How to Build Investor Relationships

This week’s tip: the 5 steps to nurture VC relationships

There are two common occurrences that happens when founders look to fundraise. Either you:

1. Successfully get meetings with investors, but you can’t get any terms sheets
2. Every investor rejects you before you even meet them

Both of these rejections, while seeming like direct opposites, usually come from the same place and have similar reasons.

Think about this for a second… how many times have you heard this:

"This is not quite right for us this time, but if you get a bit more traction we may be more prepared to invest!"?

Bad advisers will tell you that this means you need revenue because in this economy VCs will only fund businesses with revenue. Unfortunately, these people are completely wrong.

In the last 6 months, I've seen companies with my own eyes raise VC money without revenue - it has nothing to do with that. The "more traction" feedback is a very typical scenario, even more so now that we are in a down market economy. Investors are giving you a version of the "soft no," which basically means that they're not prepared to invest now but keeping you open in case you change.

If they were being honest with you, it was because they just didn't believe enough in you as a founder. It has nothing to do with traction or your opportunity - they are using the economy as an excuse to reject you.

So, if it's not necessarily revenue that's preventing an investment, then what is traction? Why the hell are they asking you for it?

Unfortunately, there is no real objective measure. You are too early stage and there’s too many unknowns to create objective measurements of what traction means you will be successful for not.

Your "traction" is simply a means to show why you are a great founder. When an investor wants to see how you are making progress with customers, product development, and initial revenue as a proof point, or attracting well-known stakeholders, they aren’t doing it for your business. It is a code word for, "I'm not ready to invest in you, and I need more proof that I can trust you.”

Getting past the “more traction” obstacle is then more about building relationships with investors over time and showing them why you are the founder that can execute.

Most of you make the mistake of thinking that funding is something you do in "funding season," some mythical three-month period when you're ready with the perfect pitch deck and then suddenly all the VCs want to invest into you.

Unfortunately, this is, at best, extremely rare and, more likely, not reality for 99.99% of you. If you want to fundraise in the future for your startup (and for every single fundraise you ever do after that), you have to treat this as an ongoing, long-term process. Not a panic three-month project you take day-by-day.

You need to build relationships with investors, connectors, experts, and every other stakeholder over a longer period of time. This gives the investor a chance:

• See journey you are on
• See where you came from
• See how you are actually executing and growing

This gives them ample reasons to invest in you, even without "traction." This is how you raise money in the best way possible.

Here’s the 5 ways to build relationships with VCs:

1. Always be raising

This is something you've probably heard before, and it's true: it's important to always be raising funds.

If you can set up the right systems (and I can help you with that!), you can create a structured list of venture capitalists you want to speak with when it's time to raise funds. You can choose a few VCs to keep in touch with even before you start fundraising.

For my clients who are working on their second round of funding with me, I suggest doing this right after you've finished fundraising.

The goal is to establish consistent points of contact with VCs and to create a positive narrative for when you eventually launch your fundraising campaign. You should keep them informed about what's happening in your business, show them your product or prototype, share your strategy for the next 18-24 months, discuss the deals you're working on, and ask for feedback.

If you wait until you're "ready" to fundraise, you're already too late. Most of us wouldn't get married after just one date, and most VCs won't fund you after just one meeting either. Since many VCs base their decision on the team, the longer they have to get to know you, the better your chances of securing funding.

2. Under-promise, over-deliver

Another way to build relationships with investors is to under-promise and over-deliver. The people who get funded are the people who actually get things done. Execution is what an investor is really looking for. They want to see progress with customers, product development, and initial revenue. You need to over-deliver and communicate back with VCs showing the progress you've made.

The best founders I worked with did everything they said they would. In fact, someone like Steve Mendel from ManyPets ($2bn+ valuation) was so good at executing he would never miss any of his targets! This is what gave us so much trust in him - we saw him do everything he said he would in the exact time frame he said he would.

If he said he wanted to ship a product, he would. If he said he was working on distribution with a certain revenue target, he would. If he said he was focusing on hiring particular key staff, he would.

