What Mistakes Do VCs Make When Fundraising? | by Mark Suster

A few weeks ago I had the pleasure of speaking Samir Kaji on the Venture Unlocked podcast on a wide range of topics that venture capitalists think about every day, such as:

  • How to Build a Generational Business: Retaining Partner Talent and Finding the Networking and Complementary Skills Companies Need to Succeed Over Time
  • The state of the current adventure and how COVID grouped 10 years of technological change into an accelerated year
  • Human Psychology of Decision Making and a book that I think all VCs should read
  • How to get LPs to become true believers and why I think data rooms are where bids die

And much more. You can listen to the whole conversation above or through this link, but I also wanted to highlight a topic we discussed that I feel very sorry for, which is how I think business sales and fundraising are basically the same muscle. . Let me explain.

One of the common mistakes I see that startups and VCs make is spending too much time funneling. Because? Because it’s relatively easy to have a first meeting, get to know each other, share stories, and so on. that you start to restrict yourself and do the work to close the deal or risk hearing a no. But here’s the problem: it’s not just startups that do it. We all do it on this side of the table as well. LPs, VC, everyone. We love the first encounters! It is the middle and lower funnel that is difficult.

In fact, I wrote a previous blog post about “Why Successful People Focus on the Bottom of the Funnel.”

I advise early VCs (as well as founders) to have medium funnel strategies to get from the first LP meeting to closing and spend a disproportionate amount of time in this area (I will tell you more about this in the podcast from time code 27). : 41). Like any business sale, you want to think from the buyer’s perspective and what it takes to feel confident about the decision to buy a stake or ownership of your fund.

Here are the three rules I think about any sale, whether it’s business sales or when I’m trying to move LPs to a decision, there are three keys you need to be able to answer:

  • Why buy anything?
  • Why buy me?
  • Why buy now?

Why buy anything?

When it comes to raising a first fund (or a fifth or even a tenth), it’s about setting your primary target market and figuring out who’s in the market for what you are they sold? While there is a wide range of LPs and you could have your first meetings for months (and many VCs do), there are probably a much smaller number of LPs who want to invest in a fund. yours size, with yours focus, and the minimum or maximum check size aligns with what you’re looking for.

So I encourage first-time fundraisers to qualify, qualify, qualify. Do your homework to find people who want to buy specifically what you sell. Investigate all those who have raised funds of a comparable size and find out who supported them: this is your target market. All other conversations will be wasted time and, like a business startup, lost time is an existential threat.

Why buy me?

Okay, you have found your target LPs that are investing in funds at your stage. Now is the time to convince them why they should invest yours funds, when they could invest in other funds with more proven returns or partners. And again, these would mean that you have to spend for these processes differentiation – What makes you different and complementary to all the other funds in your portfolio? What is your unique selling proposition?

For Upfront, this is Los Angeles. We invest 40% of our dollars in Southern California companies, and while that by definition means most of our dollars are invested outside the area, this still makes us very different from the other ten Sand Funds. Hill Road with whom this LP might be talking. . We’re definitely not a “regional investor,” but we do have some comparative advantage in much of our offerings.

It is essential to bet on a firm differentiator and here’s why: highlight whether or not you are a good bet for this LP. If you do everything other companies do in the same way, why should they buy from you? And yes, a firm differentiator means that not everyone will accept your thesis, but that’s fine. You don’t need everyone, you just need a few basic believers and having a tough “why buy me” argument makes it easier to find and convert those potential customers.

“Why buy from me” is also a good time to take advantage of referrals and outsiders who can give you a guarantee, who can defend who you are and why you are a good bet. Everyone likes to know that someone else bought it first, and LPs are no different.

Why buy now?

This may be the hardest selling of the three rules, whether you’re in business sales (“why buy this now when I can wait until you have more traction, more logos, more product features?”) Or if you’re creating a fund (“why invest now when I can see how your first fund is and move on to the next?”)

It’s about creating scarcity and being willing to leave, but doing so with a smile on your face. For Upfront, we raise funds of a constant size and have been fortunate to have LP with us fund after fund, either in our main fund A or in our growth funds that support some of our most promising investments. This means that there is not much room to attract new investors to the line, and hopefully this will also be true with funds for the first time: they do so well that the second fund is oversubscribed. Any customer, whether an LP or a buyer of a large company, should know that there is a possibility that they will be lost.

You can hear more about these three rules and more in my conversation with Samir – it was fun and I hope you enjoy it as much as I do.

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