10 Important Tips For Finding VC Funding

Believing in your product and doing your homework are just the beginning of effectively finding venture capital funding. Travel site Hipmunk's founder shares his tips on how to make sure your startup is ready to attract money.

Silicon Valley is the land of big ideas and startups looking to become the next household name. According to a recent Venture Capital report, venture firms nationwide invested $7.8 billion in 1,005 startups in the third quarter of 2013 alone. Nearly half that money went to companies in Silicon Valley.

PitchBook’s 2013 Global Venture Capital data reports there were 107 IPOs in 2013--the highest number since 2007, and according to the Silicon Valley Business Journal, more than 1,900 startups made funding efforts public on AngelList since the site opened to public pitches last fall. There are now more sources of funding for early-stage, promising companies than ever before.

But with so many entrepreneurs out there vying for attention from investors, how can you make yourself stand out from the pack? Here are 10 tips for aspiring entrepreneurs seeking funding:

1. Deliver a product that people--including you--truly believe in.

Investors are good at sniffing out people who aren’t excited about what they’re working on. That’s not to say you have to build a consumer product, but it does mean that your fundamental reason for starting the company should be something more than “I think it’ll be easy to raise money for this idea.”

2. Don’t be afraid of failure.

Nobody’s going to fund you if you have something that’s not working. But if you show yourself willing to pivot to more promising opportunities, you have a chance. Our initial idea for Hipmunk was all about flights, but once we realized that we’d never be able to build a huge flight business, we put our energy into hotels.

3. Make sure you’re filling a real need before raising significant funding.

When we started Hipmunk, we believed there was an opportunity to make travel search faster and easier. But we didn’t raise our seed funding or Series A until after we launched the product and confirmed that thousands of other users loved it too. The startup world is littered with failed companies that raised money to scale up without having a product that could scale.

4. Demonstrate to potential investors how engaged your users are in your product.

You can’t fake loyal users. Use hard numbers rather than soft “positive user feedback” whenever possible. But use the metrics that make sense for your business: if you’re building a product that you’re trying to get people to use every day, report how many people are using your product every day--not every month.

5. Choose a cofounder with complementing skills.

When we were launching Hipmunk, I took on the business development role, while my cofounder (Reddit’s Steve Huffman) focused on technical development. Investors, particularly in early-stage companies, have seen companies explode because founders couldn’t agree on roles. Having agreed-upon roles before fundraising makes you a lower-risk investment.

6. Focus on building the best team possible.

If you already have traction, a great team is an extra plus. If you don’t already have traction, a team is the main thing investors are betting on.

7. Tap your personal contacts.

If you want to talk to a particular investor, hit up people you know in common. Remember: if you’re introducing your great opportunity to an investor, you’re helping them. The threshold for being annoying is higher than you might think.

8. Do research on investors beforehand.

Accelerators and incubators like Y Combinator and resources like AngelList make fundraising more accessible, but if you use them right, they’re also a great way to learn who the best investors are for your business. This is particularly relevant if you’re in an industry with an existing “power elite” (like travel), where relationships are built over decades. Having an investor with domain expertise and connections can make a huge difference.

9. Do your homework and learn to speak “VC.”

Term sheets have gotten more founder-friendly, but you still need to understand what you’re actually signing up for. Your lawyers will help, but don’t make the mistake of leaving the negotiations entirely to them--it’s your company, not theirs.

10. Optimize for what you really want, not just valuation

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While large valuations sound impressive, they’re really just a guess at what the company is and will be worth. Remember that investments also come with things that are much more concrete: ownership stakes, board seats, veto rights, and cash in your bank account. Those things are usually more important.

--Adam Goldstein founded Hipmunk--the fastest, easiest way to plan travel--the day after graduating from MIT in 2010. A member of the Young Entrepreneur’s Council (YEC), Adam was North American Debate Champion in 2010, and was named one of San Francisco Business Journal’s top “40 Under 40” in 2014.The Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world's most promising young entrepreneurs.

[Image: Flickr user Christian Rondeau]

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1 Comments

  • Jonathan Miller

    MILLER GOLD PARTNERS

    Great Post - thank you Adam.

    In my experience, founders that only focus on equity retention are often unsuccessful in acquiring investment capital.

    Understand your needs, do your homework, target investors that share your values and get to know your investors before getting 'married.'