8 tips for founders trying to raise their first round of venture capital

If you’re an avid TechCrunch reader, someone who loves to absorb endless startup profiles and pore through fundraising stories, you might think raising venture capital is easy. In reality, it’s very, very difficult and not the best source of capital for most businesses.

For startups hoping to scale far and wide as fast as possible, VC may be the right fit. To shed light on the process of raising equity capital from venture capital firms and provide some exclusive tips and tricks for Extra Crunch subscribers, we sat down with three experts on the subject. Below are the top pieces of advice from Charles Hudson, founder and managing partner of Precursor Ventures, Redpoint Ventures general partner Annie Kadavy, and DocSend founder Russ Heddleston. The following has been lightly edited for length and clarity.

1. First, make sure your company is fit to raise venture capital.

Charles Hudson: I think venture capital, it’s really a specialty type of capital. It’s really for companies that have the aspiration to grow really quickly, to build really large businesses … If you’re not a company that needs to grow quickly, venture capital might not be the right source of capital for you. There has to be a really big prize at the end of the journey.

2. Raise capital early if you’re stressing about small costs or fretting competition

Russ Heddleston: If you’re thinking about whether or not to raise, there are a couple of reasons that I will often advise people to raise early. One is if they’re really stressing about buying a whiteboard for their office, or like some something of relatively small cost. If you think it could be a big company, and you’re stressing about small things, raise money and buy the whiteboard, hire the additional person and get back to what you should be doing, which is running your business and growing it quickly.

The other thing is if you ask the question, ‘is there a competitor I don’t know about?’ If you heard tomorrow, that competitor just raised $2 million, or $5 million or $10 million, how nervous would that make you? For some businesses, you’re like, I don’t really care, it’s a services industry, it’s not a winner take all market. And other times, you’re like, oh, I’d be really nervous. So if either those apply, that’s a good reason to make a compelling case to someone like Charles.

The number one thing you can do to get a VC’s attention is make [your pitch] really simple. Precursor Ventures' Charles Hudson

3. It’s OK to take a salary

Annie Kadavy: I’d be hard-pressed to think of an example where a founder is not paying themselves, the question, though, is how much? You’re paying yourself enough so that the basic costs of life and running your business are not giving you anxiety, because as an early stage investor one of our primary roles is to try and keep the baseline stress as low as it can be, because it’s really hard to go build a company.

If a founder is coming in at the Series A and they say I’m going to go pay myself $300,000, we might be like, well, that doesn’t really feel right, shouldn’t you want to put some of that money into the company? The ranges I’ve seen are anything from $60,000 up to probably $120,000 at the Series A, or maybe $150,000. Then, as the company grows and as the balance sheet grows and it’s de-risked, your salary as an executive at the company will scale with that.

4. Don’t be afraid to send a cold pitch

Hudson: Just be really simple and clear about what the product is, and for whom. I find that people who can’t rattle that off fairly quicklyusually more time spent with them does not produce more clarity of the inside of that business. And I’d say the number one thing you can do to get a VC’s attention is to make it really simple. This whole thing about the elevator pitch, people joke about it, it’s actually really important to be able to tell a really quick and concise story about your product, your customer and why it matters.

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DocSend co-founder & CEO Russ Heddleston and Precursor Ventures’ Charles Hudson speak onstage during TechCrunch Disrupt San Francisco 2019. (Photo by Kimberly White/Getty Images for TechCrunch)

5. Seriously, nail your elevator pitch

Heddleston: If you’re trying to describe to your good friends or family why are you quitting your well-paying job and investing two years of your life in thiswhatever you tell them to get them excited and to understand you is probably what you want to say in your pitch.

The easiest way to get in front of the Bay Area investor, is get in front of an investor [in your region]. Redpoint Ventures' Annie Kadavy

6. Solo founders: show you can play nicely with others

Hudson: We invest in a lot of single founders and my biggest concern with solo founders is are you on your own because you can’t inspire, recruit, or play nicely with others? If that’s the case, then that has all kinds of implications for the size of the company you can build.

But I think there’s one really nice thing about being a solo founder is that you have so much in your cap table to give to your early employees. You can make offers to those first few hires that are way out of market. So I think as long as I understand whyif there was no one else around in that moment of inceptionas long as it’s not a reflection of your ability to recruit and work with others, I don’t have any issue with it.

7. Remember, VC funds do invest outside of Silicon Valley

Kadavy: I think the easiest way to get in front of the Bay Area investor, is get in front of an investor [in your region], because those relationships are actually pretty tight. I’ll ping, you know, somebody in LA, who’s a seed investor, or even another Series A investor and say, ‘hey, what’s going on down there? I’m coming down for two days, who should I meet? Who should I see?’ And that’s an easy way to do it because they’re in your backyard.

The other way to do it is say, hey, I’m going to be in town for these five days and say, I’d love to sit down and talk with you about my company. And maybe you attach a deck or maybe a blurb or something. And what happens in my mind is oh, I have a time bound space on my calendar where I can meet this person. Let me do that while they’re here. And quite frankly, where they’re coming from is secondary to that.

8. When it comes to valuations, cheaper isn’t better

Hudson: Being cheaper doesn’t make it more attractive to me. There are some companies that have a $2 million pre-money valuation, because there’s a lot of issues with the company, and I might prefer to invest $4 million pre in a company that’s a little farther along or has a clear path forward versus something at $2 million pre that’s very, very nebulous.

A lot of times it ends up being a function of two things: competition and capital needs. We’ve had seed rounds that have gotten very, very, very expensive, not based on the company’s traction, but based on the seed investors perception of that founder’s likelihood of being successful because of their prior background, or the work that they have done with very little capital, or their reputation.