Our team has had the benefit of observing a large number of early-stage founders, as they embarked on their journeys to build access with investors. In the below post, we have documented our observations around the most common access points.
Building Founder Networks
In the earliest stages of company-building, founders generally find it a lot easier to establish relationships with other VC-backed founders, and then use these relationships to get introductions to investors. We have observed founder networks to play a central role in successful raise processes, irrespective of the stage.
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When building a strong network of other VC-backed founders, users have reported the most success with the following strategies:
- Mining LinkedIn & Gmail Connections: As a starting point, founders need to first mine LinkedIn & Gmail connections to identify VC-backed founders that they already know. By integrating Gmail and LinkedIn contacts within Metal, a vast majority of Metal's customers report identifying useful connections that were previously not on their radar. Additionally, customers also report being able to research the networks of their connections in ways that enable them to identify which introductions to request from a given person.
- Introductions via Existing Investors: Founders that have raised from accelerators and/or other investors with large portfolios are able to get introductions to specific founders via their investor network. In general, investors tend to be particularly open to brokering introductions across the portfolio.
- Introductions via Product Usage: In recent months, an interesting new avenue has emerged whereby users first identify specific founders that have previously raised from a given investor. Subsequently, they shortlist ones that are in the early stages of building SaaS products, and then contribute to their journeys through product usage and feedback. When done thoughtfully and authentically, this has proven to be a particularly useful channel.
- Cold Emails: In most scenarios, cold emails tend to have an extremely low response rate, and are typically not a particularly productive use of time. In a few scenarios, however, we have observed cold emails to work surprisingly well -- this typically happens in instances whereby the recipient and the sender have a meaningful common ground. This could range from raising capital in a specific country (I.e. founders in Indonesia) to raising late-stage rounds in a unique sector (I.e. founders that have raised $10m+ for hardware companies).
When building access via founder networks, users are able to get a useful perspective on the investing personalities of various investors directly from founders that have raised from them. Based on feedback from our customer base, we have observed this insight to be even more useful than the introduction itself.
Leveraging Existing Investors
Your existing investors are heavily incentivised to help you raise your next round. The ability of founders to mobilise the support of existing investors is a learned skill. The below guidelines can serve as a useful starting point:
- Build Trust: Your relationship with your existing investors starts from the very first meeting (before they even decided to invest). As is the case with most relationships, your ability to build value will depend on the relationship history. Frequent and detailed investor updates along with quarterly calls are a good starting point.
- Use Network Insights to Prioritise Asks: During a raise process, before making specific asks, you want to conduct extensive research to identify the 3-5 most valuable introductions from a given investor. The total number of introductions that you can request depends on the nature of the investor and your relationship with them. It is, however, a finite number, and you want to ensure that you are ruthlessly prioritising your asks.
For most founders, their existing or current cap table is one of the most critical assets in a raise process. Founders that successfully close rounds tend to be most effective in getting the most value of our their existing cap table.
Pre-Seed investors routinely invest in companies in the pre-product and pre-revenue stages. With this write-up, we look to bring clarity and precision around what investors look for at this stage.
Implications of Pre-Seed Valuations
At Pre-Seed, investors are often investing at a median valuation of $4m. Given the low entry price, Pre-Seed investors end up doing well as long as the Company is able to develop a reasonably strong product.
Put differently, the factors associated with whether or not the Company grows to a multi-billion dollar enterprise may not be super relevant for Pre-Seed investors. If the Company builds a strong product, and even if the Company is not wildly successful, Pre-Seed investors will still do fairly well.
Investor X invests $500K in the Pre-Seed round of Company Y at a 4m post-money valuation. Let's assume that the Company succeeds in building a reasonably strong product, but is ultimately unable to scale. The Company ends up selling for $18m (without raising subsequent venture rounds). Pre-Seed investors end up realising a 4.5x return on the original investment.
Basis for Pre-Seed Investments
While there are broad variations in how Pre-Seed investors look at companies, a common theme is a clear focus on the founder's ability to build a strong product. How, then, do investors assess whether or not a founding team will succeed at building a strong product?
