The Only Cheat Sheet You Need for Early-Stage Investor Meetings | by Daniel Kang | Mar, 2022

From a former Softbank investor and YC founder

Cheat sheets have been permitted in a few of my finance programs again in faculty. The beauty of cheat sheets is that it helps free my mind area from propositional information, so I can concentrate on fixing complicated issues. After all, realizing all cause-and-effect relationships to derive my very own formulation could be very best, however there are time and useful resource restrictions in the actual world.

Fundraising from enterprise capitalists is usually a complicated drawback, particularly for first-time founders.

Having been on either side of the desk, I wish to share my very own cheat sheet behind my thoughts once I go into investor conferences. Do not forget that each assembly is an investor assembly. There’s no such factor as a purely “informal espresso”. That assembly shall be an information level for informing selections. Let’s dive in.

Dozens of issues are taken into consideration earlier than investing resolution. Elements vary from LP bases to portfolio synergies to funding scope. I’ll boil it down to 2 of the most typical and salient elements.

1. They steadiness pace and threat

Enterprise capitalists steadiness two forces which might be typically conflicting: Velocity and Threat Administration.

On the one hand, minimizing time and sources to decide is necessary. Dozens of funds will be competing for a similar deal in aggressive rounds for early-stage traders. Particularly for early-stage funds with restricted differentiation, pace is usually a highly effective aggressive edge in entering into aggressive rounds.

However, traders have to de-risk the funding to keep away from wanting like fools. The enterprise capital business is sufficiently small that investments will be traced again to people fairly than funds. The danger is available in avoiding two kinds of errors:

• Kind I error: Passing on an funding that seems to be the subsequent trillion-dollar firm — actually, even a billion-dollar firm.
• Kind II error: Investing that goes to zero, or worse, getting performed Ft. Theranos.

On the threat of oversimplification, the 2 questions an investor solutions to keep away from these errors are (1) Is that this enterprise and (2) Is that this value?

2. They assume in portfolios

Enterprise capitalists assume on the portfolio degree, not the corporate degree. They’re on the lookout for uneven outcomes.

I’ve talked at size about uneven outcomes. Primarily, the wins are so large that they make up for all losses.

For instance, let’s say I’ve $100 and make investments $1 into 100 corporations. Let’s additionally say if I’m proper, I get 100x on my funding. Underneath these circumstances, even when I’m unsuitable 99% of the time, the 1% covers my losses. If I’m proper 2% of the time, I double my returns. If I’m proper 3% of the time, I triple my returns and so forth and so forth.

You may see why VCs have to consider your organization shall be large earlier than they will make investments. Preserve these two primary buildings in thoughts.

The cheat sheet locations traders into segments. You may assume that’s harsh. But it surely’s additionally how traders place you and your organization in buckets with respect to your business, opponents, and different founders throughout their due diligence course of.

Plus, it’s a simplified mannequin that can assist you BEFORE you be taught extra about traders and adapt your understanding.

Y-Combinator provides to optimize for pace and momentum earlier than hitting goal commitments. Primarily based on my expertise, I’ve additionally discovered pace of decision-making was one of the crucial necessary metrics as a founder, so I’ll order the segments that approach. Under, I’ll cowl possibly the three commonest segments speaking about Velocity and Funding Measurement together with common observations.

1. Angel traders

One name. Most angel traders have full decision-making energy in terms of investing their very own cash. They need to have a call with one name when you’ve got your materials prepped.

Constructing momentum: $10–20K. I’ve had something from $5K to $100K from a single angel. Most of them hover across the $10–20K mark. However angels can add strategic worth and sometimes construct the momentum required to have a profitable fundraising. Ask for introductions.

• Certified leads. Make sure that your angel record is very certified leads. I normally begin with my mentors, colleagues, and associates, who I do know will get to a sure or no in a short time. Individuals with deep experience in your business will be useful as angel traders. Don’t take the life financial savings of your family and friends. Angels must be aware of the chance of start-ups, and it must be a small allocation of their web price. If persons are severely doing angel investing, they assume at a portfolio degree. So in the event that they wish to make 20 investments that 12 months, at $10K, they’d want $200K of liquidity on simply angel investing, ignoring all different asset courses like public equities, crypto, and actual property.
• Warning indicators. Some angels will declare to “know” individuals or “add worth” after which proceed to ask for a bit of your organization as a spread of titles from strategic advisors to co-founders. Run, until it is a particular technique you keep in mind to construct your advisory community. In the event you should, probably the most normal benchmark I do know is the FAST settlement. The very best angels I do know confirmed excessive ranges of curiosity and gave generously earlier than speaking fairness. Li Jin (to be clear, not an investor in my firm), for instance, spent hours brainstorming with me and made helpful introductions. Aaron from Patch.io additionally gave me lots of steerage once I first began my pre-seed spherical in early 2021.
• About syndicates & micro funds. I haven’t had nice experiences with angel syndicates or micro-funds (usually under $10m). It’s normally a dedication problem. First, they at all times regarded for “lead traders” and cared an excessive amount of about who else was investing with out conviction on the corporate. Second, for syndicates particularly, dedication to funding measurement takes a little bit of time as a result of the deal must be circulated to tons of of traders within the community.

2. Pre-seed/ seed funds

Push for pace: 2- 3 calls. Most pre-seed and seed funds have optimized funding processes for quantity and pace of choices. It normally takes 2–3 calls earlier than making that call. You’ll in all probability want some type of the pitch deck, financials, and product demo. Don’t let a single fund take greater than three calls. Don’t allow them to make you assemble an elaborate information room. A strong pitch deck ought to do a lot of the work for the traders anyway.

