Founders Need to Know This BEFORE They Raise Venture Capital

Here are a few things every founder needs to know about raising venture capital. Number one is you need to think of VC as a product that you're buying. Now, you're the customer, and it may not seem that way, but you're the customer. And it's entirely possible, and even likely, that that product is just not a good fit for your needs. VCs are all about what I call bimodal outcomes. They either want you to be a breakout spectacular success or go down in burning flames trying. What they don't want is any of their portfolio companies kind of looking for that single or double hit, looking for that kind of modest outcome. So because if everybody's trying for that breakout success, some will succeed and they will carry the rest of the portfolio. That's just the way their business model works. And so the thing you need to know is that just because you're a bad fit potentially for venture capital doesn't mean you have a bad business. You could have a perfectly good business that will do well, but it just may not be a good fit for venture capital and what they're looking for. The next thing you need to know is if you do decide to go out and raise venture capital, be prepared to get a lot of nos. We'll talk more about that. But it's a relative game. What I mean by this is that recognize that any individual VC probably does 2, maybe 3 deals a year. And there's a reason for this. You know, when they put capital inside of a company, they're going to usually take a board seat. They're going to be active. And there's a limit to how many of those things they can do. And so they're going to look, you know, invest in maybe 2 or 3 companies over the course of the year, and they're going to see hundreds of possible deals. So when they pass on your company, it's not because your business is terrible or your idea is bad. It's because one of the other hundreds of companies that they looked at was a better fit for what they're looking for, better fit their criteria. So this is not an absolute judgment. It's a relative judgment based on their set of criteria. So I wouldn't take it too much to heart. The next thing is you need to kind of recognize that the problem investors have and the problem customers have are different. So let's say you're talking to both. Investors want— they want to see growth curves and business models and things like that. Customers want you to build a product that solves their problem. And often you are much better off spending calories on solving your customer's problem in the early stages than the investor's problem, right? They're not the same thing. And then finally, and here's like a hard one, one when you are meeting with VCs, you know, there's 3 possible things they can tell you. One, they can tell you yes, right, which is awesome. Unlikely, but awesome. The other thing they can tell you is no, which is, sorry, we're gonna pass, which happens all the time. And the third one is, is a maybe. And I'm gonna suggest to you that a clear no is better than a misguided maybe. Now here's why the misguided maybes happen more often than you would think. So let's say you go pitch a VC and it's like you came from a great school or you come off as super smart, but they're not really sure whether they should invest or not. They're kind of curious, but not quite there. You don't quite fit the criteria. So they could tell you no, but often they won't. And here's why is that it's entirely possible that they missed something. It's like, OK, well, maybe this is a better idea than we thought. Maybe the market's Maybe this entrepreneur is smarter than we thought, and I don't want to say a flat-out no because then I'm going to miss out on this thing and have regret later. What they will do instead is give you what I call a misguided maybe, which is they'll go off and say, well, you know, we like it, but can you go do some work and figure out this and solve these particular problems or answer these particular questions, meet these set of people? And kind of come back to us. They'll give you homework. And the idea here, not that they're doing it out of malice, but the kind of intent is that they're essentially buying time. And they're going to see whether, as you talk to other VCs, whether you get someone else excited. And nothing else gets a venture capitalist more excited than when another venture capitalist that they respect gets excited. And so by telling you a no, they're basically kind of giving up that optionality. By giving you a maybe, even though it's a low likelihood maybe, they're essentially giving themselves a free option that says in the event kind of they were wrong about this particular call and other VCs got interested, they can still hop back in because they're still kind of in the process. So these misguided maybes, I think, can Uh, spend a lot of your calories, um, and usually ends up being a waste of time. So you've gotta kind of be careful and detect the difference between a misguided maybe, um, what— and should have been an actual no.