The Funnel

A funnel is a diagram that represents the process of qualification, in which you start with a wide pool of potential investors and narrow it down to those worth reaching out to.

Some people prefer to characterize the levels of the funnel as “stages.” Others refer to the funnel as a “pipeline.” No matter what word you use, the whole idea is about moving a contact through a process toward a close—not everyone you start with will come out the other side as an investor, new hire, or customer.

Remember that all the data you collect is meant to help you save time and focus your efforts. If you’re raising $500K and you find an investor whose average check size is $3M, then you know you don’t have to meet with that investor (at least for this round). This is how you begin to narrow your prospects into leads. The purpose of initial data collection and then the process of qualifying investors is to move a smaller number of investors through your funnel to end up with a shortlist you’ll contact first.

Prospects

To get to 15–20 realistic target investors, you’re going to need to “fill the top of the funnel.” This means getting a much larger initial list—usually around 50, but up to 100—that you can then narrow down.

To fill the top of the funnel, you just need to find the names of a lot of different investors. Don’t worry yet about who you’ll have a chance of meeting or who’s right for your company. Once you have a list of names, you’ll be able to start figuring out how to get an introduction to each person on the list.

  1. Who you know. The first step is to begin recording the names of any angel investors or individual venture capitalists you know personally. If you’re most people, you probably don’t know any—that’s fine!

  2. Who you know of. Next, record the names of angels, VCs, or venture capital firms you’ve heard of before. Record as many of them as you can in whatever tool you decided to adopt for your CRM.

  3. Due diligence. Next, you’re going to need to begin researching relevant investors on the web. We’ll share standard search queries and several online resources that can help you get started.

  4. Ask for help. It can be tempting here to fire off emails to friends or people in your network who you think may know a bunch of investors, asking them something like, “Hey, do you know any investors?” But when you’re asking for help, it’s important to make it easy to say yes.

Leads

Definition In sales parlance, the likely or plausible buyer of a product, a service, part of a company, or something else is called a sales lead or lead. Leads are people who are associated with companies, not companies themselves. These terms may also refer not to the person but to the set of data points that make them a likely or plausible buyer, though this can also be called lead data.

confusion Note that sales leads are different from lead investors (investors who lead a round), though both can also be simply called leads.

You’ll use lead data to begin moving likely investors down the funnel from the wider set of prospects at the top of the funnel. To evaluate who among your prospects has the potential to be a fully qualified investor (that is, someone you think would be a great fit for your company and who will be among the first investors you reach out to), there are several pieces of lead data you’ll collect on each of them. This will help you differentiate between the “good leads” (those who can be considered to have a high likelihood of closing) from the “weak leads” (who might not be totally disqualified, but will be tougher to close—at least in this round).

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important Note that you probably won’t be able to dig up all the lead data you need online. We’ll cover this later, but starting your in-person pitches by asking questions to make sure you have all of these data or to verify the data you have are correct is a great way to ensure your meeting goes well. This kind of diligence will show your credibility as a careful planner and indicate that you can afford to be selective about the investment you take.

  • Data you can definitely find online with Google searches, on firm websites, LinkedIn, and databases like Crunchbase and AngelList:

    • First name
    • Last name
    • Associated firm (use “Angel” if not at a firm)
    • Region: Bay Area, NYC, Midwest, et cetera. Get this from Twitter, LinkedIn, or firm website.
    • Subregion: Menlo Park, Brooklyn, et cetera. Get this from Twitter, LinkedIn, or firm website.
    • Connections: Do you know anyone who knows them?
    • Investing locations:
      • United States? Europe? Chicago?
      • If this investor only makes investments in the U.S. and you’re in Denmark, or the Midwest and you’re in California, this will disqualify the investor.
  • Data you may be able to find online, but may have to wait for the first meeting to get:

    • Investing industries: Are they a generalist firm or thesis-driven? Do they have an active fund built specifically to support missions like yours, your demographic, or location? Or does this investor focus on healthcare and you’re a consumer mobile app? If you can’t tell whether they’re really strict about their industry focus or are curious about their fund, you can ask more when you meet with them.
    • Investing stages: Does the investor have a history of investing in companies at your stage? This is easy to find on every investor’s profile on Crunchbase—look under the investments section and then scan through the Funding Round column to get an idea of what stage most of their investments are at. Some firms invest outside their sweet spot when they find a product or team they really love. Other founders who have recently fundraised are a good source of information with regard to who is investing in what stages at any given point.
    • Fund size: Firms usually do some press when they raise a new fund; a quick Google search should be able to turn up the most recent fund size, if not available on Crunchbase.
    • Average check size: You may be able to find this on firm websites.

