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Fundraising is a delicate business that small mistakes can crush. It’s an area Katy Yam knows well after two decades in operational roles before becoming a VC Partner at Real Ventures. Speaking with SAAS NORTH, Katy explained all the little mistakes she’s seen founders make because they just aren’t aware (and what to do instead).
Key takeaways:
- Before approaching a VC, make sure their fund is actively writing the cheque size you need.
- Your pitch deck needs to demonstrate knowledge and traction within your space, each section has a raison d’être (reason to be, or focus), it’s not a preset checklist of generic must-have slides.
- Accelerators are a great tool to build and get visibility for your company, but only if you leverage them properly.
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There are plenty of articles on pitching advice. How to perfect it. How to build slides. How to make the perfect two-by-two competitor matrix so you always show up in the top right corner.
But here’s the thing: most of this advice is generic, it lacks depth and specificity in helping founders clearly explain their businesses to investors. Or at least that’s how Katy Yam, Partner at Real Ventures, feels.
After decades working in various industries and years spent advising startup founders on how to fundraise, she’s realized many founders simply don’t understand how venture capitalists actually work. And in turn this leads to mistakes that can hinder, delay, or ultimately cost them their whole fundraise.
Speaking with SAAS NORTH, Katy shared a few of those simple mistakes—and what founders need to know in order to fix them.
… ON UNDERSTANDING THE VC WORLD
Venture capitalists exist to invest limited partner (LP) money in high-potential companies, and support them to then hopefully reap the rewards. But underneath that operational statement is a lot of nuance that founders are unaware of.
Fund lifecycle: The average VC fund lifecycle is 10 years, meaning the fund needs to exit all positions and return capital with a set percentage of gains to LPs within 10 years. Funds are usually divided into two pools of capital: initial investments (active years 1-4) and a follow-on pool (years four onward) that doubles down on winners from the initial pool.
Only companies who receive cheques within the active window can receive reinvestment from the follow-on pool. So if you’re raising now, find out or ask the fund(s) you’re targeting if they have an active fund that is writing new cheques.
Cheque sizes: Big name VCs are great to have on your fundraising resume. But you may be too early for some, find out what stages they invest in to see if they’re aligned to your company’s stage. An easy way to check is to find out or ask what their average check size is versus how much you need and if they lead rounds or only follow.
The hardest part to fundraising is finding the lead investor who will invest 25%-50% of your entire round. The lead will dig in and do the hard due diligence work to earn the right to price the round which signals followers to invest.
Mistaking similar investments as a good thing: Ask what their investment thesis is and if your business fits that thesis, if not, you are barking up the wrong tree right from the start. Katy likens investing to collecting hockey cards. If she already has a player in her deck, she’ll want a different player. Same goes for approaching VCs who have already invested in a company offering a similar product/platform/service in your space—they will likely want something different.
The trick is to find a VC with deep knowledge, expertise, and connections in your industry who also has a complimentary portfolio so there’s an opportunity for both you and another startup to gain traction by working together. A cold email or Linkedin message explaining how your business is complementary to one in their portfolio shows insight and may just get you a first meeting.
The only exception is if they had a favourable exit from a similar business years ago, they may want to make a new investment in the same space. A great resource is Crunchbase—look up similar or complementary businesses that are further along than your company and turn back time by looking at their investors list from their seed or Series-A rounds, those are great VCs to add to your target list.
Specific VC demands on ownership stake and board seats: Some firms will want a board seat, others won’t. Some firms will have a minimum (or maximum) ownership stake, others won’t. It’s your job to ask those questions if the VC isn’t up front about it. Founders need to understand that early-stage VCs want to buy a target % ownership (e.g. 5 to 15%) at the seed and/or Series-A rounds to let it ride (dilute) until a significant exit event which hopefully returns 10x or more of their investment before the end of the fund lifecycle.
As for board seats, know the difference between voting member or observer seats and allocate them accordingly. When starting out, adding an advisory board might be a good idea in lieu of changing a founder-heavy board where decisions are made. As with all relationships, board member relationships succeed when built on trust and transparency—don’t be afraid to share your challenges and ask for advice, they are there to help, not only to be presented with a glossy quarterly “everything is great” deck.
Bypassing analysts, associates or principals: Katy reiterated how important investment analysts, associates and principals are to the entire investment process. Partners rely on them to surface high-potential QLs (qualified leads) from which future investments are made. Sourcing new deals is a critical function in a VC firm and since Partners need to actively engage with portfolio companies and manage LP relations, the analysts, associates and principals are the front lines.
Never bypass them or ask them when you can meet a Partner. Take the meeting and take the meeting seriously. All QLs they deem worthy are presented to Partners at our weekly investment meetings, we raise our hand if interested to move the deal forward. They are your best chance to get to the next meeting.
You’re in competition with everyone: When fundraising, you aren’t just explaining why you’re different from a competitor in the same space. You also have to show why the problem you’re solving is a better overall investment than any of the other 100+ startups a VC is considering investing in across all industries that meet their thesis.
Venture money can go anywhere, particularly at earlier stages where funds tend to be more sector agnostic, so you need to differentiate both in terms of your market fit and of the cross-section of potential investments a VC might see in a week.
… ON IMPROVING YOUR PITCH
Across the hundreds of startups Katy has mentored, she’s noticed two key issues with pitch decks.
1. The competition slide is about demonstrating landscape understanding, not positioning yourself as the best: Simply put, incumbents like Apple, Oracle, or Microsoft are not below you, so manufacturing a 2×2 matrix where that’s the case won’t get you anywhere.
Katy said this slide needs to show what you know that others do not and explain why this knowledge is so obvious to you but not to the current market. It may be a growing gap in data management, a critical suite of emergent tools, or a unique go-to market strategy, but it is certainly more than having the most check marks in a comparison table.
2. Product timeline needs to align with go-to market plans: Every new feature is both a retention opportunity for current customers and an opportunity to acquire new ones.
Katy often sees product-oriented founding teams with strong product roadmaps without a clear link to client segment growth or retention. On the flip side, founding teams strong in sales attack markets without a clear product carrot to take to that new market. The best founding teams integrate both and then weave in fundraising rounds at key milestones to ensure growth is well-funded and resourced. It also gives investors a clear signal that the team is thinking about the whole business: product, markets, and funding.
… ON LEVERAGING ACCELERATOR PROGRAMS
Katy said accelerator programs are under-utilized by startups. Yes, they are there to help you build your business, to build your network of subject matter experts, and to connect with fellow cohort participants. But they’re also much more than that.
Your real goal is to be top three in your cohort: Over 2,000 startups go through major programs like Techstars, YCombinator, 500 Startups, Creative Destruction Lab, FounderFuel, and more per year. If you’re not in the top three of your cohort, you simply won’t get the visibility you need to fundraise from the accelerator. As the General Manager of FounderFuel, Katy is often asked by fellow investors who she believes are the top three of her current cohort with intro requests made only to those.
To maximize your chances of being in the top three, Katy advises founders to focus on making progress throughout the accelerator. Identify early on what metrics to work on that will show your company’s evolution best on-stage at demo day. Don’t be afraid to iterate these with the program’s general manager and your key mentors, then work tirelessly to achieve traction during the program.
Fundraising is a stressful experience because it is a second job from start to round-close. But the real shame from Katy’s perspective is when founders make things harder on themselves by not understanding the true dynamics at play in the VC world. While understanding these dynamics and the various rules of engagement are not a guarantee of success, Katy hopes these tips will make fundraising easier and more enjoyable for all.