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Many VCs think that startup fundraising is an efficient market. They believe everything that ought to get funded gets funded. Underpinning this belief in the market's efficiency are two arguments. Argument one is that there is enough publicly available information that any founder willing to do the work can successfully prepare themselves for fundraising. While the second argument is that a founder’s inability to convince investors is evidence in and of itself of their deficiency, because if a founder can't sell to investors this is a sign that they also won't be able to sell to customers.
Working as an investor, I encountered this set of beliefs pretty regularly amongst peers, however, one thing I noticed was that ultra early stage VCs (i.e people at Pre-Seed funds and Accelerators) almost never held them. Why? My hunch is that actively working with large numbers of companies on fundraising when they are at their most vulnerable inoculates us against this point of view. An ironic result of these differing opinions is that Pre-Seed funds and Accelerators often devote huge amounts of time and resources into helping founders pitch to Seed investors, many of whom believe that the good companies would raise anyway. Someone who believes that startup fundraising is an efficient market would conclude that ultra early funds are wasting their time.
Having worked at a Pre-Seed fund for the last 3 years and prior to that at two leading European Seed funds, I firmly believe the startup fundraising market is inefficient. The VCs who argue the opposite are ignoring how the sausage is made. In this essay I'm going to explain what many investors are missing by 1) providing a window into why and how ultra early stage investors act to maximise their portfolio’s prospects and 2) showing the limitations of the information and the sales arguments above. I’ll then explain how I think publicly available startup fundraising resources can be improved so that more companies that should get funded have a fighting chance.
If you ask investors at Accelerators or Pre-Seed funds whether the best companies always have an easy time getting Seed funding they say no. They understand that there are two separate games, the business building game and the fundraising game. The clearest articulation of this came from a conversation I had with an investor at a leading European Pre-Seed Fund. He pointed out that since it is possible for people to raise a $5 million Seed round with nothing but an idea (yes even in 2023), any failure to raise a Seed round can justifiably be blamed on a lack of fundraising ability. The logic: If the founder could tell the story better, the fundraise would have worked. At the same time, raising Seed capital is clearly difficult. In the same conversion the investor mentioned that he had seen countless examples of businesses that, as an insider, he knew were performing, but still struggled raising a Seed round.
Pre-Seed investors are acutely aware of this imperfect alignment between business performance and fundraising ease. This is why they try to rig the game by investing a lot of energy into upskilling founders’ fundraising abilities. The hope is to maximise the number of founders getting the fundraising outcomes they deserve and to perhaps even steal some undeserved positive outcomes in the process. So how do they do it?
Pre-Seed funds and Accelerators don't simply rely on materials online but actually put in place their own bespoke programs to assist startups. At well established Accelerators in particular (e.g. Entrepreneur First and Antler) a huge amount of time and resources goes into this. Below is a non-exhaustive list of things that these institutions assist their portfolio companies with:
Creating Materials
Workshops
Process management
Getting calls
Pitch and narrative optimisation
These forms of support are far from superficial. One of the Accelerators I interviewed before writing this piece had the following approach to pitch training. They put all 40 members of their cohort through ten to 15 1-on1 practice sessions; with each of these sessions lasting 45 minutes and typically being conducted by 3rd party investors acting as volunteers. Founders are given unfiltered feedback on their narrative, learn what questions to expect about their business and generally get used to talking to investors. Given that they have two cohorts a year, this level of involvement means that the Accelerator is facilitating 7+ hours of pitch training for 80 separate companies. It would be a large organisational lift to do this for just one company, doing this all of them is testament to just how important they think this workstream is. And this is only part of their fundraising support program.
Even First Round Capital (Flexport, Superhuman, Looker) - a fund that can easily pick the ‘creme de la creme’ of Seed founders, i.e. those that least need help - runs a program. Their Pitch Assist is an immersive bootcamp designed to make their founders fighting fit for fundraising. While one could cynically look at the initiative as a marketing exercise, the amount of resources that go into the course (‘one hour of practice for every minute of the pitch’) make this seem unlikely. Instead it seems more plausible that this amount of effort is one of the reasons why 76% of First Round’s portfolio companies have successfully gone on to raise further capital. More than double the industry average!
While later stage VCs have the luxury of believing that the good companies automatically come with good pitches, those investing at the earliest stages have seen great businesses struggle with fundraising countless times. Thus they react by spending their time and energy to plug the gap between good businesses and founders and a successful fundraise.
Now that we’ve shown what the people tasked with raising Seed funding at scale are doing in practice, let’s turn to the arguments deployed by those who believe it's an efficient market.