Your goal is to constantly be hitting your goals and making progress - all the while communicating with investors for every milestone you hit.

3. Don't let investors forget you

When it comes to marketing to your customers, it's important to consider those who are ready to buy and those who aren't. Your sales team should focus on the former, while the latter should receive marketing emails to keep your product or service top of mind. You should be thinking the same way for your fundraise.

I understand that the VCs seemed to be impressed when they met you. However, it is important to note that they receive hundreds of pitches, and they often don't have the time to proactively step back and think about the companies that seemed promising but weren't quite ready for investment.

Your goal with starting an investor relationship is to make sure that investors never forget you (you can see more details on how do this here). This is where investor updates and organised meetings can be so powerful you. Even with a monthly email or quarterly chat it can give you the opportunity to provide short highlights of your achievements and why that investor should still be speaking to you.

This keeps you at the top of their memory. When I was an investor I had 3-7 companies at any time that I was super interested by. I was tracking them, had structured meetings with them, and when it came to raise it was less about if I liked them enough, but rather if I could convince my colleagues!

4. Find ways of helping the investor

Building relationships fundamentally comes down to both parties giving value to each other. Whilst I know it can be hard to think about what type of value you can give to a VC during your fundraise, there are 3 main areas you can:

• Your general expertise
• Your domain expertise
• Your network

Here's some additional information on how you can provide value to VCs.

There was a founder who we unfortunately rejected when I was still a VC at Octopus. We just couldn’t get comfortable on whether the company could be large enough for our fund. We had built a great relationship with him over a 3 years period: he had helped us with some DD on a separate company, introduced us to a few domain experts and was even on a panel at one of our events!

Although we could have rejected the founder based on a lack of traction, we had developed such a strong relationship with him that we decided to provide detailed, structured feedback on why we passed.

By demonstrating to investors that you are a valuable connection for them, they are more likely to reciprocate in kind. This could result in an investment or, at the very least, more detailed and honest explanations for why they are not interested in your proposal.

5. Find ways to keep meeting the investor

A recent founder I’ve been working with has just raised £4m. We are now setting up the tactics for him to raise a bigger Series A next year. An important tactic we are using to build the right relationships for him is keeping a quarterly cadence of meetings with each investor.

We are planning to set-up where each milestone will be (preferably every 3 months!), and focus on having those meetings directly after. Every meeting or point of contact with the VC we want him to have done something better: product improvement, new deals signed, new hires. Whatever shows them the additional progress he’s made.

We want to keep each meeting short - 30 minutes preferably. The focus being on updating them on the progress he is making, giving value to each other, seek input on how they could be a good investor as well as warming them up for the fundraise next year.

You want to keep the time short - don’t abuse their time and focus on showing how you are growing fast. Then leave them wanting more.

Don’t come back with fake progress however. If the businesses isn’t getting “traction” then probably best not to come back with a bad impression - tell them you are focusing on something in particular and its best you push the meeting back. After all, your time is better spent actually making progress then speaking to investors.

A great example here was the founders at QuitGenius (Pelago). Every time I saw them they had moved the ball forward and evolved their strategy. After more than a year of updates I pulled the trigger and invested.

In conclusion

In conclusion, if you want to fundraise in the future for your startup, you have to treat it as an ongoing, long-term process. Relationships take time to build. Investing is more permanent than marriage, and there’s no way you can get a divorce.

Whilst I understand its easy for you to find stories of founders raising with nothing, from a piece of paper or from the first meeting. This is not the norm. People also win the lottery, but these are rare occurrences.

You have to build relationships with every stakeholder that will help you going forward. You have to keep them informed about what's happening in your business, show them your product, share your strategy for the next 18-24 months, discuss the deals you're working on, and ask for feedback.

The strongest position for you when building relationships is when you have just raised your round. Most founders fail at this. Once you do raise a round, start immediately building the relationship with investors who could invest into your future round.

Then rinse and repeat each step with every new and old investor you come across. The more time you have to build these relationships and establish trust, the better your chances of securing funding.