After accompanying Justin to hundreds of pitches leading up to what TechCrunch called one of the biggest “party rounds” in the Valley, I got to experience and distill some best practices for fundraising.
Misconceptions when Raising
While most natives are more familiar with the fundraising process than me (I’m from Chicago), many Silicon Valley assumptions ran counter to what I saw Justin use for success. Currently, the following “misconceptions” prevail in Silicon Valley’s zeitgeist:
- VCs rely only on numbers, facts, and data.
- VCs seek logical founders who have considered all the angles.
- Fundraising is a numbers game: keep reaching out until someone writes you a check.
My experience with Justin, however, has taught me to update those beliefs:
- VCs invest also based on intuition.
- VCs seek founders with high conviction and confidence.
- While fundraising starts with a broad reach, getting a term sheet requires honing focus.
No One Knows Anything
No one knows the value of an early stage startup. Sure, vague market sizes exist, but a startup holds more promise than substance. VCs are quantitative people seeking quantitative signals, but early stage startups possess very little quantitative metrics on which to judge. Therefore, VCs invest based on how confident they feel, which is made up of qualitative signals.
VCs observe pitches for a series of signals that inspire confidence. While numbers and facts can influence this, my experience shows that the biggest signaling is their perception of the entrepreneur. They invest in high-risk areas, so the entrepreneur’s pitch should be designed to make them feel safe. Consistently, if a VC sends a follow-up email asking factual questions, they’re already emotionally uninterested. Many entrepreneurs get caught up in this process: they send the VC a fact and citation, which the VC nitpicks, etc., but it’s already too late. The entrepreneur has failed by not creating the type of confidence necessary to de-risk the investment. This isn’t to disparage how VCs make their decisions, as these intuitive signals may actually be good measures of later success. After all, much of an entrepreneur’s job relies on persuasion, so an entrepreneur’s skill at influencing VC’s emotions transfers to their skill at selling.
Therefore, while VC questions typically appear to be probing for facts, they’re really designed to check for personal security, such as how deeply an entrepreneur has thought through their vision and whether their conviction in it can be knocked off balance.
Hold tension, especially in the toughest moments
Of course Justin walks through the logic of Atrium’s vision, but it’s his unwavering confidence that closes deals. When VCs ask questions, any uncertainty or shakiness sends off warning signals, but utter confidence inspires emotional investment.
Often, unwavering confidence requires holding tension during high-pressure moments. After Justin says, “we’re raising at a valuation of XX million, post,” the room gets quiet. It gets awkward and intense. I felt the urge to ask, “are you okay with that?” but that’s already not confident. Justin doesn’t ask for permission; by holding tension, he turns a proposal into a statement. I’ve seen the same parallel in legal depositions: we call it “one sentence too many.” When a lawyer’s deposing you, it’s always better to simply say “yes” or “no.” The lawyer will latch onto anything more and scrutinize it over and over. It takes utter confidence both to acknowledge the task’s difficulty and still exude certainty. Justin kept it short. These moments come up over and over throughout our pitches, and the key is holding the tension because the next person to speak loses.
Start Broad, Hone Focus, then Broaden Again
At the outset, Justin followed conventional wisdom by pitching everyone he could find. In reality, however, that first round wasn’t to raise money, but to draw out which investors to focus our attention on. Starting at the second round, he narrowed his focus to only the most interested investors and let the others fall by the wayside.
I expected it to be much tougher to determine which investors to drop, but it proved simple. Almost everyone gave strong emotional feedback on their faces or in their nods. When limiting to the VCs with the most confidence in Atrium, he simply approximated (clearly accurately) by reading body language.
Based on Justin’s past successes, a handful of investors will always give him money. While a rookie entrepreneur wouldn’t have any investors immediately willing to fund them, they would still have some VCs more interested than others. While conventional wisdom suggests entrepreneurs should keep as many balls in the air as possible, Justin honed specifically to the few investors most likely to give us a term sheet. Closing is tough — it requires time, focus, and energy, so he targeted specifically. Only then, term sheet in hand, did we broaden focus again. We successfully shopped the term sheet to investors who we had previously let drop: many VCs are much more comfortable joining in than being first.
How to Prepare a Pitch, Given these Observations
- Focus on the VC’s emotional investment, not just the facts.
- Expect to be probed, and answer every question confidently even if you’re uncertain.
- Hold tension, especially in the toughest moments.
- Focus on only the most interested VCs to get a term sheet.
After watching Justin raise, I’m confident I could try these approaches on my own. Even with these tips, however, the value anyone could raise is capped by their track record. For Justin, VC confidence is astronomical because he has a long history of strong returns. I’ve therefore elected to work with him.