“When an investor If something happens to you, they won't tell you the real reason,” said Tom Blomfield, group partner at Y Combinator. “TOIn the initial stage, frankly, no one knows what is going to happen. The future is very uncertain. The only thing they judge is the perceived quality of the founder. When they pass by, what they think in his head is that this person is not impressive enough. Not formidable. Not smart enough. He's not hardworking enough. Whatever it is, “I'm not convinced this person is a winner.” And they will never tell you that, because you would get angry. And then you’ll never want to throw them again.”
Blomfield should know: he was the founder of Monzo Bank, one of the brightest stars in the UK startup sky. For the past three years, he has been a partner at Y Combinator. He joined me on stage at TechCrunch Early Stage in Boston on Thursday, for a session titled “How to Raise Money and Get Out Alive.” There was no mincing words or fisticuffs: just real conversations and the occasional F-word flowed.
Understand the power law of investor returns
At the heart of the venture capital model is the Powerful Law of Profitability, a concept every founder must understand to effectively navigate the fundraising landscape. In summary: A small number of very successful investments will generate the majority of a venture capital firm's returns, offsetting the losses of many investments that fail to take off.
For venture capitalists, this means a relentless focus on identifying and backing those rare startups with 100x to 1,000x returns potential. As a founder, your challenge is to convince investors that your startup has the potential to be one of those outliers, even if the probability of achieving such massive success seems as low as 1%.
Demonstrating this enormous potential requires a compelling vision, a deep understanding of your market, and a clear path to rapid growth. Founders must paint a picture of a future in which their startup has captured a significant portion of a large, growing market, with a business model that can scale efficiently and profitably.
“All venture capitalists, when they look at their company, don't ask, 'oh, this founder asked me to invest $5 million.' Will it reach 10 or 20 million dollars? For a VC, that is as good as failure,” Blomfield said. “For them, hitting singles is literally identical to zeroes. It doesn't move the needle in any way. The only thing that moves the needle for VC returns is home runs, it’s the 100x return, the 1000x return.”
Venture capitalists look for founders who can back up their claims with data, traction, and deep knowledge of their industry. This means clearly understanding your key metrics, such as customer acquisition costs, lifetime value, and growth rates, and articulating how these metrics will evolve as you grow.
The importance of the addressable market
One power law indicator is the size of your addressable market: It is essential to have a clear understanding of your total addressable market (TAM) and be able to communicate this to investors in a compelling way. Your TAM represents the total revenue opportunity available to your startup if it captured 100% of its target market. It is a theoretical limit to your potential growth and is a key metric that venture capitalists use to evaluate the potential scale of your business.
When presenting your TAM to investors, be realistic and back up your estimates with data and research. Venture capitalists are highly skilled at assessing market potential and will quickly spot any attempts to inflate or exaggerate the size of the market. Instead, focus on presenting a clear and compelling case for why your market is attractive, how you plan to capture a significant share of it, and what unique advantages your startup brings to the table.
Leverage is the name of the game
Raising venture capital isn't just about pitching your startup to investors and hoping for the best. It is a strategic process that involves creating leverage and competition among investors to ensure the best possible conditions for your company.
“YC is very, very good (at generating leverage). “We basically put together a group of the best companies in the world, put them through a program, and at the end we have a demo day where the best investors in the world basically run an auction process to try to invest in the companies,” Blomfield summarized. . “And whether you're doing an accelerator or not, trying to create that kind of pressure situation, that kind of high-leverage situation where you have multiple investors bidding on your company. It's really the only way to get great investment results. YC simply makes it for you. “It is very, very useful.”
Even if you're not part of an acceleration program, there are still ways to create competition and leverage among investors. One strategy is to run a strict fundraising process, setting a clear timeline for when you will make a decision and communicating this to investors in advance. This creates a sense of urgency and scarcity as investors know they have a limited supply window.
Another tactic is to be strategic about the order in which you meet with investors. Start with investors who are likely to be more skeptical or have a longer decision-making process, and then move on to those who are more likely to act more quickly. This allows you to build momentum and create a sense of inevitability around your fundraising.
Angels invest with their hearts
Blomfield also discussed how angel investors often have different motivations and rubrics for investing than professional investors: They typically invest at a higher rate than venture capitalists, particularly for early-stage deals. This is because angels typically invest their own money and are more likely to be swayed by a founder or a compelling vision, even if the business is still in its early stages.
Another key advantage of working with angel investors is that they can often introduce you to other investors and help you build momentum in your fundraising efforts. Many successful fundraising rounds begin by bringing in a few key angel investors, which then helps attract the interest of larger venture capitalists.
Blomfield shared the example of a round that developed slowly; more than 180 meetings and 4.5 months of hard work.
“This is actually the reality of most rounds happening today – you read about the successful round on TechCrunch. You know, 'I raised $100 million with Sequoia-type rounds.' But honestly, TechCrunch doesn't write much about 'I left it for 4 and a half months and finally closed my round after meeting with 190 investors,'” Blomfield said. “Actually, that's how most rounds are done. And a lot of it depends on angel investors.”
Investor comments can be misleading
One of the most challenging aspects of the fundraising process for founders is analyzing the feedback they receive from investors. While it is natural to seek and carefully consider any advice or criticism from potential backers, it is crucial to recognize that investor feedback can often be misleading or counterproductive.
Blomfield explains that investors often reject a deal for reasons that are not fully disclosed to the founder. They may cite market, product, or team concerns, but they are often superficial justifications for a more fundamental lack of conviction or fit with your investment thesis.
“The bottom line here is that when an investor gives you a lot of feedback on your early-stage pitch, some founders say, 'Oh my God, they said my go-to-market isn't developed enough.' You better go and do that. But this leads people astray, because most of the reasons are nonsense,” says Blomfield. “You could end up changing your entire company strategy based on some random feedback an investor gave you, when in reality they're thinking, 'I don't think the founders are good enough,' which is a hard truth they'll never know. tell you.”
Investors are not always right. Just because an investor rejected your deal doesn't necessarily mean your startup is flawed or lacks potential. Many of the most successful companies in history have been passed over by countless investors before they found the right one.
Do your diligence with your investors
The investors you bring on board will not only provide you with the capital you need to grow, but will also act as key partners and advisors as you navigate the challenges of scaling your business. Choosing the wrong investors can lead to misaligned incentives, conflicts, and even the failure of your company. Much of this can be avoided by doing Thorough due diligence on potential investors before signing any agreement. This means looking beyond the size of your fund or the names in your portfolio and really digging into your reputation, track record, and approach to working with founders.
“80 percent of investors give you money. The money is the same. And you will be able to run your business again. And you have to figure it out. I think, unfortunately, there are 15 to 20 percent of investors who are actively destructive,” Blomfield said. “They give you money, then they try to help and they screw up. They are super demanding, either they pressure you to turn the business in a crazy direction, or they pressure you to spend the money they just gave you to hire faster.”
A key piece of advice from Blomfield is to talk to founders of companies that haven't performed well within an investor's portfolio. While it's natural for investors to trumpet their successful investments, you can often learn more by examining how they behave when things don't go as planned.
“Successful founders are going to say nice things. But the mediocre, the single, the struck out, the failures, go and talk to those people. And don't get an investor presentation. Go and do your own research. Find those founders and ask them how these investors acted when times got tough,” Blomfield advised.
