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RTC #16: The 4 top rules you NEED to follow to secure VC money

RTC #16: The 4 top rules you NEED to follow to secure VC money

Plus: Venture capital term sheet guide 2024

Stephan Freudl
April 02, 2024

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Headlines 📢

(Timeless) best fundraising advice from Paul Graham (co-founder Y Combinator) 💡

Venture Capital Term Sheet Guide 2024 - key terms and clauses of 426 final, signed term sheets 📜

Time for secondaries to take center stage? ✨
Accenture’s generative AI revenue surpasses all VC-backed startups combined 💰
Y Combinator has made 4k+ investments - even for YC only a few will make it to unicorns 🦄

Tough times for fitness startups - outlook does not look better 🏋️
New VC funds investing in Europe💸
- UK-based Ada Ventures has closed its £63 million second fund. £250,000 and £1.5 million in pre-seed and seed-stage startups
- OTB Ventures has closed its second $185 million deeptech fund. Focus on Series A, with up to a 10% allocation for seed ones
- Berlin-based World Fund has closed a €300 million first fund, with a focus on climate tech startups
- IVP, US and UK-based, has raised $1.6 billion (!) on Series B and Series C
Signs of spring in VC land - venture firms are calling for more capital 🌱

🤿 Deep Dive: The 4 top rules you NEED to follow to secure VC money

Before starting with today’s deep dive I have to admit something:

“The 4 top rules” I will be discussing today are basically “my” top 4 rules for making an early-stage investment.

Hope you don’t stop reading now…🤪

How come?

When I began thinking about this issue and its structure, my initial idea was to create a melange (yes, I live in Vienna when not in New York 😄) of the top capital-raising tips and advice I've encountered over the past few months.

See a couple of the most recent ones:

And there are many more out there. Each with a slightly different focus but they have one thing in common: they are pretty subjective.

Being pretty subjective is OK for me but I thought: in this case, my top 4 rules can be subjective too😊

And here we go…

How did I come up with my rules?

I started investing in early-stage startups over 6 years ago. I have had 2 EXITs so far and 3 ventures do not exist anymore - the remaining circa 15 startups are progressing well on their Road-To-Capital (across all stages).

As a first step, I took a look back and assessed the investment process of all my investments based on the following questions:

Was there one ultimate reason for each of them that made me invest and what was it? Is there any pattern?
Are there any learnings from the ones not performing well?
Cross-checking common advice and tips on capital raising and evaluating how the founders applied them to me in their process (and how it worked out)
Finally, looking at some of my closest “non-investments” (roughly another 20) and assessing why I did not invest at that time and how they are performing today

The result of my analysis was surprising. I did not know what to expect but certain patterns revealed and resulted in my 4 top rules 📜

Rule #1 - (Fellow) Investor Intro

People tell you, “Warm Intros Win” - I would say “Maybe”. What is true is that it increases the chances of getting attention and having the investor take a look at the deck.

Does it increase the chances of investing? Not so sure.

But if you manage to come through a warm intro that comes from a fellow investor that even is potentially looking at the deal as well, this is a game changer.

I (and most other early-stage investors) are not Sequoia or a16z, but still want to have access to the best deals, and make sure that top founders want them on their cap table. This is why inner circle are created among early-stage investors. These are basically trusted fellow investors to share deals with: They show me a deal and I show them a deal to co-invest.

Highest level of “pre-vetting”.

Rule #2 - (Well-prepared) Cold Outreach

Yes, cold outreach works - if it’s done right (and I prefer a straight cold email over a sort of warm intro just for the sake of being referred by somebody).

How is cold outreach done right?

👉 Keep it short & simple

👉 Do your research: Make sure your startup matches the investor’s focus

👉 Highest level of personalization

👉 Before you hit send on your pitch deck, try to trigger interest ideally to be asked for the pitch deck

👉 Short & simple means: 3-4 bullets with the one superstar achievement/traction

👉 In my case: LinkedIn worked, but direct email (so far) did not

Rule #3 - Don’t ask for an NDA

Source: VC memes

You need to be able to present your investment case without signing a NDA.

No further comment.

Rule #4 - Give me the “everything is 1,000% under control” feeling

The most important question for early-stage investors

What makes this founder truly exceptional?

Nothing else matters.

The GTM will change. The product will change. The business model will change.

Exceptional is very subjective (again) and I have thought about what it means for me:

➡️ 'Exceptional' is the founder's ability to execute in all situations

They need to give this “everything is 1.000% under control” feeling:

This starts with no typos in the pitch deck
But most important:
- You need to show that you “own” your investment case
- Do not give me options or question marks on how to execute certain topics
- Have an answer to all questions. If unsure, explain why and how you'll find the answer (side note: when exceptional founders do not know the answer, often the answer is that the investor question does not make sense)
Conduct your due diligence on me and ask questions about my background/track record. The investors on your cap table should also be selected and do not give the impression you just take anyone saying “yes”
Extra speed after meetings when following up or providing additional info

These are my 4 rules. Simple but (hopefully) straightforward.

Interested in how Harvard Business Review advised on securing capital over 30 years ago?

You will be surprised how similar this might sound to today’s tips and advice 💡

Everything You (Don’t) Want to Know About Raising Capital