I got an email on my phone, it was a Friday afternoon, I could only read the subject and the beginning of the text:
“ Subject: Investment Decision”
“Hi Vítor, I just got out of the meeting, we’re going ahead with the investment in Vantta, I’ll prepare a term sh….”
It was the most unreal moment, it also felt like deja vu because of how many times I‘d imagined that happening, there it was, finally someone believed enough in what we were doing to the point of putting their money on the line.
This is not one of these stories of being rejected countless times, it was the 2nd investor we spoke with and it didn’t take long, all I had to do was apply a few advice I’d learn from successful founders, here are the 3 most important ones:
Phase One - Be strategic
1- Understand how investors think
Investors work with Power-laws, they invest knowing that 80% of the times they’re likely to lose their money so in each investment they make they look for a 10x return so that the 10–20% of the times their investment goes well, it pays off the entire fund.
This is the reason why investors look for big problems to be solved and growing markets, it’s because they want a big return on their investment!
Investors look for markets where a new startup has a chance of being worth a lot more than the valuation at which they’re investing even if it only captures a small part of the market.
This is why it’s important to solve big problems and show them how much this opportunity can worth.
2- The investors’ Troika
As you already know, the market is one of the three main things investors look at when evaluating an investment opportunity, the other two things you, as a founder, need to nail are the team and the product.
Why are you the right people to make this big? What is the solution you’re building and how is it much better than the existing ones? How will your unique value proposition be defensible in the long term?
The ratios here depend from case to case, but I’d personally weigh a lot on the team, more often than not the group of entrepreneurs solving the problem are the main reason why investors will write your first check.
3- Investors are human beings
I can’t stress this enough, it was probably the main reason why I was able, as a first-time founder to fundraise, I understood that they’re just humans and have emotions like we.
Initially, I was just thinking about writing cold emails to investors I could find on Crunchbase but after being advised by a couple of founders I tried another approach, I connected with successful investors and asked them out for lunch to talk about my new project and ask for their advice, and I eventually found them on Angelist and through other founders’ networks/intros.
I also decided to focus on angel investors given the stage at which our product was and the fact that it was our first startup, my goal was to build a mentoring relationship that would then evolve to an investment one — and that was exactly what happened.
After months of product interaction, lunches, dinners, phone calls, and discussions about how our resilient and visionary team would disrupt a stagnated big market with a completely different solution, the angels’ investors stepped forward and made an investment proposal.
All I thought at that moment was “Wow, we’d hardly get this investment if it wasn’t for the relationship we’ve built and the specific targeting we made to angel investors, these guys are much more prone to risk and investment in earlier stages”.
Phase Two — Pay attention
So, after that proposal we had to pitch and defend our hypothesis in front of the investment committee but we nailed it, they were in, phase one was over, congrats to us — we got an investment offer, now comes phase two.
Boy, were we unprepared for that… as founders, especially first-time founders, all we want is to wake up and work on our vision 16 hours a day, eat Ramen, sleep and repeat, even if that means sometimes not paying ourselves a decent salary if any whatsoever, so our biggest concern isn’t the legal aspect of things, we just want to build cool products for the world, right?
Well, wrong! The part where you have to build a legal entity and you’re presented a term sheet, investment terms, shareholders agreements and you start looking at all that and having to choose if you’re going to pay the bills and eat or spend all your money on expensive lawyers and accountants is a major problem and can set your startup to failure or success from the beginning.
I can’t stress how important this is, and how perfectly well I understand you as an early-stage founder that just wants the money in the bank and fair terms to everyone, unfortunately, that’s not how things work, unfortunately, if we don’t read the terms and understand them well enough we either have to spend great sums of money paying someone that does or we’re might be signing a terrible deal that will, later on, haunt us.
I learned this the hard way, this investment story I’m telling you wasn’t the one we ended up getting, although the process was the same.
This one never got us the money in the bank despite having investment terms partially signed and all of that.
So what happened?
We didn’t want to spend the money on the legal documents, lawyers, and all of that, so we just read and accepted the terms and contracts drafted by the investors as they said they were “standard and friendly terms”, well — they weren’t.
They eventually changed their minds about investing and because of some contract terms they were allowed to so, leaving us with no money and in need of going through the whole thing once again (which we did, and well, but it gave me a lot of unnecessary anxiety).
To raise an investment round, I repeated the whole angel investor, personal relationship, a product with traction formula but this time I made sure I was covered from the legal aspect of things.
No, I didn’t sell a kidney to pay for a lawyer, I just decided to use Capbase, the founders’ best friend when it comes to all aspects of setting up a corporation and fundraising documents at a founders’ friendly pricing point.
This time, we did things right and protected ourselves, every legal document we needed for the investment, and also to form our Board (we didn’t even know we needed that).
Starting a company is a rollercoaster, some of the problems and challenges we’re going to find cannot be avoided, we can just expect to find them and trust our ability to solve them, luckily we can all learn from each others’ mistakes, so I hope to have shared a good few pieces of advice on how to find the right investors for you and how to avoid massive headaches from the beginning.
As a founder you need to be in a mental state where you can be creative and proactive, don’t let the avoidable mistakes ruin your mental health or chances of success and… good luck :-)