At Pre-Seed, the main bet is on the founder's ability to build a great product. Investor discussions are, therefore, focused heavily on developing an assessment on whether or not a given founder will be able to build a great product.
Of all venture stages, Series A shows the steepest drop-off point. Specifically, of all companies that raised Seed rounds in the five-year period from 2015 to 2020, only 45% successfully raised Series A.
The most common cause of drop-off is simply company performance. Most companies are unable to achieve the growth metrics that are typically required for Series A.
For companies that hit exciting performance milestones, a sizeable drop-off stems from an inability to work capital markets. In Robotics or Consumer, for instance, raising capital has historically been much harder than for B2B SaaS or Fintech. Relative to the Seed landscape, we believe Series A is distinct in the following ways.
In how founders manage their financing strategy, Series A rounds generally require a lot more sophistication than do seed rounds. From targeting to process, and from narrative to collateral, the general skill set required at Series A is fundamentally different from prior rounds.
In a given raise process, the type of investors that founders pursue varies broadly based on the context of the round. Are you looking to raise on the back of sustained growth and traction, or are you yet to see traction? Are you looking for a lead investor, or are you instead seeking a party round with a lot of small investors?
In the below post, we explain how founders can go about forming an empirical criteria to zoom in on the right type of investors for the round.
Example Scenario
For purposes of the below example, let's assume that the founder is raising a $12m Series A round for a "Buy Now, Pay Later" company that operates in the Fintech sector and is based in the US. In this specific scenario, the founder will need a lead investor to put the round together.
- Geography:
- Criteria: Investors that have made at least 10% of their total investments in the US
- Rationale: The above criteria helps limit our focus to investors that are focused on the US
- Stage:
- Criteria: Have made at least 15%+ of their total investments at Series A
- Rationale: Limits our focus to investors that truly specialise at Series A
- Sector:
- Criteria: Have made at least "3" investments in Fintech
- Rationale: Limits our focus to investors that are at least familiar with Fintech
- Inclination to Lead:
- Criteria: Have led at least 10% of their total investments
- Rationale: Limits focus on investors that have the capacity and the inclination to lead rounds
- Fund Size
- Criteria: Have a minimum fund size of $250m
- Rationale: Limits focus on investors that have the capacity to write $3m+ lead checks
Conceptually, founders should distinguish between attributes that serve as qualifications versus ones that work as disqualifications. The above list shows a list of factors that should serve as disqualifications. If an investor does not meet the above criteria, then they probably should not be on our target list. The specific thresholds can be adjusted based on our preferred levels of flexibility or rigidity.
After closely observing thousands of raise processes, we find that a vast majority of founders end up targeting and pursuing investors that aren't a great fit for their Company. In the absence of a data-driven process, it can be challenging to identify the right investors.
On the contrary, targeting the right investors leads to:
- Improvements in conversion rates from first to second calls,
- High-context and high-fidelity conversations,
- Higher probability of actually closing (versus just talking to investors).
It takes time and effort to take a super targeted approach (versus just getting on calls with whichever investors can be easily accessed). At Metal, we view the time and effort invested on this front as the highest leverage activity in a raise process.
Among founders that have prior experience with raising venture capital, a common strategy is to identify and pursue investors that have historically followed their existing investors. As an example, a company that raises capital from YCombinator may pursue investors that most frequently invest in YC companies.
The Venture Ladder
Venture investors typically specialise in one or two very specific stages. Investors that specialise at the Seed stage tend to focus on specific types of deal flow -- they often lean on a given set of accelerators that fund companies at Preseed and that they believe have the right approach toward identifying promising companies. Similarly, investors specialising at Series A tend to focus on specific types of deal flow, targeting a specific set of Seed-stage firms that refer their best investments.
Given the above context, it can be particularly useful for founders to:
- Identify their existing_investors that have a strong brand and/or are generally well-known
- Determine the set of investors that have historically frequently followed their existing_investors
Let's look at a few specific examples.
