The venture capital market is slowing down, which means early-stage founders are chasing a smaller pool of money.
According to Carta, the number of seed deals funded between Q4 2021 and Q1 2022 fell 41%, and dollar volume followed suit, dropping from $2.62 billion to $1.81 billion, a 31% decline.
Don’t abandon all hope: “You can still finance hopes and dreams, but just with smaller dollars,” Mayfield Partner Arvind Gupta recently told TechCrunch+.
But founding teams that close a fundraising round will find themselves with a shorter runway than they planned on, which means partnering with an investor who understands the business well enough to add value is even more critical than it was a year ago.
“Oftentimes, investors have a sense of whether a pitch is going to go somewhere within the first 15-20 minutes of a conversation.” Christine Tsai
Because a founder’s pitch is the first step on that journey, we’re running a series of interviews with active investors to learn more about what they’re looking for and how they prefer to be approached.
We also asked each of them to name a pro forma pitch practices that founders should retire. Angel investor Marjorie Radlo-Zandi said entrepreneurs who embellish the size of their market are sabotaging themselves.
“Don’t be tempted to overstate your market size and its infinite potential,” she said. “We call blatantly inflated numbers ‘handwaving.’ If you exaggerate, you’ll appear less credible to investors. Not all investors expect to invest in the next unicorn.”
Thanks very much to everyone who participated:
- Christine Tsai, CEO and founding partner, 500 Global
- Marjorie Radlo-Zandi, angel, Launchpad Venture Group, Branch Venture Group
- Clelia Warburg Peters, managing partner, Era Ventures
- Anarghya Vardhana, partner, Maveron LLC
- Frederic Huynen, partner, and Wijnand Bekker, associate, HPE Growth
Christine Tsai, CEO and founding partner, 500 Global
What kind of investment opportunities are you looking for in Q3 2022?
We will continue to invest across many sectors and geographies, as we have been for the past decade. A big advantage of this approach is that we can spot trends happening at global scale — we’ve often found that certain sectors aren’t considered “hot” in some regions, but they’re emerging and growing fast in others.
Shining a spotlight on one area we’ve increasingly spending more time on — web3. What’s particularly notable here is that unlike sector innovation in the past that may start in Silicon Valley and spread out to other countries later, web3 innovation is happening everywhere and simultaneously.
We are particularly excited about opportunities to further build web3 infrastructure and interoperability and create a more inclusive, equitable ecosystem for wealth creation at a global scale.
How do you prefer to be approached by a founder with their initial pitch: a cold email, a warm intro or another method?
All of the above! We’ve invested in companies that come in via warm intros from the 500 Global network (especially from our existing founders), as well as companies that pursued cold outreach or applied on our website.
This is key to finding diverse teams — expanding our networks such that we can discover great founders with diverse backgrounds and expertise.
Can you share one piece of advice that can help a first-time founder stand out?
Take the time to make your pitch personal and connect with the other side of the table. So often, meetings feel purely transactional and become a one-way conversation. Especially with the increase in virtual meetings, it is more difficult to tell whether the investor is engaged.
So you should ensure that they aren’t tuning out. When a founder takes the time to really understand what makes the investor tick and the meeting is a more lively conversation, it helps to build trust and engagement both ways.
Also, what happens after the meeting matters a lot. Regardless of the investor’s decision, founders that try to stay in touch and build a relationship leave a lasting impression on me.
What’s one traditional fundraising tactic that founders should remove from their toolkit — something that no longer works, but is still a pro forma practice?
When founders mention that their team has a “combined XX+ years of experience.” Founders often do this to make up for the fact that they don’t have a lot of experience individually, but this figure doesn’t mean anything to me.
I would rather see founders focus on what they do bring to the table and their big vision for the company. What they have done is not as important as what they will do.
Tell us about the best pitch you’ve received recently: At what point in their presentation did you realize you were going to invest?
The best pitches are those that are a two-way conversation. Approach it as a discussion rather than a presentation. Keep it conversational and show that you have done your homework.
How can you be a good partner to the investor and vice versa? It’s important to think of investments as a long-term relationship versus writing a check and nothing more. I also encourage founders to pause throughout the pitch to ask whether investors have any questions or input.
