Last week we released an article about unprofitable growth.
The gist was that raising money to focus on growth – even if that growth isn’t increasing your revenue – might be a good strategy for some startups.
But not for everyone.
(We explained how you can figure out which strategy is right for you. Read more about it here.)
I was expecting reactions about this article from our community. But what I wasn’t expecting was the same question over and over again:
What makes a company VC-backable?
The answer is surprisingly uncomplicated (though not easy to achieve): VCs generally look for companies that can earn $100 million in revenue in about 5 years.
This is a tall order. No one denies that. But it is doable.
Generally speaking, this is the type of revenue VCs are looking to see:
- Year 1: $1-2 million in revenue
- Year 2: $6-7 million
- Year 3: $20-25 million
- Year 4: $50 million
- Year 5: $100 million
It’s very challenging to hit these numbers. And while some companies can successfully fundraise from VC firms without hitting them, it can be quite challenging.
Luckily, there is another alternative to raising traditional VC money: angels.
Angels, in this case, doesn’t refer to a winged creature sent from above. Angel Investors are individuals who choose to use their disposable income to invest in startups.
And (here’s the best part) they’re all around us.
But first… what’s the difference between VCs and angels?
A VC (venture capital) firm is a group of investors who go out and raise a bunch of money. Then they use that money to invest in other companies.
Because of the nature of their business, VCs have a financial responsibility to return their investors’ money (plus some).
Angel investors, on the other hand, are just individuals who invest in companies on their own.
Since they don’t have a financial responsibility to outside investors, angels don’t need to see a specific return on their investment.
Which means that they’re not necessarily looking for companies to hit certain revenue benchmarks before writing a check.
The other big difference between VCs and angels is the size of the checks they write.
Where VCs often write large checks (think $100k+), angels write checks of all sizes, from $1k to $100k.
Why is that a good thing?
Small checks can be very useful for a fundraising founder.
First off, it’s often easier to convince a bunch of people to write small checks rather than a few people to write huge checks.
And those handful of small checks can create a ton of momentum as you continue to have conversations with other potential investors. Seeing that others have jumped onboard (even if it's a smaller investment) is social proof to other angels that they should at least consider the opportunity.
Secondly, people who invest in your company want you to succeed. It’s in their best interest.
So they’re more likely to introduce you to their wealthy friends… giving you even more opportunities to elicit more checks.
So how do you raise angel money?
Tip #1: Pitch Everyone
When she was on the fundraising circuit, Elizabeth Yin (GP at Hustle Fund) did something insane. She pitched her eye doctor.
If you’re asking yourself “why?” and also “wasn’t that awkward?”, join the club.
The “why” starts to make sense when you think about who angel Investors are: people with disposable income who want to invest in companies.
Elizabeth knows one important fact about doctors: they make good money.
She didn’t expect the conversation to go anywhere, but as it turns out… her opthamologist actually is a part-time investor.
And while he didn’t end up investing in Elizabeth’s first round of funding, she learned something important: her eye doctor is an active investor. So the next time she goes out fundraising, that’s a warm lead she can follow-up on.
The moral of the story is this: you just never know who is a good candidate to invest in your business.
The worst thing that can happen is that the person you pitch says 'no'.
But there are ways to turn the 'no' into something valuable. Which leads us to...
Tip #2: Ask for referrals
After he turned her down, Elizabeth asked her optometrist this question: Do you know one person who might be interested?
She could have asked for 10 people. Or 5 people. But she didn’t… she asked for one.
Most people out there know one wealthy person. And this optometrist was no exception. Feeling badly that he turned her down, the doctor introduced Elizabeth to his doctor friends, and her fundraising efforts continued.
Tip #3: Embrace the awkward
When asked, Elizabeth told me that pitching her eye doctor was pretty awkward.
“But pitching anyone is awkward in the beginning,” she said.
The secret? Just keep doing it. The more you do it, the more comfortable you get, and the smoother your pitch becomes.
Speaking of which...
Tip #4: Nail your elevator pitch.
The next time you’re at a social event, and someone asks “How are you?” or even “What do you do?” that’s an opportunity to let them know you’re fundraising.
Of course, whipping out your phone to show off your slide deck isn’t always good cocktail-hour etiquette.
But you can give them a 15-second run-down on what you do.
New Acquaintance: “Hey Elizabeth, great to meet you. What do you do?”
Elizabeth: “Oh, I run a digital ad platform that helps companies track and measure their ad campaigns. We’re actually fundraising right now, if you or anyone you know would be interested (insert laugh here to soften the awkward).”
That’s it. If he’s not interested, they’ll move to another topic.
If he is, or if he knows someone who might be a good fit, then that 15 seconds was a great use of her time.
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