When fundraising, ignore the why.
If you’ve been around the Australian startup ecosystem for a few years, you will have heard the major venture capital firms parrot the same line.
“It’s never too early to come and talk to us. We invest from pre-seed all the way through and we love to meet founders early. In fact 60 to 70% of our investments were made when the company was pre-revenue”.
They are not lying and I am sure their internal data backs it up. They do invest early, and yet Australian founders will often tell a very different story. They don’t believe that VCs invest early, because their experience tells them otherwise.
“I pitched LEADING VC FIRM and got told we were too early for investment. They want to see more traction first and told me to come back in 12 months”.
What gives? How can we have a collection of investors who invest pre-revenue, but who ALL have a reputation for not investing into early companies?
It’s because they aren’t giving you all the information.
Venture Investors Tell Noble Lies All The Time
If you are a venture investor, your goal is to put your money into the best companies. To do that you need the best founders to choose you when they elect to raise money. It’s no more complex than that.
Unfortunately it can be very hard to pick who is going to be successful in the early days of a company. The company might look a bit janky now, but what happens if they suddenly start flying in 18 months time? Do you want to be the VC that missed the boat?
You don’t.
You always want a founder to come back to you if they somehow miraculously manage to get their distribution pumping. The only way to get a founder to come back to you is to let them down gently. Make them feel like with just a bit more traction you would be in. That does two things:
If they turn out to be amaze balls in 18 months time, they will remember you as a good human and come back with their deal.
If you were right and they do suck, they still leave with a good experience. They tell their friends it was a good experience and this creates more deal flow via referrals.
If the VC thinks the CEO is a dingus or the market opportunity is tough, they have very little incentive to pass this information on. It’s all downside. What they should do instead as a rational actor is give the founder a polite no. This encourages the founder to return in the future.
Which brings us back to “You are a bit early for us”. It’s the perfect let down. It doesn’t say anything bad about the business and leaves the founder thinking “wow - I just need to get a little bit further along and I can come back for money”.
If you are the founder, I can tell you this is rarely true. You are almost never too early in Australia because as their own marketing shows, they invest pre-revenue all the time. What is actually happening here is that the VC feels uncomfortable with some aspect of your business, or with the team. They just aren’t telling you what it is.
When you get told you are too early, dig deeper. Ask which aspect of your business they would want to see more evidence of success in. It’s your job to work out what the issue might be, because it probably has nothing to do with your traction or lack of it.
Your Actions Build Your Reputation
The venture community in Australia has a reputation for not investing early, despite their protestations to the contrary. I suspect it is because they use the line “you are too early for us” as a crutch to avoid offending founders. You say that to enough people, and pretty soon you develop a reputation for not investing in early stage companies.
If you have chosen the right VC for the stage of your company and you are told you are too early, it’s a noble lie. They just don’t want to tell you the real reason.
You should believe the no but ignore the why.