A good friend of mine from business school reached out to me the other day asking for some advice on fundraising.
That conversation was a stark reminder of the massive advantage that insiders have when it comes to startups and fundraising. To better understand this insight it's worth describing my friend and her background.
When you hear the term “VC outsider” many profiles might come to mind. This one will be unexpected and eye-opening.
This particular outsider has a pristine resume with incredible work experience and sparkling degrees. I met her at Harvard Business School which says a lot already (people will point to the good and bad of that distinction, but it’s all positive for me...). At HBS she was top of her class as well as respected and beloved by classmates. After school, she went on to do a number of impressive things that led her to be celebrated in her industry and acknowledged around the world.
That last paragraph may sound like hyperbole, but I guarantee you it's not. If anything, I'm underselling how impressive this woman is in my attempt to keep her anonymous.
By that description, you might guess that she has every advantage in the book to enter the world of startups and raise venture capital dollars. In many ways, she does have incredible advantages, network and general savvy being tops of that list. But being an outsider gates her from some of the most important pieces of information that allow a founder to execute fantastic fundraises.
When we first talked, I asked her to describe the business that she wanted to raise money for. The story started in my favorite place for any founder. She experienced a personal problem as a leader in her industry that she wanted to solve. Her description of the opportunity was so effortless and filled with passion. It was the type of description that could only come from a place of deep experience. When I asked follow-up questions, she rattled off specific stories that immediately led my investor mind to dream about what was possible.
Being smart and networked certainly helps, but it won’t take you all the way.
While the potential was obvious, it wasn’t long before I saw obvious signs that she was an outsider to the world of tech and startups.
First, the way she told her story said it all. I saw the immediate connection to analogous companies who have become massive winners but needed to wade through a confusing mess of esoteric industry jargon to get there.
Insiders understand the connections to companies and storylines that can both drive amazing potential within a company's strategy and help tell a story that will light up an investor’s eyes.
Second, like most founders who are new to fundraising, the prospect of running a fundraise was both foreign and slightly scary to her. Because of that she was primed to avoid it as much as possible. Instead of talking to multiple options, she began her “process” by speaking to specific individuals that she could get to conveniently, no matter how good of a fit they were.
Avoiding the process creates situations where she would be unable to optimize the outcome of a fundraise and leaves negotiating power solely in the hands of the few individuals that she was talking to. An insider has a more refined plan for engaging specific types of investors in early conversations. They know that the value of incorporating more parties into a fundraise vastly outweighs the time and pain spent bringing them in.
Third, as she talked about the initial fundraising conversations she had, it was clear that she was unaware of what was possible in a negotiation or what standard fundraising terms were. This greatly restricted her belief in how hard she could push for terms that would benefit her in the long term.
Standards and deal making are funny things. There's no set of rules that dictate what can be asked for and what should be asked for other than what is happening in the market. What’s more is those standards change from generation to generation, from year to year, and more recently from month to month in crazy economic times!
The risk of an outsider's lack of awareness around standards is many fold. It can be easy to request things that unwittingly turn people off because they are more aggressive than the market is willing to bear. While this happens due to naivety, it can easily be perceived as brashness. At the same time, the flip side is true. It's more natural for a first-time founder to be afraid of scaring off investors by asking for too much. In those scenarios, they can anchor way too low or accept requests that are far too generous or investor-friendly. Even worse, they may accept terms that could harm the future prospects of the company.
In this real world case, my friend was close to accepting terms that included outsized ownership levels, executive titles to investors, future options, and other elements just because she just did not know what was standard.
In one short conversation, I helped her understand that not only were those investor requests aggressively off market, but also might hurt her ability to recruit talent and investors in the future.
After talking for 30 min, I was able to set her on a much better path. Whew.
This quick chat reminded me how important it is for newcomers in the industry to learn as much as they can and to get as much support as possible. The huge information gap between founders and VCs creates disadvantages during the fundraising process. Making the effort to learn the standards of the industry is key to executing as successful of a fundraise as possible.
So founders, as you're getting into the game, do what you can to level up. Read books on venture capital, blog posts from insiders, Twitter threads from investors, etc. Spend the cycles to learn as much as you can and get up to speed.
Harder for underrepresented groups
Underrepresented founders feel the insider vs. outsider differential much more severely.
Founders from all backgrounds possess the raw ingredients to be a great founder. Anyone can have a great understanding of a problem that's worthy of being solved and to convince customers to pay for it. But if outside funding is necessary to take the first step, underrepresented founders are left with the short end of the stick.
Without connections into advisors or supporters that can help educate a founder on the outside, many worthy founders will fail before they have a chance to thrive.
Find opportunities to support those who need it the most. Short 30 minute conversations, sharing of information, and overall support can be the difference in elevating underrepresented founders to be able to start great businesses that serve lesser-known markets and generate fantastic returns.