With the right investor, the odds are 25%. With the wrong investors, the odds are exactly 0%.

Too many people in the startup community tell founders that finding investors is a numbers game. No surprise, most of the loudest voices extolling the need to spam hundreds of investors are selling lists of investor contacts or databases to track investor outreach.

Still, it’s a well-established tenet of venture fundraising that you have to spam a hundred frogs before uncovering a single prince. Success therefore requires a huge outreach effort.

This would be true if all investors were equal and finding one ready to write a check to you simply a roll of the dice.

But we’re not. In fact, we’re all different. And treating us the same is exactly the wrong way to attract investors.

So let’s look at the problem of finding investors a different way. How many of the right investors do you need to contact to find investment in your startup?

I’m the head of pre-screening for an angel group. All of the applications land in my in-box, and my first job is to hit the reject button on the many non-starters. Then I shepherd the remaining applications through our pre-screening, screening, and diligence processes.

Typical of early-stage VCs and angel groups, we invest in roughly 1.5% of the companies that apply to us. If we just went by statistics and assume you need 5 investors to fill the round, the math says you’ll need to apply to 333 investors. Better rev up the spam machine.

But…it doesn’t work that way. We don’t randomly invest in 1.5% of the applications that land in our queue. If you’re a good fit for what we invest in, you have a high chance of getting investment. If not, well…you have zero chance.

So let’s look at the real probabilities of getting invested by my group.

Reject the Out of Scope Applications

My group is specialized. We invest in innovation in chemistry and materials. We’re based in the US and are limited to investing in startups in the US and Canada. For tax purposes, we only invest in C-corps.

About half the applications don’t meet those basic requirements. We get applications from Europe and South America. They may be great startups with attractive valuations, but US tax and reporting requirements make it impossible for us to invest in them.

We also get applications for SaaS, for AI, for consulting services, and for blockchain. Sorry, we’re the wrong investors for that. A handful of applications smell like scams or are just completely incomprehensible what their business is. There’s nothing to do but to drop them ever so carefully into the trash.

We also receive applications for startups that are structured as LLCs. That’s an automatic rejection, too.

Then there are the startups offering investment in common shares or SAFEs or convertible notes without valuation caps. Sorry, delete.

Approximately half the applications we receive are out of scope and get rejected out of hand.

So, considering only eligible startups, the investment rate is 3%. Not big, but…

Pass on Startups that Aren’t Pre-Seed/Seed

All startups that meet the basic criteria get a 5-minute pre-screening pitch. We see a lot of presentations each month.

There is a prevailing and enduring belief among startup founders encouraged by bad advice from late-stage VCs that angels invest in ideas, visions, and pitch decks.

We receive a lot of applications that are still academic research. Interesting ideas proven at benchtop scale. It will take a lot of money and years of work to get from there to customer trials. Sorry, that’s not us or any other VC or angel group I know.

There are people who do invest in pre-product startups. Those are friends and family, and sometimes industry professionals. They’re not people like us who call themselves “angel investors” where the focus is on investor. We’re investors looking for a financial return, which means we invest in completed products with some sort of customer traction.

Yes, especially in hardtech, that creates a horrible chicken-and-egg conundrum. You need investors to build the product. Investors say come back after the product is finished. Unfortunately, we’re not the solution to that problem. (See my previous article on funding sources to help get the product off the ground.)

What founders are presenting as a pre-seed round is often extended friend-and-family or perhaps pre-pre-seed. They’re looking for funds to build the product.

The majority of startups that make it to a pre-screening presentation get rejected as “too early.” We encourage them to apply again in their next funding round. And some do end up getting funded by our group 2–3 years later. But let’s consider that a fresh application, one where they’re at the right funding stage.

We also see a handful of applications that are into a Series A raise (or think they are.) They’re trying to raise $10M on a $50M valuation. They need to be talking to VCs writing $2M to $5M checks rather than small investors like us.

Between the startups that are too early and those that are too late, about 75% get weeded out as outside our funding stage. That means we invest in 12% of the startups that meet the basic criteria for sector, geography, and raise.

Is it a Venture Investment with Venture-Sized Returns?

Once we’ve weeded out the irrelevant applications and passed on those that are too early or too late for us, the next thing to look at is whether they are actually venture businesses that offers venture-sized returns.

That typically means a business plan showing revenue growing exponentially to $100M and beyond, and a likely exit by strategic acquisition, or in rare cases, IPO. We need to see a clear and credible plan to reach a minimum 10x return.

That generally rules out service businesses and technology licensing models. It also means that niche opportunities which can be wonderful profit machines are quickly rejected as unsuitable for venture investment. It means exits to private equity or a plan for dividends instead of an exit aren’t suitable for the venture model.

About half the applications that pass through the scope and stage filters get rejected as unviable venture investments.

That means the remaining applications that make it through these basic filters have a 25% chance of gaining investment from us. These are the startup that make it to a full pitch to the group.

The Subjective Factors

Once you’ve made it through the basic filters weeding out the unsuitable applications and have a chance to pitch to our group come the subjective factors we evaluate through the pitch and diligence process.

  • Do you have the right team for this business?
  • Is the market really as big as you think?
  • What’s the customer traction?
  • Will the tech work at scale?
  • How strong is the competition and is there a moat?
  • Is there a viable go-to-market strategy that will get you in front of customers without spending millions?
  • How much capital will be required to reach scale?
  • How big is the exit likely to be?
  • Are the deal terms fair and attractive?

These factors are subjective and different investors will have different views on both where your startup fits in this rubric and the importance of each factor.

Once you’ve advanced to this stage of evaluation, getting investment from our group does depend somewhat on being in the right place at the right time with the right pitch. Different investors and different investment groups will reach different conclusions.

Targeting, not spamming

If you’re targeting the right investors, you have a 25% chance of gaining investment. After that’s it’s up to the pitch. If you don’t have the pieces in place or are targeting the wrong investors, you have a 0% chance of success.

It’s not about statistics; it’s about creating an attractive investment opportunity then finding the right investors for it.

So instead of wasting time spamming hundreds of investors, find the 10 to 20 that actually fit your sector, stage, and geography, and tailor your pitch them. Because the better your application and pitch are tailored to the interests of each of those investors, the more you can move that general 25% success rate towards 100% for you.