TL; DR Only serial founders with strong domain knowledge and track records and traction get funded quickly. For most founders raising a seed round is a lot more work, but there is a method to the madness.
We often write here about raising capital. Capital allows startups to move faster and generate growth. However, raising capital is not simple, at least for most founders.
Let’s start with what is probably the worst-case scenario – you are a single founder, right out of college, with an idea in a space where you have no domain expertise. That is, you have no team, no product, no traction, no experience in general, and no experience in the space specifically.
This extreme case illustrates the reasons why investors are skeptical – this is a very risky investment situation. You may be brilliant, and you may pull it off and build a massively awesome business, however, this is clearly a very risky bet.
Investors, particularly angel investors, look for ways to reduce the risk when they are funding a company. That’s why the founders who get funded the fastest are the ones who REDUCE INVESTMENT RISK.
Below we discuss the profiles of founders that investors gravitate towards and tend to invest in.
- Serial founders
You already know this, but I will say it anyway. The world is not fair.
Serial founders who have been successful are MUCH MORE LIKELY to get funding.
I’ve met many investors who simply would not fund first-time founders. These investors are not bad people; this is just not part of their funding strategy.
When these investors raise money from their LPs (limited partners, i.e. investors who give money to investors), they promise to only focus on serial entrepreneurs. This is no different from an investor saying they will only focus on healthcare or they will only invest in NYC companies. It is funding strategy, and while I personally do not believe in investing this way, I recognize that it is a perfectly legitimate tactic.
Investing in serial founders with domain expertise just makes sense.
First, serial founders avoid making all the silly mistakes that first-time founders are notorious for. Serial founders intuitively know what NOT to do.
They know what WON’T work. Because of this, serial founders tend to execute more efficiently, grow companies in smarter ways, and obtain revenue faster. At least, this is the perception of the investors.
- Founders with domain knowledge
When you are starting a business in a space you don’t know much about, you are at a MASSIVE disadvantage.
Think about it, when you don’t know something, you have to study it. To become knowledgeable about physics or international affairs you go to college. You spend years learning, and you have to pay for your education.
When you start a business in a space you aren’t familiar with, investors feel that they essentially pay you to learn the business. That is, you aren’t executing right away—first you are learning.
Investors aren’t your mom and dad; they don’t want to pay for your education.
Investors are attracted to founders with domain knowledge. Investors talk about a so-called founder-market fit.
Why are these founders doing this business? The answer investors are looking for is—the founders know a ton about the space, and have identified an opportunity. The founders know that there is an opportunity based on their strong domain knowledge, and years of experience in the space.
- Founders with Traction
While your business is just an idea, investors will come up with 1 million reasons why it won’t work. However, if you keep growing week-over-week, month-over-month, and grow your revenues and customers, eventually all objections will go away.
Investors can’t resist funding growth. Investors can’t resist funding traction.
Growth and traction are indicators of a product market fit.
They are indicators that the business is really working. Whether you’ve created a startup before and whether you know a space or not does not matter. Growth and traction mean that you have figured the business out, and it is successful, so the investors want to jump on board.
- Founders with Experience and Network
If you aren’t a serial founder, and don’t have a ton of domain expertise or traction, you can still get funding, but it is MUCH HARDER.
There is a pattern in the industry where founders coming out of top tech companies like Google and Facebook get funded. If you have spent years and proved yourself in a product or engineering role at one of these top tech companies, potential investors tend to take you more seriously.
This is because you are connected with a strong network of alumni from those places who are likely to vouch for you and introduce you to the investors. For example, you worked with a founder whose company got acquired. When this person introduces you to his or her investors, the investors will be paying attention.
In a way, this dynamic is not very different from graduating from a top-tier school. You lean on a strong network and leverage your connections to get an introduction to investors.
- Mission Driven, Intellectually Honest Founders
Some founders clearly stand out from the rest. You can tell how obsessed they are. These founders won’t go away, and won’t give up no matter what. Investors often refer to these founders as mission-driven.
In addition to being mission driven, these founders are deeply self-aware and intellectually honest. They are socratic and introspective.
Mission-driven founders are on a journey of discovery. They have a true north, but are flexible about the specific path that gets them there.
They radiate power and awesomeness, and although they may be young and inexperienced, they manage to convince investors with a mix of enthusiasm and knowledge. Mission-driven founders have an infectious energy that attracts investors, and investors decide to roll the dice alongside these founders.
When raising capital, think about the various types of founders that tend to get funding. Which one of these founders are you?
Image Credit: CC by Ben Werd
