These Are the 3 Essential Steps to Take Before Contacting Venture Capitalists

These Are the 3 Essential Steps to Take Before Contacting Venture Capitalists

Learn to do them and you’ll be a much more efficient fundraiser

These Are the 3 Essential Steps to Take Before Contacting Venture Capitalists
Photo by NoWah Bartscher on Unsplash

Good venture capitalists are keenly aware that the world has a vast variety of markets. They also understand that nobody can possibly be an expert in every one of them. Heck, nobody can be an expert in more than a few of them. As a result, and because they’re basically gambling enormous amounts of money, they do everything they can to increase the odds of success. This is what leads them to develop an investment thesis.

An investment thesis is a VC’s custom-tailored strategy that leverages his or her personal knowledge of business, markets, technologies, and so on to predict what startup investments are most likely to generate a strong ROI.

I bring this up because, as an entrepreneur, you need to understand three important things about the concept of an investment thesis.

  1. It is what it is. No matter what you say or how great your pitch is, you’re not going to change a VC’s investment thesis, so don’t try.
  2. Pitching an investor whose thesis doesn’t align with your startup is a waste of time. Don’t do it.
  3. Every investment thesis is unique.

For the moment, this last point — the uniqueness of every investor’s thesis — is the thing I want us to focus on. I realize it’s somewhat of an obvious point since, of course, every person in the world has different perspectives and opinions, but that doesn’t make it unimportant. Instead, the uniqueness of every investor’s investment thesis is one of the biggest challenges entrepreneurs need to overcome when fundraising. It’s the key to determining whether or not an investor is worth pitching.

Because of this, before contacting any VC, you need to figure out that VC’s investment thesis. How are you going to do it?

Here are three steps you need to take in order to understand a VC’s investment thesis before trying to pitch your startup:

Step #1: Research the firm

Professional investors — i.e. venture capitalists — rarely work alone. They’re usually partners in larger firms. Those firms operate under a specific set of criteria that they establish in order to raise money from their limited partners (a.k.a. the people who give VCs all the money they invest in startups).

Every VC firm has an investment thesis. This thesis will generally be more broad than the thesis of any one partner, but it creates a broad set of guidelines for every partner involved in a given fund.

The specific VC you’re pitching will have an investment thesis that falls within the umbrella of the larger VC firm. Because of this, before reaching out to a partner at a firm, make sure the firm, itself, is a good match for your type and stage of startup, For example, if a VC firm only invests in growth-stage clean energy companies and you’re a pre-seed, consumer app, don’t waste your (or their) time.

Step #2: Identify the best partner

Once you’ve determined that a certain VC firm will invest in your type of startup, you need to find the specific partner at the firm with a personal investment thesis that best aligns with your company. Realistically, there should only be one partner at the firm who makes the most sense for your type of startup because, in general, a firm is going to avoid having overlapping/competing partners.

Usually, the specialization of a partner is obvious. For example, if an investor spent 20 years building SaaS marketing tech companies before becoming a VC, that investor is almost certainly going to be focused on SaaS martech companies. As a result, a simple scroll through someone’s LinkedIn bio is going to tell you a lot of what you need to know. At the very least, LinkedIn should tell you enough to figure out which partner(s) to focus on. This will narrow down your target to, at most two or three people.

Step #3: Research previous investments

Now you know the right potential partners to talk with at a VC firm that invest in your type of company. You’re almost ready to reach out.

But wait! Before you press send on that cold intro email you’ve meticulously crafted, spend time reviewing the companies a VC has already led investments on. You can almost always find this information on the VC’s website, LinkedIn, or company websites.

Not only is this going to help ensure you’ve found the right partner, it’s also going to verify that the VC isn’t already invested in one of your competitors. If the VC is invested in a competitor, you won’t raise capital from that firm. Period. End of story. Stop wasting your time and find another investor.

Go to Publisher:

Entrepreneur's Handbook – Medium

Author: Aaron Dinin, PhD