The public information argument goes as follows. There is a lot of resourcing available for startups to learn how to get in front of VCs and what Seed investors want. There are blog posts, books and podcasts on teams, market sizing and valuation. There are manuals on how to write cold emails for investors and pitch deck templates. There are some amazingly dense resources provided by Tier 1 institutions like YC and NFX, as well as books like the Secrets of Sandhill Road and Venture Deals. You could probably even find detailed psychoanalysis of VCs!
Therefore, any sufficiently talented founder should be able to educate themselves, learn how to position their startup and raise money (provided their business is good). Those that can't take these resources and turn them into a funding round have no one to blame but themselves. I actually buy part of this argument. The publicly available resources can get a startup pretty far. In 2023, there is no real excuse for having a bad blurb, deck, one-pager or financial model because there are sufficient free examples online and you can see why they are good or bad. Similarly, while it is definitely harder for outsiders to get calls with investors, the resourcing on how to cold email your way into investors’ calendars is actually pretty good. There are also databases of VCs that are searchable by fund geography, strategy and cheque size. However, when we look at the four stages that most startups have to go through to successfully fundraise, good resourcing is missing from the last and most important part. The part where founders actually talk to investors and convince them to back them.
What makes the first three stages different from the last one? The fact that you can actually see examples of how to do them.
You can find seed investor lists, see 1000s of real pitch decks and free templates, access examples of good and bad cold emails. But what you can't see are examples of founders pitching VCs in the typical 30 min - 1h format that these interactions often take. The best thing founders have are recordings from demo days and pitch competitions and, I promise you, those couldn’t be further from what investor meetings really look like.
I recently listened to a podcast where Emmett Shear the Co-Founder and former CEO of Twitch was speaking about this. He argues that there is a significant but invisible number of startups that fall through the cracks because they are bad at talking to investors. His diagnosis of the reason why they struggle: “How can you expect someone to be good at something they’ve never even seen anyone else do?”
Yes founders can see decks but they can't hear the words, or questions. Expecting startup founders to be perfect without examples is like giving someone a language textbook and wondering why they are struggling to learn something they have never even heard spoken. Compared to designing decks or writing blurbs, founders have no good references to train their mental model on what a good or bad pitch actually sounds like. Recognising this is why the Accelerator mentioned above has over 7 hours of 1-on-1 pitch practice for all 80 of the startups they back each year and why First Round’s Pitch Assist recommends one hour of practice for every minute of pitching. This lack of practical examples is the reason why I started PitchDoctor!
Some investors might respond that, although founders lack resources they still can learn by using their first 5 or 10 meetings to triangulate their understanding of investors. However, this argument doesn’t pass the smell test.
Firstly it assumes that all founders are in markets with a deep pool of relevant investors - in Europe many Seed investors are geographically constrained limiting who a company can feasibly pitch. Secondly, investors are highly networked therefore using your first meetings to practise can burn your reputation poisoning later meetings with others. Lastly, how VCs approach feedback is not conducive to learning. Investors are often guilty of ghosting startups and when they do give feedback they often avoid telling the truth about why they said no. They bury negative feedback for two main reasons, 1) they want you to call them back if your startup suddenly takes off and 2) they want you to refer your talented friends to them.
In the end the argument that founders are sufficiently resourced rings false. There is an absence of the type of material that founders would actually need to get good at the most important step of fundraising, persuading investors in conversation. Moreover, the dishonest nature of VC feedback means that learning from a few meetings isn’t viable either - in many markets you'll likely run out of investors before you can get enough practice.
The second argument deployed is that a founder’s inability to fundraise is a sign of wider deficiency. The core of the idea is that any Founder bad at ‘selling’ to VCs is, by extrapolation, not good enough at persuasion to successfully grow their business as quickly as VCs dream of. A founder who can’t persuade, can’t sell and can’t recruit - two key skills needed on the journey to startup glory.
I see two problems with this line of reasoning 1) the false assumption that being good at pitching VCs is a good proxy for general persuasion skills and 2) the failure to acknowledge the difference between selling shares and selling products.
The argument assumes that all forms of persuasion are the same and that being good at persuasion in one area means you are good in others. A cursory glance at how sales teams (masters of persuasion) are set up in real life provides the counterargument. If all persuasion was the same then it wouldn’t be common for sales personnel to be specialised into different industries, customer sizes and contract sizes. Roles like technical sales wouldn’t exist. Yes persuasive skills bleed into one another, but different people are skilled and suited at persuading different people with different needs.
The story of Nike is a great illustration of this. Phil Knight the founder of Nike was by all reports, quiet and not particularly suited to sales.