Oftentimes, investors have a sense of whether a pitch is going to go somewhere within the first 15-20 minutes of a conversation. I’ll have an idea of whether the investment opportunity is something I want to be a part of and help grow.
Recent examples that stand out for me are our investments in Kiira Health — a technology-enabled healthcare provider focused on addressing the needs of young multicultural women, and Retailo, a B2B marketplace that is digitizing retail supply chains in the Middle East and Pakistan.
While these companies are in vastly different industries, one thing stood out when meeting with the founders: I felt a connection because they took the time to build a relationship and share how their values align with ours. It was also notable that they were always very accessible and quick to respond to follow-up questions. They also did a great job building trust by being open and transparent with their company metrics and data.
What are you reading/watching/listening to right now?
I’m currently reading “Pachinko” by Min Jin Lee. The story chronicles a Korean family across four generations. It is a riveting story and one that is personal to me because of my own Korean heritage and what my grandparents experienced during the Japanese occupation of Korea. Pachinko was also turned into an AppleTV+ series, so I’m watching that and reading the book in parallel.
I’m currently listening to a few podcasts. Two of my favorites are Capital Allocators with Ted Seides and StrictlyVC with Connie Loizos. Their guests include a number of established and emerging managers, allocators and thought leaders in venture capital. I enjoy learning from the various perspectives they bring onto their shows.
I’m also a big fan of The Dave Chang Show. Dave Chang has smart, inspiring and oftentimes hilarious conversations with a wide cast of leaders and visionaries. As a fellow Korean-American, I resonate a lot with how Dave describes his experience growing up as a “hyphenated American” and how he came full circle with his Korean identity. (One of my dream list items is to be a guest on his show.)
Marjorie Radlo-Zandi, angel, Launchpad Venture Group, Branch Venture Group
What kind of opportunities are you looking for in Q3 2022?
I belong to two angel investment groups: Launchpad Venture Group and Branch Venture Group.
Launchpad is the third-largest angel investment group in the U.S. It focuses on tech, clean tech and life science early-stage companies in the Northeastern United States.
Branch focuses on food and food tech throughout North America. We invest mainly in priced equity rounds for seed through Series A stage funding.
Q3 2022 at Launchpad has us looking for companies inventing or innovating tech and life science solutions for current and expected challenges and opportunities with a strong product-market fit.
At Branch, we’ll continue to zero-in on innovative clean food products, or food tech companies with significant breakthroughs. Our primary sector includes food and beverage products, sector-related digital content and media, e-commerce and marketplace platforms, direct to consumer, agriculture technology, industry robotics and restaurant technology.
For 2022 and 2023, some trends we’re seeing and continue to look for are:
“Better for you” food and beverages and cultured protein. From the perspective of food as medicine, I am seeing several new trends in the F&B industry, including clean labels, low salt and sugar, natural functional additives, gut health products, environment-friendly and cruelty-free cultured meat and fish.
Telehealth and rapid diagnostics: With the global pandemic, telehealth has grown 38 times from before the pandemic, proving it’s here to stay. Accompanying this trend is a surge in development of rapid, often at-home diagnostics both for people and their companion animals.
AI, machine learning, predictive analytics: As machine learning and telehealth become ensconced in society, AI and predictive analytics will increasingly be woven into a range of industries, with startups in education and healthcare among the dominant sectors.
In health care, predictive analytics aim to alert clinicians to the likelihood of a patient event before it happens. It already assists with the diagnosis of hard-to-identify diseases through algorithmic models that use historical and real-time data. Predictive analytics is increasingly accurate and has expanded to include more diseases.
AI in education is expanding to be useful for both teachers and students. One such area is providing immediate feedback to students as they drill down to more challenging issues and problem-solving.
How do you prefer to be approached by a founder with their initial pitch: a cold email, a warm intro or another method?
If your company fits into our areas, succinctly state your value proposition directly to me via LinkedIn InMail. If I’m interested, I’ll ask for your pitch deck. If I see a fit and am further interested, I’ll schedule a Zoom meeting with you. We don’t need to be connected on LinkedIn for you to message me.
Can you share one piece of advice that can help a first-time founder stand out?
As a founder, you must show a combination of humility, honesty and passion and have a team that combines technical wizardry and business know-how within a market you know extremely well.
