Raising money for a startup is hard.
Raising a great VC round requires a combination of the art of storytelling and the science of a rigorous process (to pin down meetings and build fomo amongst investors).
The process is very important, but it’s also boring and hard. It would be better for all parties if founders could focus on the storytelling, and I believe this can be the case.
If deal-flow was democratised, it would mean that every investor saw every deal, rather than quietly being handed new deals via contacts. This would mean that VCs had to persuade founders why they should take their money rather than the next VC’s money. A meritocracy amongst investors, if you will. This could be a very good thing for founders because in an ideal world you’d pick your investor based on how helpful they can be, rather than how big their network is (a big network might just mean a fund has been around a while). Network is important, but only to an extent.
There’s a hidden force in the world of startups and investing which means that it’s not always the best company that wins. Sometimes it’s the company that’s simply best at raising money. This is sort of ok but means that investors might be missing out on enormous opportunities just because the founder was not as good in pitch meetings as the next founder, who was a persuasive character but turned out not to be great at running a business. To an extent, it’s the job of the investor to work these things out, but their job is made harder by an imperfect fundraising environment where founders who are weak fundraisers start at a disadvantage even though they might be fantastic operators.
It’s also interesting how this hidden effect plays out in the long term. As a great fundraiser, you raise from a top tier investor at seed stage. Series A investors then look at your company with a positive bias — ‘if they invested, it must be good!’. So the company raises from a top tier Series A fund.
Of 305 VC backed companies worth >$500m (Europe and US-based, founded in last 10 years), 140 (46%) raised series A from a top tier investor (top 50 funds out of over 7000 according to Pitchbook).
These investors will no doubt be skilled at picking great companies, but the pronounced findings are likely something to do with the halo cast over the company by having a good seed VC on board — you’re set on a virtuous circle to success.
Arguably, great fundraisers have it relatively easy (it’s still hard…). But you don’t have to be a great fundraiser from day one to build a big business. It’s a skill that grows over time and the startup’s fundraising efforts can eventually be supported by metrics which takes some of the pressure off the storytelling. What this means is that great startups are missing out on great rounds because their founders are not great storytellers.
Anyway, back to why democratising deal flow matters. If all the funds saw all the good companies, there’d be a far greater likelihood of founders who are weak fundraisers but have great businesses, raising great rounds. VCs might be looking too closely at founders’ ability to fundraise, and this could mean they’re not investing in the best companies. This would, in turn, mean they’re not getting the best returns for investors in their funds.
It’s important not to overlook the fact that being a great fundraiser can be a great signal. They’ll be able to convince great people to join the team, and customers to try their product. But my suggestion is that too much weight is being placed on their fundraising ability.
So, how should we democratise deal flow?
A few weeks ago, I launched The Seed Stage, which is a demo day without an accelerator. About 30 of the leading seed and pre-seed funds have co-promoted it and we have a ton of applications. We’ll each vote on the companies we like the most and the ones with the most votes will be invited to pitch at the virtual demo day. The demo day is open to anyone and already we’ve had over 400 registrations from people at funds including Balderton, Northzone, Draper Esprit, Lakestar, Index, Atomico and loads of angels.
Usually, you’d have to go through an accelerator to get the chance to pitch to such an esteemed group. This just seems like an easier route. For the funds, it should act as a great source of deal-flow. Demo day is on the 20th October at 10am and I’m thoroughly looking forward to it — I think there’ll be some fantastic companies pitching. Sign up to watch here.
Some funds might be worried about losing ‘proprietary’ deal-flow, but I don’t think this is too much of a worry. From conversations with more than 30 funds over the last few weeks I’ve learned that funds are more interested in seeing new deal-flow than they are worried about losing some proprietary deal-flow. This was an interesting find, and not necessarily what I expected.
The vision is for The Seed Stage to become known as the best place for companies to pitch their early-stage startups. My hope is that even the very best founders will apply in order to generate competition for their round. This demo day could become as hyped as the YC demo day, but it’ll take time to get there and this is only the start.