“When investors abandon you, they won't tell you the real reason,” says Tom Bromfield, group partner at Y Combinator. “At the seed stage, frankly, no one knows what’s going to happen. The future is so uncertain. All they’re judging is the perceived qualities of the founders. The thoughts in my head are: This person isn't impressive enough. They're not smart enough. They're not hardworking enough. I don’t think people are the winners.” And they'll never tell you anything like that because you'll get upset. That way you'll never want to throw them again. ”
Bromfield should know – he was the founder of Monzo Bank, one of the brightest stars in the British startup world. For the past three years or so, he has been a partner at his Y Combinator. He joined me on stage at TechCrunch Early Stage in Boston on Thursday for a session titled “How to Raise Money and Make a Living.” There were no mincing words or pulling any punches, just the real story and the occasional F-bomb.
Understand the power law of investor returns
At the heart of the venture capital model is the power law of returns, a concept that every founder must grasp to effectively navigate the funding environment. In summary, a small number of highly successful investments generate most of a VC firm's revenue, offsetting losses if many investments are unsuccessful.
For VCs, this means a relentless focus on identifying and backing rare startups with potential for 100x to 1000x returns. Your challenge as a founder is to convince investors that your startup has the potential to be one of the outliers, even if the probability of such a huge success seems as low as 1%. It is to let.
Demonstrating this huge potential requires a compelling vision, a deep understanding of the market and a clear path to rapid growth. Founders need to envision a future in which their startup captures a significant portion of a large, growing market with an efficient and profitable business model.
“No venture capitalist looks at your company and thinks, 'Oh, this founder asked me to invest $5 million.' Is it going to be $10 million, or is it going to be $2,000? Will it be $1,000,000? For VCs, that's a failure,” Blomfield said. “A single hit is literally zero for them. The needle doesn't move at all. The only thing that moves the needle on VC returns is a home run, a 100x return, a 1,000x return.”
Venture capitalists are looking for founders who can back up their case with data, traction, and a deep understanding of the industry. This means having a clear understanding of key metrics such as customer acquisition cost, lifetime value, and growth rate, and how these metrics evolve as you scale.
The importance of addressable markets
One measure of the power law is the size of the addressable market. It is important to have a clear understanding of the Total Addressable Market (TAM) and be able to explain this convincingly to investors. TAM represents the total revenue opportunity that a startup can gain if it captures 100% of its target market. This is a theoretical upper limit for potential growth and is a key metric used by venture capitalists to assess the potential size of a business.
When presenting your TAM to investors, be realistic and support your estimates with data and research. VCs are very skilled at assessing market potential and will quickly see through any attempts to inflate or exaggerate market size. Instead, be clear about why your market is attractive, how you plan to capture a large share of it, and what unique advantages your startup brings. Focus on presenting a convincing case.
Leverage is the name of the game
Raising venture capital is more than just pitching your startup to investors and hoping for the best. This is a strategic process that creates leverage and competition among investors to secure the best possible terms for the company.
“YC is[レバレッジを生み出す]It's very good at that. We basically bring together the best companies in the world and put them through the program, and then we have a demo day at the end where the best investors in the world basically run an auction process and try to invest in the companies,'' Blomfield said. he said. I summarized it. “And whether you're doing an accelerator or not, you're trying to create that high-pressure situation, a high-leverage situation where multiple investors are bidding on your company. That's the only way to get great investment results. YC just manufactures it for you. tocreatethatkindofpressuredsituationthatkindofhighleveragesituationwhereyouhavemultipleinvestorsbiddingforyourcompanyIt'sreallytheonlywayyougetgreatinvestmentoutcomesYCjustmanufacturesthatforyouIt'sveryveryuseful” [generatingleverageWebasicallycollectabunchofthebestcompaniesintheworldweputthemthroughaprogramandattheendwehaveademodaywheretheworld’sbestinvestorsbasicallyrunanauctionprocesstotryandinvestinthecompanies”Blomfieldsummarized“Andwhetherornotyou’redoinganacceleratortryingtocreatethatkindofpressuredsituationthatkindofhighleveragesituationwhereyouhavemultipleinvestorsbiddingforyourcompanyIt’sreallytheonlywayyougetgreatinvestmentoutcomesYCjustmanufacturesthatforyouIt’sveryveryuseful”
Even if you're not participating in an accelerator program, there are still ways to create and leverage competition among investors. One strategy is to tightly follow the fundraising process, setting clear timelines for when decisions will be made and communicating them upfront to investors. This creates a sense of urgency and scarcity, as investors know the offer window is limited.