While he was in Hawaii,… Phil gets a job as a stockbroker trying to sell stocks. He doesn't make any sales. He's the most introverted person in the world, he can't be a salesman.1
After starting what would become Nike, he attempted to raise money for his already operational and growing business from venture capitalists and local businesses. He fails miserably and ends up being forced to to raise from the families of his employees. According to the thinking above, it would make sense to write Nike off. Phil’s inability to sell shares would represent a clear sign that he lacked the persuasion skills to grow the business. If he couldn't win over investors, he definitely wouldn’t be able to persuade customers or talented employees to join him.
Reality, however, was quite different from theory. Phil Knight was uniquely qualified to sell running shoes. When it came to his actual customers - runners - as an ultra passionate founder and a domain expert with credibility as a former athlete, he was an extremely effective salesperson. He built the company up by “[going] to track meets and [convincing] kids and their parents to buy these shoes out of the back of his car.”1 While Phil may not have been able to convince equity investors or even sell encyclopaedias - this had no correlation with his ability to market Nike shoes to customers that he intimately understood. It also didn't handicap him when persuading Onitsuka Tiger to make him their US distribution partner, nor did it stop him from successfully recruiting Bill Bowerman (US Track legend) as a co-founder. Your ability to sell shares in your company is not a consistent proxy for your ability to persuade writ large.
The sales argument also misses the fundamental difference between selling shares in a company and selling more tangible products. To sell a product you are typically identifying a need that someone has and convincing them that what you are selling meets that need. It is typically a lot less reliant on belief. Selling shares in your startup is essentially selling lottery tickets and selling lottery tickets is fundamentally different. Most people think of lotteries as things stacked against you. Thus to sell someone a lottery ticket they need to be convinced that the odds are stacked in their favour and that if they win they will win big. That is an extremely different type of persuasion than getting someone to buy bookkeeping software. It doesn't make sense to assume skill at one translates to skill in the other.
Moreover, most startups don't start off good at sales. They often learn how to sell through trial and error and typically customer feedback is a lot more honest than VC feedback enabling companies to actually iterate. Startups have far more time and opportunities to practise selling to customers and than they ever get with investors. In light of this, it seems silly for the VCs to assume that, just because a founder isn't good at pitching them, they are bad at selling.
If we want to fix this as an industry and stop founders from falling through cracks, the solution is not waiting for investors to change how they see the world. People are time poor and to the extent that they need to sift through thousands of companies a year and select only a few investments it is logical for them to pick those that pitch the best. If we want to fix fundraising for founders we need to help them get better at getting their message across. We need to make the levels of fundraising support that are currently only available to people backed by Pre-Seed funds and Accelerators available to the masses. We can do this by:
While honest feedback is not easy to bring about at an industry wide scale, founder’s can help themselves a little. One thing that I’ve seen work for some founders is directly asking VCs to tell them what they really think after the bullsh*t rejection email. The trick here is to make it clear to the investor that you aren’t going to take it personally or hold it against them.
I’m more hopeful about the second solution. I believe it is very possible to make a library of founder's pitching VCs complete with those VCs honest analysis of what's good or bad about what they just heard. This will show how VCs discuss and evaluate startups when nobody’s watching. Founders would be able to learn in the same way that new sales personnel can, i.e. with recordings and analysis of other people's calls. They would finally be able to know what good looks and sounds like and not be forced to burn vital investor meetings in a bid to learn. I started PitchDoctor to bring this into reality.
PitchDoctor is designed to stop founders who ought to get money from falling through the cracks. It is practical material with an emphasis on examples so founders finally get a chance to see the thing they are magically expected to be good at. There is something fundamentally different about someone reading in a blogpost where they’re told that when pitching VCs the investor needs to believe that the market is big enough versus that same person seeing and hearing 3 founders describing their markets and seeing how investors react to them. The latter is much more useful. It is the answer to Emmett Shear’s rhetorical question: “How can you expect someone to be good at something they’ve never even seen anyone else do?”
My aim is to arm founders especially those outside of Accelerators and Seed funds with the ammunition that they need to have a fighting chance when it comes to fundraising from early stage investors. To date I have tested the product with 40+ founders and, based on their positive feedback, I’m certain it can make a difference. I have included a sample of the content below showing a founder walking through his market size with a VC and analysis of how it lands.
If you are a founder and want to see more content like this - check out the full free trial here. You might not have an Accelerator or Pre-Seed fund, but PitchDoctor is here to help you rig the game in your favour.
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1. An example VC investment memo
2. Our analysis of a founder:VC pitch from our premium library.