Show how your company’s product or service has a huge advantage versus the competition; or show how it solves a huge problem where there currently is no solution, and it’s within a large total available market that can rapidly scale.
What’s one traditional fundraising tactic that founders should remove from their toolkit — something that no longer works, but is a pro forma practice?
Don’t pepper your presentation with jargon, because investors won’t be impressed; it may backfire on you. Investors come from many different backgrounds; a presentation full of buzzwords that lacks substance won’t entice them.
Don’t be tempted to overstate your market size and its infinite potential. If you exaggerate, you’ll appear less credible to investors. Not all investors expect to invest in the next unicorn.
What are you reading/watching/listening to right now?
With Ukraine and Russia in the headlines, I am rereading “Red Notice.” American investor Bill Browder tells his true story for justice that made him an international human rights leader. The book presents the history and inner workings in Russia that led to Russia’s 2022 invasion of Ukraine.
I’m also reading the excerpts of my husband’s cousin, Shori Zand’s, journey from immigrant to one of the top entrepreneurs in Sweden. The book is being translated to English, and I get to read sections as they’re translated.
Clelia Warburg Peters, managing partner, Era Ventures
What kind of investment opportunities are you looking for in Q3 2022?
We are looking to partner with founders building transformational businesses that impact the physical world. We are particularly excited about businesses that are improving the ways that we build, making the residential transaction process easier and serving the long tail of the commercial real estate market.
Ultimately, we are excited to meet any passionate, driven and kind founder trying to solve a big problem for the physical world that needs to be fixed right now.
How do you prefer to be approached by a founder with their initial pitch: a cold email, a warm intro or another method?
A warm intro — it helps me contextualize where the founder is coming from and ensures that the person connecting us thinks we could be a fit.
For founders who might have less conventional access to VCs, I am always open to a cold email (clelia@eraventures.com), but it should be specific and describe why they think Era Ventures could be a good partner for them.
Mass emails are a turnoff.
Can you share one piece of advice that can help a first-time founder stand out?
You should approach fundraising with the same process and structure that you would when launching a product. Refine your pitch with early feedback, and then develop a tiered meeting strategy (tier 1 investors, tier 2 investors, etc.) which you batch and book well in advance.
This more structured process gives your top investors adequate time to perform diligence on the company and ideally means that you receive offers/term sheets back in a similar timeframe.
Also remember that in today’s venture market, capital is more of a commodity, so you should be looking for an investor who truly seems to understand your business, can add value and can be a great partner.
If you are too focused on “selling,” it makes it harder to genuinely tell what the personal connection feels like. If you show up and be yourself, it allows for an authentic relationship to develop (or not).
Tell us about the best pitch you’ve received recently: At what point in their presentation did you realize you were going to invest?
It would be unusual for me that I would know I was going to invest based on a single interaction, but I can generally tell quickly if I don’t think an investment is a fit for Era.
With companies where I end up investing, I generally leave the first discussion with my mind racing, feeling really excited about the concept, and then, as I learn more, my excitement about the team and the company continues to increase.
By the time I choose to invest, I ideally want to be at a “stop strangers on the street to proselytize about the company” level of enthusiasm.
What’s one traditional fundraising tactic that founders should remove from their toolkit — something that no longer works, but is still a pro forma practice?
Overvaluing your round, or mistaking raising money for successfully building a company!
The froth in the market in the past few years has meant that round size has become a proxy for success, but this is not necessarily the case.
I think we are going to see companies get stuck as they transition from “early” venture rounds (seed through Series B), where there is currently so much money chasing good deals that valuations are still inflated, and the “growth” rounds (or, for the lucky few, the public markets), where more mature companies will face greater valuation scrutiny.
This may make Series C the new “crisis round,” as companies that were overvalued by the earlier-stage market confront the reality of the growth market, meaning we may see more regular markdowns and down rounds at this inflection point.
What are you reading/watching/listening to right now?
It’s National Poetry Month and I try to send a poem a day out to friends and family in April, so I am reading a lot of poetry! In particular, I am a huge fan of the work of Mary Oliver, Alice Walker and Walt Whitman.