important You may find investors who invest in different industries, at different stages, or only invest in countries you don’t live in. It’s tempting to think this stuff isn’t relevant to you and not record it, but you’re missing a big opportunity. Later down the road, you may be raising a bigger round and therefore need a list of investors at a later stage. Or a friend of yours might ask if you know of anyone who invests in security companies. If it’s easy for you to record data in the moment, and something looks interesting but not right for you right now, it may be worth recording it anyway. But don’t spend more time than you need to on investors you know won’t be moving through the funnel.

Qualified Investors

The next step in the funnel is determining which of the lead investors will make your target shortlist of qualified investors.

Definition Qualification is the process of applying a set of criteria to a set of entities to determine whether they fit a defined profile. In the context of relationship management for fundraising, a set of criteria is developed to determine whether a potential investor fits the fundraiser’s ideal investor profile.

You will be able to collect some of these data points through online research; others you should request from investors once you meet them. You may not be able to get all the information you need to qualify a lead before meeting with them, but it’s a good idea to try your best to do so, as it will maximize your chances of getting a meeting with that investor if you do. This list should help with some of the obvious, fixed factors, and also get you to think about the less obvious factors determined by your personal preferences.

Industry and domain expertise. The benefit of a VC who has worked in your industry is that they are more likely to understand what you’re doing and ask the detailed questions that will actually help you.*

Competitive investments. Know whether they have invested in any competitors. Keep in mind that many investors prefer to be conservative when ruling out companies for investment if they think they might compete with a company in their portfolio—imagine how it would feel to learn that your investor was backing a new competitor!

Location. This data point has a couple facets. First, where is the investor located? If the investor is likely to take a board seat, either you or they will have to travel for quarterly board meetings if you aren’t in the same city. While the trend toward video-based meetings is increasing, building a company is a gauntlet of a challenge and you’re likely to want to get face-to-face time with your investors.

danger Signaling risk. Be wary of VC firms that typically invest at Series A or later when you’re raising a seed round. Seed money from big VC firms, including from seed programs at these firms, comes with two major risks, and not the fun kind. First, these firms often give seed funding just to buy options on later rounds. If they don’t go on to invest in Series A, that scares off other investors by signaling something is wrong with your company. And if the VC does follow on, you have less opportunity to compete for better offers in your Series A. Standard VCs are also known to push too much money at seed-stage startups, driving up valuations and putting companies in the disadvantaged position of having to raise flat or down rounds later on. Chris Dixon has an excellent series of posts on this topic:

Fund Size. Just like fund size can have implications for signaling, it is also likely to affect your relationship with your investors. For example, an investor will look at you very differently if they invest $1M in your company out of a $10M fund (10% of their capital) vs. out of a $1B fund (0.1% of their capital). This can work to your advantage or to your disadvantage. In the former scenario, an investor may not leave you alone because the success of their fund is pegged to your success as a company. Alternatively, they may get their hands dirty and be helpful because they’re so motivated. In the latter example, your investor may not pay much attention to you because their success is spread out across other, most likely larger, investments. On the other hand, they may leave you alone so you can focus on building your company.

Lead vs. follow. Some investors prefer to lead rounds, some say they lead rounds (just not yours), and others never lead rounds. Qualifying investors by lead vs. follow will allow you to prioritize your time in the right sequence. Don’t disqualify investors because they won’t lead, just note that and circle back to them once you have a lead investor.

The right person. At this stage in your research, focus on partners, not associates.* Partners make the decisions. Associates may be helpful in getting introduced to partners, however, and if you’re only able to get in touch with an associate, don’t write them off. Keep in mind, too, that many associates will one day be partners.

