After closely observing thousands of founders raising capital, we found that the winners are taking a high-precision approach. To get the round done, successful teams rely less on luck and serendipity, and more on data and process.
The manifesto that follows institutionalizes some of the best practices required to adopt a data-driven approach toward raising VC.
1. Focusing on the right investors
Venture investors typically invest in specific opportunity spaces that they are excited about.
As an example, a given investor may focus on developer tools at the seed stage in the US, specifically in founders with a technical background. Another investor may focus on pre-seed investments in hardware or robotics in Europe.
When raising capital, the most important activity for founders is to properly chalk out their opportunity space, and then to identify investors that have been actively investing within that space. An opportunity space consists of five parameters:
Venture investors typically invest in specific opportunity spaces that they are excited about.
As an example, a given investor may focus on developer tools at the seed stage in the US, specifically in founders with a technical background. Another investor may focus on pre-seed investments in hardware or robotics in Europe.
When raising capital, the most important activity for founders is to properly chalk out their opportunity space, and then to identify investors that have been actively investing within that space. An opportunity space consists of five parameters:
Last-mile delivery, software for developer tools or consumer marketplaces are examples of specific business models.
Pre-seed, seed or Series A are examples of various stages that venture backed companies go through.
Fintech, healthcare or B2B software are examples of sectors that span across a broad operating space.
Most venture investors focus their investments in a given continent. Some large investors, especially at the earliest stages, invest across all geographies.
Some investors like to follow along in rounds that already have a lead investor that has set the terms. Others prefer to lead rounds and set the terms themselves.
Ultimately, founders need to ensure that they are pursuing investors that operate within their opportunity space.
2. Developing a replicable process to unlock access
In order to get in front of investors, founders need to configure a replicable process that yields success in a definitive manner. The below visual provides an example of what a replicable process could look like at the pre-seed stage:
Without a replicable process, most founders fall back on personal heroics and resilience to unlock access. While personal heroics can be extremely valuable, these tend to not persist for the entirety of the raise process.
3. Leading indicators for a successful raise
When taking a high-precision approach, there are three leading indicators that provide an early indication on the likelihood of success.
Opt-in conversion is the percentage of total investors that hear about our Company from a mutual contact that opt-in to take a first call. Typically, opt-in conversion stands at between 25-50%.
1st Call to 2nd Call Conversion
1st to 2nd call conversion is simply the percentage of first calls that lead to a second discussion (or subsequent interest). Typically, 1st to 2nd call conversion stands in the 10-30% range.
By tracking the above leading indicators, founders can use data to assess how their raise is progressing. A reliance on data and process tends to yield better results than the feedback from a small set of conversations.
In fact, many of the top investors commonly advise portfolio founders to offer limited weightage to feedback from investors that do not invest. The underlying rationale is that feedback tends to be skewed in nature and is often not helpful for the purposes of the raise. The exception to this rule is when the exact same feedback is surfacing in most conversations, especially in late-stage raises.
In most cases, if at least one out of every five investors are opting to chat with you, and if at least 10% of first calls are converting into second calls, then you are fairly likely to close. These metrics are not skewed and can, therefore, be useful leading indicators for the health of your raise.
4. Running a high-velocity raise process
After closely observing 1,000+ raise processes, we have learned that process velocity is the most important predictor of success. Process velocity can be easily measured by looking at the average or median number of days that the average investor sits in the same stage of the pipeline.
In high-velocity pipelines, investors either move deeper into the pipeline via due diligence, or are eliminated and subsequently replaced by new investors. Through our interactions with founders that ran high velocity pipelines, we found a set of characteristics that stood out:
These founders generally moved fast in whatever they did. In a given time period, they were taking way more shots than their counterparts.
By being decisive, these founders were moving on from investors that disappeared, or that weren’t leaning in.
High velocity raises require an advanced level of consistency. These founders were working on the raise with immense consistency.
Amidst a raise process, it is not the avoidance of mistakes that makes the biggest difference; instead, it is the velocity of the forward motion, and the associated learnings, that maximize the odds.
5. Getting round collateral and communications right
Founders that have strong social proof, either through top-tier investors on the cap table or via their prior background, are often able to raise rounds without having to develop the most compelling collateral, or without a sophisticated communications strategy.
For most founders, however, round collateral plays a critical role as part of a broader communications strategy. The collateral often plays a central role in shaping how investors perceive a team’s ability to execute on a venture scale business.
Alongside the collateral, written communications play an important role in the ability of founders to unlock access with investors. As an example, for an introduction request to materialize into an investor call, founders need to first convince a mutual connection to forward the request to the investor. Subsequently, their written company blurb needs to convince the investor to take a first call to learn more.
In our experience, we observe that most founders are communicating very actively. However, we see very few actually making an intentional effort to devise and convey a strategy that comes across as differentiated, credible and thoughtful.