You may push for pace right here. For instance, when you’ve got a name on Monday, you’ll be able to in all probability have the second mid-late in the identical week. Ask for the weekly funding committee dates.

Sufficient to “lead”: $200–500K. Many pre-seed funds are sufficiently big to “lead” a spherical lately. In the event you’re elevating on a SAFE (more than likely when you’re within the US), it simply means they will put within the largest cheque. Except it’s the fund’s express funding technique to not lead, hesitancy to guide is a nasty signal. Traders hate giving up possibility worth. Traders will fake they’re . It’s their job. On a associated word, if communication responses take greater than 48 hours with out trigger, it’s in all probability a lifeless finish. Transfer on.

• Valuation sensitivity. As a result of pre-seed and seed funds can’t observe on in your bigger rounds, the one factor left for them is dilution in possession. This implies they virtually have to safe sufficient possession to start with in order that by the point you’re in your Collection-C, they nonetheless personal a significant quantity of your organization.
• Execution vs. IPO story. Associated to the above, many pre-seed funds turn into “within the cash” or make an unrealized revenue by the point you hit your subsequent spherical. They will even money out by promoting their shares as secondaries in later rounds. On common, this implies they are going to focus extra in your subsequent 6–12 month execution plan than the way you turn into a $10bn enterprise.
• Warning indicators. Keep away from pre-seed funds which might be overly burdensome and ask for loopy issues. After I didn’t know any higher, I entertained traders who requested me to construct after which grill me on a three-statement monetary forecast mannequin of a PRE-REVENUE, PRE-PRODUCT firm. That’s insane. These calls for come in numerous flavors, from asking for elaborate information rooms or lengthy facet letters. The sample will proceed as your organization grows.
• Be memorable. That is particularly necessary for pre-seed traders as a result of they cope with the quantity. The truth is that you simply’re in all probability assembly quantity seven out of ten that day and one of many 100 founder calls they’ve scheduled for the month. Discover a technique to be memorable. Make it thrilling. Make it enjoyable.

3. Multi-stage funds

3–4 calls: Structured course of that can’t be rushed. Most multi-stage funds have a set funding course of with necessary checkboxes than can’t be fast-tracked. Sometimes over 3–4 calls, there shall be deeper dives into your organization, crew, and product.

Even with leverage, it won’t be straightforward to push them quicker by a significant quantity. They will at all times wait till the subsequent spherical and de-risk the funding in alternate for a better valuation. It’s additionally not unusual for them to ask for board seats and a proper reporting construction.

Sufficient to guide right now and tomorrow: $2m+. The advantage of multi-stage funds is that they will “lead” not simply this spherical however future rounds, usually within the order of tens of thousands and thousands of {dollars}.

The upside is that when you’re doing nicely, you don’t must waste time fundraising in your subsequent spherical. These traders can double down. The draw back is that in case your current multi-stage investor doesn’t make investments, this sends a adverse sign to the market. Simply remember.

• Valuation doesn’t actually matter. So it’d look like multi-stage funds take longer, require extra, and even be extra specific. So what’s the upside? Effectively, as soon as they determine to take a position, they don’t care about valuation. I’ve already talked concerning the dangers of excessive and low valuation, however from the investor’s POV, $15m vs. $20m vs. $25m post-money valuation doesn’t matter when you’re going to be a $50bn firm. They’ll simply make investments extra money for his or her goal possession of 10–15% usually.
• Imaginative and prescient issues. Many multi-stage funds received’t transfer with out a $10bn+ imaginative and prescient. Your organization must be price their time and sources on a portfolio degree. It takes price to establish, diligence, make investments and add worth to portfolio corporations. Again once I was an investor, that is why there have been “minimal cheque sizes” and possession targets. This isn’t to say they don’t care about your subsequent month’s execution — actually, some funds have formal reporting buildings to prep founders for formal board conferences — however they do have to consider you’ll be able to turn into a $10bn+ firm to entertain investing their human capital and cash.
• Scale benefit for hiring, gross sales, and infrastructure. Bigger funds have extra capital (from administration charges) for formalized packages and instruments to assist portfolio founders. If it’s worthwhile to rent, there are inside instruments. If it’s worthwhile to make gross sales, there are mature portfolio corporations. One such instance is SignalFire’s Beaon Expertise. I’ve by no means used it and can’t vouch for it, however VCs additionally differentiate themselves in offering worth to founders.

Cheat sheets aren’t complete. It’s normally a short-form model of useful instruments wanted to resolve sophisticated or complicated issues. There are different issues I may speak about, akin to what to look at for titles and roles of enterprise capitalists or various capital sources like household places of work and enterprise debt funds. But when this had all the pieces, it’d be a textbook, NOT a cheat sheet.

One final I’ll go away with on this cheat sheet is that this: Be sort to traders. I don’t assume this must have an instrumental objective. It’s typically life observe to have good character. If it helps, many early-stage traders spend 10 hours a day assembly dozens of individuals solely to provide or obtain rejections 90% of the time. It’s a tough job. Having been concerned in later-stage investments, it’s simply 70–90 hour weeks to run an inside diligence course of, handle exterior service suppliers, talk with firm C-suites, and run the evaluation.

This cheat sheet is to assist founders higher navigate the enterprise capital world by understanding the common incentives of traders of sure segments. However the onus of being a good individual and treating traders as individuals is on you.