How Founders Get Funding and How Investors Ensure They Deserve It

I spent the past few days listening to founders of seed-stage – and often pre-revenue – startups pitch their worth to potential investors at TechCrunch Disrupt in San Francisco. I was looking for companies that would make good investments for our First Stage Investor members (click here to sign up and discover some startups worth investing in).

It’s a scene I’m extremely familiar with. In fact, I’ve been on both sides of the equation. I’ve asked for funding before. And, as I was this week, I’ve been the investor (or represented the investor).

So as I spoke with founders about their startups and fundraising goals, I had a great deal of empathy. Raising money is hard. It’s a grind. No matter how tired or frustrated you are, you always have to be “on.”

But I was surprised by just how many founders were struggling to relate with – or communicate effectively with – the potential investors standing right in front of them.

Similarly, I was shocked by the number of investors who failed to even take the opportunity to talk to or grill the founders standing right in front of them. Looking founders in the eye and asking them tough questions about their business, listening to their passion, evaluating their knowledge and expertise, and seeing them operate under pressure are all things that are done best in person.

Yet far too many investors barely engaged with the founders. Instead, they walked up, asked the founder to email them a “deck” (the slide presentation every startup has to help attract investments) and moved on.

If there were an investor’s jail, I would have arrested them right away and thrown them in it. It’s a crime to waste opportunities like that.

So today, let’s look at what founders and investors should talk about when they first meet each other.

We’re doing this for two key reasons…

First, understanding what investors and founders should talk about will help you think about how to evaluate startup opportunities in person and online.

And second, most founders don’t have experience raising money or dealing with investors. They can use all the advice they can get.

Selling the Vision

Startup founders have five to eight minutes (if they’re really good, 10 minutes) to demonstrate they have the vision to guide their company to success, as well as the drive and attention to detail needed to execute their plan. It’s a tall order. So here’s what founders should talk about to impress investors.

  1. Succinctly explain the product.
  2. Describe the market being addressed.
  3. Offer an origin story. What sparked the idea for the product? Why did the founder choose to build it?
  4. Demonstrate product-market fit.
  5. Explain the monetization path.
  6. Demonstrate traction.
  7. Describe the team currently working on the startup.
  8. Display industry knowledge and expertise.
  9. Tell investors how much money they’re raising and what they’ll use the money for.
  10. Demonstrate the tenacity, knowledge and leadership skills needed to turn the startup into a success.

That’s a lot to squeeze into a short conversation. But the best founders know exactly how to work the room.

Challenging the Vision

As investors, your job is to gather information and challenge the founders to defend their vision and plan. How founders respond to your questions will reveal a lot about how well they know their product, their company, their market and their path to success.

Here’s what investors should try to do when they talk to founders.

  1. Dig deeper into the founder’s background and skill set. In many ways, this is an extended job interview. It’s your chance to see if the founder is capable of leading a startup to success. Ask about the founder’s team too. This is information you can’t get from a deck.
  2. Question the problem they’re trying to address. How big is the problem they’re trying to solve? Is it worth solving?
  3. Question the solution. Do they really solve the problem? Have they solved the problem in a way the market will respond to?
  4. Dig deeper into their monetization path. Will customers really pay for their solution? Have founders maximized the monetization potential of their product?
  5. Push back on claims of traction. Are these just letters of intent, or are they real customers/partnerships?
  6. Understand how the technology or product works. If something doesn’t make sense, ask. Depending on the sector, understanding how the product works is critical to evaluating its potential for success.
  7. Push for details on how they’re going to spend the money they’re raising. Good founders have spent countless hours thinking about this. If they can’t answer beyond generalities, that’s a bad sign.
  8. Ask the founders to address what you see as potential weaknesses. How they respond will go a long way toward determining whether their company’s worth investing in.
  9. Ask for their deck. It should provide some of the hard information and details you need (and that shouldn’t be discussed in an open setting) to help inform your decision.

One of the trickiest things about these conversations is making sure you approach these conversations with skepticism and not cynicism. A skeptic can be convinced to invest. And that’s what you want – to be convinced. A cynic can’t be convinced – and will miss out on tremendous opportunities.

One Last Trap

Founders and investors alike need to remember they’re not always the smartest people in the room. Founders, just because you’ve started the company and lived with it for years doesn’t mean you know more about the industry than the investor standing in front of you.

As for investors, just because you’ve been investing in (or working in) a sector for years doesn’t mean you have everything figured out. Remember, everything can be disrupted. Many of the best investment opportunities are disruption plays. And if your mind isn’t open to new ways of thinking and solutions, you’re going to miss out on truly great investment opportunities.

Evaluating startups is both an art and a science. You can’t get all the information you need from a deck. So if you get the opportunity to talk to founders and ask them some questions – even if it’s just through a webinar (another reason to sign up for First Stage Investor) – you should take advantage of it.