How to raise money from existing investors in your first round of funding
The easiest way to raise your next round of funding is to start it out with money from your existing investors. This is why in almost every Techcrunch Series B funding announcement you see “participation from existing investors” somewhere in the article, unless the original investors were priced out of the round. There are several reasons for this: existing investors already believe in the product, if things are going well they want to protect their past investment from not receiving funding for poor reasons, and they are able to ensure the new funding doesn’t do anything to screw over their previous investments. As a founder, this means the ideal composition of a new round of financing consists existing investors + new strategic partners. But what if you’re not raising a Series B - what if you’re raising you’re first seed funding? How do you get the magic that is “existing investors” when you don’t have any investors? You have to make the people you’re pitching become investors before they write a check.
We all know that investors come in many forms - founders invest their time and expertise, advisors invest their connections and experience, and VCs and Angels invest their money. That’s how we see it - but it’s not always that straightforward. In fact, the best Angels and VCs at the minimum make powerful introductions to sales channels, partnerships, and talent to take their investments to the next level. The trick is to make your investors invest in this way before they write you a check, making them “existing investors” in every way except exchanging equity for cash. Here’s how to do it:
1: Make sure they know you’re looking for a financial investment first
It’s classic startup advice to attempt to get intros to investors by asking for advice first and money second. While this is a fantastic strategy, if the investor isn’t clear that you’re absolutely looking for a financial investment from them, they’re likely to avoid talking about a financial investment for as long as they possible can. Investors love to be the last money into a round to see as much social proof and validation of the product as they can before committing, but founders need early commitments more than anything when raising money. Further, this process isn’t about tricks or lies - you need people to know what your goals are so they don’t feel manipulated. Make sure people you want money from know you want money from them, even while attempting to get them to invest in other ways
2: Make the right ask
Investors are looking for weaknesses in your startup - they exist and they will find them. Look for the moment when they identify a weakness in your startup that they themselves would be able to best help you with, own up to it as a weakness, and ask for their help in a tangible way. If they offer to make an introduction to someone who can help you with this problem - ask them to come with you. Ask them to get as involved as possible - this will give them a feeling of being a part of what you’re doing and simultaneously give them the chance to see how your team operates first hand.
3: Thou shalt not bullshit investors
This strategy doesn’t work if you’re being manipulative. It just doesn’t. You need to earnestly want the help of the investor, honestly assess and communicate their value to you that goes beyond money, and the genuinely treat them as part of the team while they are helping you. I’m sure there are people who can bullshit their way to raising funding, but if you were one of those people, you wouldn’t be reading this post. Just like you need a product that fits a real need, a team that can actually execute, and some small but real evidence that you’re on the right track, you need strategies for raising money that involve treating people with honesty and respect. Asking for help from investors isn’t about tricking them - it’s about making them part of your team and giving them a better look at you. Once they’ve invested in you and your team, they’ll have a better idea of whether they want to write a check - and that’s all you can ask for.
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