Raising VC Money, Easy or Hard?

By Esteban Reyes, Founding Partner

In average only 1 in 100 startups gets VC funding. In emerging startup markets the ratio is much lower, something like 1:250. I don’t have extensive research supporting these statements, but it’s what many experienced VC report, and it feels about right. In 2017 we looked at +1,000 deals to make 5 investments at Las Olas VC, so 1:200.

Why is it so hard for founders to raise VC money?

Put simply, because it’s incredibly hard for founders to achieve the expected outcomes, and VC know that. Obviously the success of a VC depends on the success of the founders she backs.

In today’s market an early-stage VC must achieve 3x to 4x returns in order to successfully raise subsequent funds. For example, a VC managing a $100M fund needs to find, invest, and support companies all the way through exits, and deliver to investors $300M to $400M in gross returns.

As I described in my prior post, the challenge is that VC “don’t expect to make an equal amount of money on every transaction (i.e. investment), but rather a lot of money from a small subset.” Since many investments will not perform VC are extremely selective when placing their bets (i.e. 1:xxx).

It’s true that raising money isn’t a big concern for a small subset of founders. They either have a history of achieving successful exits, or have discovered something extremely unique, defensible, and valuable that many are willing to fund. There’s also many non-VC-back-able founders, and then there’s founders with ideas without action. Fortunately I don’t have much to say about that other than wish them luck.

What can the rest of founders do to increase their odds?

Below are three common knowledge nuggets, very simple, and underrated.

1. Tell stories: Any great idea should be easy to explain. It may not be obvious how to, but great entrepreneurs always simplify complexity. No matter how technical your idea you can always turn it into a story.
2. Be hyper-responsive: Many say it’s human nature to procrastinate. While I agree we’re all guilty of it (myself included) I would suggest it’s a strong indicator of lack of interest or incompetence, not nature. Procrastination is easy to fix with advance preparation and prioritization. What’s hard is saying “no” to things that matter but aren’t your priorities. If you‘re taking more than 24 hrs to respond to prospective VC inquiries, then you may not be ready to be pitching them. Stop and reassess your priorities. It’s very rare for a VC to ask questions about your business that you don’t have answers for. If you don’t have answers for questions it’s always best to turn those into learning opportunities vs. trying to fabricate an answer.
3. Go deep on “why”?: “Why” is one of the simplest yet the most powerful word in human reasoning. Clearly explaining the “why’s” of your startup will help people believe and trust you. Only the founder(s) will know which why’s to talk about and why. For example: why build this company now? Why will you win? Why are you unique? Etc… It’s easy to take a superficial approach to this and many do. The problem is that doing so shows laziness, lack of motivation, and other negative perceptions.

I’m not suggesting a magic formula for raising VC money, but I can’t see how doing these things would hurt a founder. I’ve had the honor to interact with great founders, and unequivocally they always exhibit these traits, and without exception when raising VC money.