  • It’s essential that you pick the right partner for your company, because it’s hard to change from one partner to another once you’re locked in.* In First Round Capital’s 2018 State of Startups, 64% of surveyed founders listed “good character” as one of the “three most important criteria” for a lead investor; and 52% listed “individual partner expertise.” (“Terms of the deal” topped the list, but not by much, at 68%.*)

  • Ultimately, you want buy-in from the whole team, so make a point of getting face time with as many people as you can at the firm.*

  • If, as part of the negotiation, an investor joins your board of directors, you could be signing up to work with that individual for upward of ten years. Whatever your personal system of values, we recommend you determine whether your potential investors share those values. If an investor is ruthless and you don’t believe in doing whatever it takes to succeed, you should question whether you’re going to make a good team.

Reputation. Does an investor have a reputation for being a tough negotiator? Are they known for being honest and helpful, or blunt and harsh? Are they particularly good at recruiting executives in your industry? Are they actually a really solid silent investor who will leave you alone so long as you send an update email occasionally? Do they think they’re the smartest person in Silicon Valley because they worked at an investment bank for three years and talked to the CEO of Uber once? Other founders and investors all tend to have opinions about who is pleasant to work with and who isn’t.

  • This kind of information is rarely shared publicly, given the risk of looking like a jerk by criticizing someone in public. Given that, you’ll need to find ways to have private conversations. Other founders are remarkably forthcoming when talking to other founders about their experiences with their investors. Additionally, any lawyer worth their salt will have worked with many of the partners in their city or region and in Silicon Valley. Ask your counsel who they would and wouldn’t recommend.

  • Just keep in mind that an investor one founder characterizes as “harsh” could be “forthright” to someone else,* so take all hearsay with a grain of salt and think seriously about what kinds of relationships you want to invest in.

  • As we discussed in Bias and Discrimination in Fundraising, talking with founders who have worked with investors on your list before can be a crucial step in sussing out patterns of behavior, like sexual harassment, that you really want to avoid.

Investor track record. Investor experience can vary dramatically. Evaluating the pros and cons of experience can be highly subjective, but that doesn’t mean it’s not worth examining.

  • Inexperienced investors at the beginning of their career have not seen many companies go through the tumultuous cycle of growth, downturn, successes, failures, acquisitions, and shutdowns. Given this, they may not have as much to offer in the boardroom—especially if they haven’t been an operator themselves. Less experienced investors may also have their judgement clouded by a desire to prove themselves. Conversely, a good investor new to the scene will realize they’re investing their career and reputation in your success, along with their firm’s money, which could mean they’ll work harder for you than someone with less to prove. There are new investors who are remarkably helpful and are willing to be hands-on (if you want them to be).

  • Other investors are at the tail end of their career. They may have seen many companies go from two or three people in a garage or apartment all the way past IPOs. They’ve likely seen and suffered through more than their fair share of failures and disappointments. Their experience may be a helpful edge to guide you on your journey, but they may also over-apply lessons learned from past businesses to yours. If an investor made early investments in massively successful companies, like Amazon or Google, they may be willing to take more risk on your company, given that they may no longer be financially motivated. Occasionally, they can be out of touch with reality, spending their weekends racing expensive cars or making gut-wrenchingly tone-deaf comments, so it’s good to do your homework.*

  • We recommend typing your investor’s name into Google with various phrases like “scandal,” “harassment,” or “ousts founders” to see if anything alarming comes up. We cover this in far more detail in Bias and Discrimination in Fundraising.

Board seat preference. Do you want an investor who will take a board seat, or not? Carefully weigh the tradeoffs and then see if your leads typically do or do not take board seats. Many investors list current board seats on their LinkedIn or Crunchbase profiles, which can help you figure out their common practice or preference.

Investors’ LPs. Investors’ investors, LPs, can sometimes bring trouble. Take, for example, the Saudi Arabian investor scandal of October 2018.* It’s not a bad idea to ask investors who their investors are.* We talk a lot more about LPs and investors’ motivations in Understanding Venture Capital.

Activity. If the firm has not made an investment in the last year, or has not raised a fund in more than five years, the firm may be a “Zombie VC,“ no longer operating.

important Make sure to share your list with your lawyer. One of the easiest ways to get value out of your attorney is to ask them how they think about each firm and partner on your list of target investors. On top of that, they should be able to tell you which partners and firms you left off your list who you should consider.

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