What It Means When Investors Say “You’re Too Early” and How to Fix it
Mentoring dozens of early-stage startups on fundraising, the #1 question I’m asked is what it means when investors say they’re too early and what to do about it.
Invariably they’d been pitching their very, very early-stage startups to venture capital firms. In other words, the reason they were told they were too early is that they were too early for those investors.
Investment usually proceeds through stages with different investors in each stage.
First are the network of friends and family who help get the company off the ground.
Then comes the seed stage of angels and small VCs who invest to build out the product and team once the startup has achieved initial customer traction.
Last comes the VCs who invest only after the startup has achieved significant revenue to propel the company to exponential growth. Even with the VCs are a hierarchy of firms that invest in Series A up to giants that only invest once the IPO is within view.
A seed-stage startup pitching a venture fund will be told, “Sorry, you’re too early. Similarly, a pre-revenue startup pitching angel investors will be told they’re too early.
There’s a pernicious myth that angel investors will write big checks once they hear a great idea. The truth is that most angels invest only after the startup has shown some validation, usually an MVP and initial customer revenue.
How To Get Beyond Too Early
The usual reaction of founders who are told they’re too early is to spam a dozen more VC firms hoping for a hit. That’s the wrong response.
If you’re told you’re too early, it means you’re talking to the wrong type of investors.
Before pitching an investor, be sure to understand their stage and criteria. Most investors list their stage, verticals, and investment criteria on their website. Focus on the ones that are a good fit and leave the others until later.
The biggest challenge, though, is the earliest stage. You have a great idea, lots of customer interviews, maybe even a prototype, but you need money to build the MVP to bring to customers and gain traction.
In something of a Catch-22, you need investment to build the product and get revenue, and you need customer traction to attract investment. If you’re feeling frustrated, you’re not alone.
Traditionally, entrepreneurs waited until they had sufficient savings before starting a company. My career path began at big companies through my 20’s and paid jobs at startups through my 30’s, before founding my first startup at age 41. Between me and my cofounders, we were able to fund the development ourselves.
Nowadays, though, founders in their 20’s need investors to fund the business from the earliest stages.
The huge sums of money flooding into venture capital today make it far easier to get startups funded from Series A onwards. Finding investors at the earlier stages, though, still isn’t easy. But it can be done by focusing your efforts on the right investors. Here’s how:
- Expand Your Friends and Family Network. Friends and family don’t care about customer traction, pitch decks, and investment terms. They’re investing because you have a great idea and they want to help you build the business. Get everyone you’ve ever met to introduce you to anyone who might be interested. Building a startup means not being shy in reaching out to potential customers and investors.
- Get Customers to Invest. Strategic investors are customers and partners that not only sign up as initial customers but are often the earliest institutional investors in the company. They need what you’re building and see the long-term value in the product long before an outsider can. The involvement of a strategic investor is also a strong validation of market need that helps attract angel and VC investment.
- Find Industry Angels. Angel investors focusing on a particular industry will often invest at an earlier stage than generalist financial investors. Personally, I focus my investments on energy sustainability which looks at a social need as much as a financial investment. With my experience as an energy engineer, I’m able to evaluate a startup’s prospects earlier than angels who depend on customer traction for validation.
- Join an Accelerator. Acceptance in most accelerators includes a small investment. More importantly, industry accelerators can be a great way to meet industry angels and venture funds that are actively looking for investments in the space.
- Use Crowd Funding. For consumer products, Kickstarter and Indigogo can be a great way to collect the money needed to build the product while generating customer validation. Gofundme can be a good way to reach a broad network of friends and family, especially if the startup includes an element of social benefit. Wefunder can reach small, early-stage investors looking for interesting ideas.
- Reach the Next Milestone. The best way to get past too early is to be further along. Do everything you possibly can to accelerate customer revenue so you can pitch the validation, growth, and milestones hit rather than how much you need to reach the starting line.
Shortcuts to Investors
If raising early money seems hard, it is. So who are all those people you hear about who get big cheques from VCs with nothing but a PowerPoint presentation?
The first group is the well-connected. Theranos only got off the ground because Elizabeth Holmes was a childhood friend of Tim Draper’s daughter, one of the biggest of the big VCs. She convinced him to throw $1 million her way. And she leveraged his connections to get introductions to other big VCs.
In essence, her friends and family network included billionaire investors. Which was unfortunate since they didn’t go through a VC’s regular diligence process.
If your family’s friends include Tim Draper, or Peter Thiel, or Elon Musk, make those calls. If you’ve got it, use it.
The second group is the leaders of startups with big exits. When the leaders are ready for their next startup, they walk into the venture firms that made billions from their previous company and walk out with a big cheque. It doesn’t matter what they’re building, the VCs will gladly fund it.
Indeed, it’s not fair. But then, it’s up to us to build our unfair advantage.
Early rounds of funding are hard. But if you approach fundraising strategically, it can be done. So hang in there and don’t let the too early responses get you down. Refocus your attention on the right investors.
The good news is that too early doesn’t mean no. It’s an invitation to pitch again when you reach the right stage for that investor.