Techstars
As one of the most active investors, Techstars has developed an incredible brand around being one of the most founder-friendly early-stage investors. With detailed programs to support founders, and with an operating model that has a strong presence in numerous geographies, Techstars has built an ecosystem of investors that love investing in companies backed by Techstars. Using Metal, we set out to identify the set of investors that meet the following criteria:
- Investor type must be "VC" or "Corporate VC"
- Specialise at Seed (I.e. at least "15%+" of total investments at Seed
- Have been reasonably active (I.e. at least "3" investments in the past 12 months)
- Have made 10%+ of their total investments following Techstars
The above search yielded 200+ VC firms that meet the above criteria. In addition, when we adapt the search to "Angels", we identified 250+ angels that love following Techstars.
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First Round Capital
Over the years, First Round has established a terrific brand as one of the top VC firms specialising at the Seed stage. The First Round Review is well known for publishing world-class content on various aspects of building high-growth startups. Using Metal, we set out to identify the set of investors that meet the following criteria:
- Investor type must be "VC" or "Corporate VC"
- Specialise at Series A (I.e. at least "10%+" of total investments at Series A)
- Have been reasonably active (I.e. at least "3" investments in the past 12 months)
- Have made 5%+ of their total investments following First Round
The above search yielded 76 VC firms that meet the above criteria. In addition, when we adapt the search to "Angels", we identified 140+ angels that love following First Round.
By adjusting the parameters, founders can identify specific investors for their subsequent round that love following their existing investors. Pursuing such investors is a terrific strategy for founders to focus their efforts on the "highest" probability financing partners.
For most sectors, there is a small set of investors that specialises within that space. Such investors are easy to identify by virtue of their historical investing pattern, which shows a large percentage of total investments in a given sector. In the below post, we distinguish between sector familiarity and specialisation (while also explaining how B2B Software is a unique mega sector).
Familiarity vs. Specialisation
Investors that are familiar with a given sector are ones that have made several investments in that space. As an example, investors that have made a minimum of "3" investments in Fintech are familiar with that sector. Such investors can be easily identified using the "Minimum # of Investments in Selected Sectors" filter.
Investors that specialise within a given sector are ones that are concentrating their overall investments portfolio within that space. As an example, investors that have made 10%+ of their total portfolio investments in Fintech are specialising in that space. Such investors can be easily identified using the "Minimum % of Investments in Selected Sectors" filter.
Our product documentation brings further clarity on how to identify and when to pursue investors that specialise in a given sector (versus ones that are familiar with it).
Historically, founders have relied on word of mouth to identify sector specialists. As the venture landscape matures, founders are increasingly relying on empirical data to determine sector specialists. This is best achieved via two distinct methodologies.
Pursuing Sector Specialists
In our conversations with thousands of founders that are actively raising, we observe a pattern whereby founders report high-fidelity and high-context conversations with investors that specialise within their sector. This trend seems to be most prominent with founders that are building in niche sectors (I.e. robotics, productivity software, etc.). Below, we have shared examples of sector specialists that have deep expertise within their spaces:
- Goodwater Capital: With more than 30% investments in Consumer, Goodwater is best known for deep expertise and specialisation within Consumer.
- QED: With over 40%+ investments in Fintech, QED brings deep expertise within Fintech (enabling them to lead 50%+ of all Series A rounds in which they invest).
In most scenarios, founders find it particularly useful to engage with sector specialists that really understand the space and can engage from a position of deep industry knowledge. In some cases, however, it may become critical to pursue sector specialists:
Recommended Treatment for B2B Software
Historical data on venture activity shows that about ~70% of all rounds over the past decade came from companies building in the B2B Software segment. In the realm of B2B SaaS, companies should be able to target a broad variety of investment firms (as most investors are open to investing in B2B SaaS).
Within B2B SaaS, however, there may be specific sub-sectors that require or benefit from sector specialisation. Examples may include enterprise software or productivity software whereby there may be important attributes that are unique to that sub-sector. Therefore, B2B SaaS founders might be best off considering investors that specialise within a given sub-sector.
