Investors seldom tell you why your idea is rejected

 

Tom Blomfield, a group partner at Y Combinator, shared some candid insights about the fundraising process and investor behavior during a session titled “How to Raise Money and Come Out Alive” at TechCrunch Early Stage in Boston. Here are some key takeaways from his talk:

1. Investor Feedback: Blomfield emphasized that when investors pass on a startup, they often don't provide the real reasons for their decision. Instead, they may cite superficial concerns about the market, product, or team. In reality, the main factor influencing their decision is often their perception of the founder's qualities, such as intelligence, work ethic, and capability.

2. The Power Law of Investor Returns: Blomfield highlighted the importance of understanding the Power Law of Returns in venture capital. VCs are primarily focused on identifying startups with the potential for significant returns, often aiming for 100x to 1000x returns on their investments. As a founder, it's crucial to convince investors that your startup has the potential to be one of those outliers.

3. Total Addressable Market (TAM): Founders should have a clear understanding of their TAM and be able to articulate it convincingly to investors. The TAM represents the total revenue opportunity available to the startup if it were to capture 100% of its target market. It's a key metric that VCs use to evaluate the potential scale of a business.

4. Creating Leverage: Raising venture capital involves creating leverage and competition among investors to secure favorable terms. Blomfield emphasized the importance of creating a high-pressure situation where multiple investors are bidding for the company. Even if not part of an accelerator program like Y Combinator, founders can still create competition among investors by running a tight fundraising process and strategically scheduling meetings.

5. Angel Investors: Angel investors often invest at a higher rate than VCs, particularly for early-stage deals. They can be swayed by a compelling founder or vision, even if the business is still in its early stages. Angel investors can also provide valuable introductions to other investors and help build momentum in fundraising efforts.

6. Investor Diligence: Founders should conduct thorough due diligence on potential investors before accepting their investment. This involves looking beyond the size of their fund or the names in their portfolio and examining their reputation, track record, and approach to working with founders. Speaking with founders of companies that have not performed well within an investor's portfolio can provide valuable insights into their behavior in challenging situations.

Overall, Blomfield's insights shed light on the complexities of the fundraising process and the importance of understanding investor motivations and behaviors.