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AA 008: What’s the best time in a startup’s life to approach an investor?

Welcome to the eighth podcast of the Ask Alex show! Today the question is “What’s the best time in a startup’s life to approach an investor?”pitch deck

In this podcast, we break this question about how to approach an investor into two parts:

  • When should you approach investors
  • When start your process to fundraise

We go through the importance of building relationships with investors early so when it comes to fundraising, you have built trust and rapport to make the whole process easier! If you are about to raise, you need to hear this.

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Transcript if you prefer to read

Hey, guys! Welcome to episode 8 of the AskAlex podcast. Today we have a question from Sarah in Dublin, Sarah asks “What’s the best time in a startup life to approach investors?” Hey Sarah, this is actually a very difficult question at least in terms of getting it right. I wanna break this into 2 point, firstly, when should you approach investors and secondly, when should you actually start your process to raise money. So, the first point, when should you approach investors? Always approach investors build a relationship with them.

A famous blogger VC in America called Mark Suster talks about this concept of dots not lines so if you think of a scatter graph xy axis with the x axis being time then each interaction will form a dot on that graph and over time within each interaction you can form a sort of regression a line of best fit between that and investor can sort of start understanding the direction that you’re going and whether not they even like you, you really need to build trust with investors if you’re going to get that money and that takes time and no VC wants to give you money and then spend the nights restless thinking “Was that really a good idea?” and can they really trust you? Are you really kickass?

So, how can you build that trust with investors? Here are some things you can do; after you meet them ask if you can put them in a monthly or quarterly update newsletter and send a very structured milestone update to that investor providing some real value. No one wants to read an essay so keep it to the point about what they want to know and that’s typically your key updates, the real traction achievements you’ve done, maybe you’ve entered a startup competition and won. Congrats, share that. Maybe you landed some fantastic customers let them know.

I saw one founder do a fantastic example of this where they made awesome infographic and I was just gobsmacked, so cool! Now, another idea you can organise a meeting maybe twice a year to update them and ask for advice, build rapport, you will know when you get on with people and not everyone is going to do this with you. It’s best to get an intro to the investor first also helps building that rapport if you’re not quite sure how to be reaching out to investors I’ve written a blog called “How to get warm introductions to venture capital investors” I’ll put a link to that in the show notes.

Lastly, have interesting things to say. It’s all very well to get into the room but what you say in a room that’s what really matters, right? VCs love learning; their entire business model success is based on information, so why would they pass up meetings with you when it’s a two-way learning opportunity? You want this dialogue so when you want to raise you aren’t coming in from the cold and yes this does take time but it’s investment you need to make to make sure the actual raise is a little less painless it’s always gonna painless.

Now dealing with the second part of how I want to answer this. When you start your actual fundraising process this doesn’t actually really apply to everyone since it’s a luxury. A luxury most founders will never actually have. The best time is when you don’t need the money you’re basically bored as you keep growing by accident as you’ve just got awesome product market fit and at that point investors are asking to give you cash and secondly when you’re already funded and wearing pajamas and have a psycho founder egging you on to get back at that investor, this is obviously a joke reference to Mark Zuckerberg who went to went to a meeting dressed in his dressing gown, egged on by Sean Parker.

If you want an academic answer to this question for early stage companies then I’ve written a blog called “The real reason you should launch faster (that doesn’t get talked about)”and it also deal with getting your product out there. So, for early stage companies an actual better question, better way of thinking of this is “Should I wait a bit longer before actually raising?” this actually applies to 99% of companies not the 0.00001% that the question would imply. Startups are default dead and you always need the money. So should you actually wait longer or not to raise money? You need to raise money when your product is not an MVP, minimum viable product. I like this term MDP, minimal desirable product. This implies a product is a little less buggy you gotta sort of clear value proposition and you’ll likely getting better traction results of it. But it’s not getting a perfect product, right? Don’t wait and keep on doing extra development if you actually need money because that may not lead to increase in your actual valuation or terms.

If you don’t get a higher valuation for all this extra work, why wait to start your fundraising? You got lot more to lose, in early cash getting it in spending less time fundraising will actually help you go a lot faster and minimise your risk of failure. Valuation doesn’t always reflect how much work you have done unless you pass into a new phase or you put yourself in a new box. It is only when you change your stars and put yourself in a new phase of box that your approximate valuation arranges and terms are going to change. Only, this can cost money and as a founder said to me last week “But I need more money to get customers.” Well, if you got a great team, great product and no traction that’s tough VCs will take a pass. So if you’re not going to make a real change to your business within you know, a couple of months and now is the right time actually to start that fundraising round.

You’re not going to really have some fantastic updates which are really going to change people’s perception of you. Are you going to get Seed terms as opposed to Angel terms if you wait a few months, or a month? So, if I say waiting a month will deliver some real awesome updates like maybe if you’ve hired some fantastic people, you close a really big deal, then sure, wait. That advice applies if you’re really early stage Seed, Angels pre Seed stage but now.. let’s say you are Series A or Series B, so what now? Well, you kind of already set your timeline when you raised because you planned to raise money for about 12-18 months.

So you now have a timeline you may be needing this to stick to this requirement, because you have the burn rate unless you can bring that down and give yourself a longer runway. So, if you have 18 months then the time to raise or the best time for you to raise is actually a month 12 assuming you have planned for 18 months runway because then you have 6 months to ensure the deal actually gets done before the clock runs out. But if you had done as I recommended earlier on and built those relationships with investors, kept them up to date, if they really understand what your business is and how you’re building it and you’ve established trust and credibility with them, then you going out to fundraise may actually be a very quick thing to do.

So, thank you so much for that question, Sarah. Fundraising is really hard, think critically about what you going to do, the real value that you are illustrating to investors and hopefully that will make your process really easier. Thank you so much. Okay, guys if you’d love to get featured on the AskAlex podcast head over to alexanderjarvis.com/askalex and ask your question and I love to answer it for you. Thanks guys, have a fab time. Bye!

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