Another tactic is to strategically decide the order in which you meet with investors. Start with investors who are likely to be more skeptical or take longer in their decision-making process, then move on to investors who are likely to act quickly. This gives your fundraising momentum and a sense of inevitability.
Angels invest wholeheartedly
Mr. Blomfield also discussed how angel investors often have different investment motivations and criteria than professional investors. They typically invest at higher interest rates than VCs, especially in early-stage deals. This is because angels typically invest their own money and are more likely to be swayed by a compelling founder or vision, even if the business is still in its early stages.
Another important benefit of working with angel investors is that they often introduce you to other investors, which can help give your fundraising efforts momentum. Many successful funding rounds start with the participation of a few major angel investors, who then help attract large VC interest.
Bromfield shared an example of a round that came together slowly. Over 180 meetings and 4.5 months worth of hard work.
“In fact, this is the reality of most rounds happening right now. You've read about blockbuster rounds on TechCrunch. You know, 'I raised $100 million in a round like Sequoia.' Sho. But to be honest, TechCrunch hasn't written much about “the four-and-a-half months it took us to raise money, meet with 190 investors, and ultimately close the round,” Blomfield said. Told. “In fact, most rounds are done this way. And a lot of them rely on angel investors.”
Investor feedback can be misleading
One of the most difficult aspects of the funding process for founders is dealing with the feedback they receive from investors. While it is natural to seek and carefully consider advice and criticism from potential backers, it is important to recognize that feedback from investors can often be misleading or counterproductive. is.
Bromfield explains that investors often pass on deals for reasons that are not fully disclosed to founders. They may cite concerns about the market, product, or team, but these are often just superficial justifications for a more fundamental lack of belief or fit with investment thesis.
“The lesson here is that when investors give us a ton of feedback on seed-stage pitches, some founders are like, 'Oh my gosh, they told me I wasn't far enough in market development.' You should go and do that.’ But the reasons are mostly bullshit and lead people astray,” Blomfield said. “Reorienting your entire company's strategy based on random feedback that investors give you, even though they actually think, 'I don't think the founders are good enough.' This is the hard truth they will never say. ”
Investors aren't always right. Just because an investor passed on your deal doesn't necessarily mean your startup is flawed or lacks potential. Many of the most successful companies in history have been passed over by countless investors before finding the right one.
Engage with investors
The investors you bring on board not only provide the capital you need to grow, but also act as important partners and advisors as you navigate the challenges of scaling your business. Choosing the wrong investors can lead to misaligned incentives, conflicts, and even company failure. Many of these can be avoided by conducting thorough due diligence on potential investors before signing a deal. This means going beyond a fund's size and the names in its portfolio to delving into its reputation, track record and approach to working with founders.
“Eighty-odd percent of investors are going to give you money. So is the money. And then you go back to running the business. And you have to understand that. Unfortunately, some investors I think there are about 15% to 20% of investors who are actively taking disruptive actions,” Blomfield said. “They give you money, and then they do crazy things to try to help you. They're very demanding, and they force you to pivot your business in crazy directions, or you take the money they give you and take it sooner.” I may force you to use it to do something.”
One of Blomfield's key pieces of advice is to talk to the founders of companies that have not performed well in investors' portfolios. It's natural for investors to tout their successful investments, but we can learn more by looking at how they act when things don't go as planned. .
“Successful founders say good things. But if you're a mid-level, one-shot, strikeout, failure, go and talk to those people. And don't take referrals from investors. Find those founders and ask them how their investors did when the going got tough.'' Bromfield advised.