I have been watching “WeCrashed” (and previously watched the WeWork documentaries). WeWork is arguably the world’s best known proptech company, but it’s been interesting to see how little focus is given to either the visionary nature of the solution or the business risks. Even in film, the primary focus is the cult of personality around the Newmans.
I have a three-year-old and a five-year-old and am therefore listening to [the “Encanto” soundtrack]. On repeat, all day, every day.
Anarghya Vardhana, partner, Maveron LLC
What kind of investment opportunities are you looking for in Q3 2022?
Consumer healthcare companies, pre-seed to series A. What does consumer healthcare mean? Digital health companies that have a consumer-facing brand, though I prefer that the payor pays!
How do you prefer to be approached by a founder with their initial pitch: a cold email, a warm intro or another method?
A warm intro is easiest, given how inundated my inbox can get. I also do a lot of thesis-based outbound. For that, I’ll study an area, form a thesis and then go search for companies that fall into specific criteria.
Writing about what you are doing, getting press, etc., can help you be seen by investors like me.
Can you share one piece of advice that can help a first-time founder stand out?
Talk about founder-product fit, not just product-market fit. Why are you the right person to build this? What makes you uniquely advantaged?
Tell us about the best pitch you’ve received recently: At what point in their presentation did you realize you were going to invest?
The founder had a clear roadmap for what they were building, when and why. They had a sense of what was in scope now and could come onto the roadmap later. And they had a strong sense of what the business model and unit economics would be now and at scale.
What’s one traditional fundraising tactic that founders should remove from their toolkit — something that no longer works, but is still a pro forma practice?
Explaining how they think the company could exit.
What are you reading/watching/listening to right now?
I’m reading the Out of Pocket substack, watching “Succession” on HBO and listening to my favorite Brit, Harry Stebbings!
Frederic Huynen, partner, and Wijnand Bekker, associate, HPE Growth
What kind of investment opportunities are you looking for in Q3 2022?
We continue to look for world-class teams at companies across software, fintech, digital health and consumer internet-enabled tech that have established clear proof points with respect to product-market-fit, are growing fast in a capital-efficient and sustainable way and are considering a Series B-C round.
How do you prefer to be approached by a founder with their initial pitch: a cold email, a warm intro or another method?
Whether we receive info through a cold email or an in-person meeting, we’re interested in understanding the vision and motivation of the founder as well as the value proposition and the historical track record of the company.
As part of our assessment, we will (in)directly check some references, so a warm intro could be helpful, but is definitely not a requirement.
Can you share one piece of advice that can help a first-time founder stand out?
Some founders focus a lot on what their company is doing, but forget to drill down on why they’re doing something. Taking that leap of faith, perhaps quitting a well-paid job and starting a company has major implications that often also completely shakes up one’s personal life.
We’re as much interested in the intrinsic motivation of the founder as well as about the actual value proposition of the company. Don’t be afraid to open yourself up to investors and share your personal story.
What’s one traditional fundraising tactic that founders should remove from their toolkit — something that no longer works, but is still a pro forma practice?
Don’t try to lure in investors by misrepresenting certain key metrics (e.g., inflating net retention rates by only focusing on one customer). Make sure to clearly communicate your value proposition and be transparent about your company’s underlying metrics (e.g., ARR dynamics, unit economics).
Many investors you’ll reach out to won’t be a good fit based on their investment criteria. When these investors look deeper into your company, they will find the correct representation of all relevant metrics and will then pass on the opportunity anyway.
By providing investors with a clear overview of your business upfront, you won’t waste too much time on interacting with investors that are not a good fit, and you can spend more time on convincing the investors that actually might be a good fit to invest in your company.
What are you reading/watching/listening to right now?
The Almanack of Naval Ravikant: This is a great collection of Naval’s most interesting interviews and reflections based on his experiences from the last 10 years.
From Impossible to Inevitable: This book provides the hypergrowth playbook of companies like HubSpot, Salesforce.com and EchoSign. It’s a very interesting read that provides you with a basic introduction to all relevant metrics for SaaS companies and gives you a flying start in understanding how successful SaaS companies quickly scale their business.
Range, by David Epstein: Following the ongoing trend of ever-increasing specialization, he covers how generalists triumph in a specialized world. By providing stories and research, he explains how developing a range can help us excel.