. Investors want to know that you’re taking competitors seriously, that you understand their strengths and weaknesses, and that you have the differentiating qualities necessary to rise to the top. Don’t tell them you won’t face any competition because in the vast majority of cases, that’s simply not true. When you say that, investors will assume that you just don’t know who your competitors are.
Be aware that the investors you’re talking to may have already invested in one of your competitors. If that’s the case, and they don’t consider investing in two competitors to be a conflict of interest, ask them how they protect founder IP and other proprietary assets.
10. Be clear about your fundraising strategy.
Don’t wait for an investor to give you a strategy. Instead, find the VCs that would make the most sense to partner with from a strategic perspective and explain why you want them to take the lead. Have a reasonable attitude about your early-stage valuation, and don’t get too hung up on it. That number is not a real reflection of how much your company is worth. Just make sure that the number you land on is sustainable. Don’t aim too high, or it will eventually become a burden.
The last suggestion I always like to give founders is to treat every opportunity to pitch to VC as a free consulting session. This will totally change your perspective. You won’t be as likely to take it personally when hearing no, and you will be more open to taking feedback and suggestions, which in turn will give you higher chances to build up long-term relationships with investors.
Lu Zhang is the founder and managing partner of Fusion Fund, a company dedicated to promoting early-stage venture capital for entrepreneurs. She is also an elite member of the Forbes 30 Under 30 list and was nominated as a World Economic Forum Davos 2018 Young Global Leader.