7 steps for conquering your startup's first investment round

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Getting money for your startup is equal parts art and science, but there's no ✨ magic ✨ behind it. 

Fundraising can and should be broken down into a process. And there's no better way to learn these steps your startup should take to raise its first round than to hear it directly from experts on the biz. 

That's why we called them for our "Demystifying fundraising for LatAm startups" webinar. You know, just our glorious line-up, as always 💅: Antonia Rojas Eing (ALLVP), Brian Requarth (Latitud's co-founder and an angel investor), Dileep Thazhmon (Jeeves' co-founder and also an angel investor), Gabriel Vasquez (a16z), and Jonathan Lewy (Investo).

The founders and VCs answered the most common doubts pre-Seed and Seed startups have when fundraising – from how to get in front of the right investors and how to stand out during initial investor conversations to how to build a relationship with investors and curate their feedback. 

You can check the whole thing out in the video above. Or you can keep reading for our simple and clean summary – the seven steps your startup can take to get that first check. Time to climb that ladder! 🪜

1. Do your due diligence on the VCs

You probably know that venture capitalists wanna know everything your startup did last Summer – and that's officially known as doing due diligence. 

No worries, it's common practice to open your books for investors. Unfortunately, it's less common that founders follow that same process. 

Don't let the pressure of getting an investment offer stop you from doing due diligence on every single VC. You need to know if they're the right fit for you just as much as you need to know if you're the right fit for them. Shift the dynamic and have them feel the pressure, as our friend Jason Yeh has already shared with Latitud's Blog.

"As investors do due diligence on founders, founders should do due diligence on VCs." (Antonia Rojas, ALLVP)

And how in hell should I start doing that, you might be asking. Well, here's how you should do due diligence on the VCs, as a startup founder:

1. Start from primary sources

Your due diligence should begin by reading the firm's website and page on Crunchbase. This should be your starting point for understanding each investor's thesis: a.k.a. what stages, sectors, and companies they've already invested in, and what they offer besides money.

2. Get the real deal from other founders

The second step of your due diligence is jotting down any questions and asking them to other founders. Go beyond the web search and talk to real people that have received both a yes and a no from that venture capital firm. And when you talk to people that have received the investment, talk both with startups that are doing pretty well and not so well.

VCs make their money off the companies that are doing well, and their reputation off the companies that aren't.

Founders should ask more about the deals that did not go well, and see how the VCs make sure they are there for them.

3. Have a deeper conversation with the VCs

The idea is to build a relationship with the founders you've talked with and eventually get an intro to the VC firm you're aiming for. Getting a recommendation from that VC's portfolio companies is the hottest intro you could get.

But if you didn't get that, there's always the option of writing a cold e-mail. And if you really want that message to be read, don't do it as everybody else does. (we're silently screaming, PLEASE DO NOT SEND A GENERIC EMAIL TO 100 PEOPLE HOPING THAT SOMEONE WILL RESPOND!)

Jonathan makes the time to answer e-mails that are well-written, explaining why the founder specifically reached out to him and why it would be interesting to schedule a talk.

"90% of founders are talking to the wrong investors. And that’s why they get rejected most of the time." (Jonathan Lewy, Investo)

When you do get to talk, turn the tables around. Take the meeting as a chance to ask them questions and check if they're a good fit for your startup. "Founders don't generally do that because they're selling every time", says Latitud's Brian.

Don't take this lightly: you want to preserve your equity as much as possible, giving a piece of your pie only to those that will really add value and are in it for the long run. 

2. Understand your market better than everyone

There's no worse feeling than getting to your pitch and realizing you can't explain your business or the market you're in with confidence.

And yes, that's a red flag for VCs. "When you have the feeling that you know better the space than the founder, there’s a problem", Jonathan says. It's a sign that maybe it's too early to write a check.

Before going into a meeting with investors, make sure you have that part nailed down. You should know about your company's market, mission, strategy, and numbers. Moreover, you should be ready to explain why your pitch is different from your competitors.

"When you see a lot of founders pitching the same thing too similarly, there's always one that has specific intel and a new way of approaching the product. You can see the difference there", Jonathan explains.

a16'z’ Gabriel shared an amazing framework to understand how well you know your business and products that Marc Andreessen uses a lot: the Idea Maze. (If you were at our most recent Vamos Latam Summit, you've probably heard about it before 👀)

The startup journey is like a maze. There are a lot of paths that might lead to some traps that slow you down, or even to the death of your business. 

Should you turn right or left? If you entered the maze at ground level, you don't have the answer and it doesn't matter how fast you go: your journey will probably end in failure.

Successful founders analyze past casualties of players battling the same maze, train their top-down view, and finally draw a map of the maze. For writing that map, you need to be obsessed with your industry.

The earlier you can have that guide and the more you update and refine it, the better. That way, you'll become the master of the maze – and by that, we mean the master of your startup's journey. 

3. Have the right corporate structure

Most entrepreneurs want to get rid of the legal work as quickly as possible to focus on the operation. But a little dedication right from the start can save you not only a lot of headaches but also the loss of millions of dollars. 

These losses don't just come from taxes (remember how the wrong corporate structure made Brian lose US$ 100M?), but also from investors who won't put money into your business.

We've already talked about this in our guide for you to start with the right corporate structure for your startup. When you raise larger rounds or when you raise with international investors, having only one local operation can worry them about unexpected financial and legal obligations.

In the case of a labor suit, for example, investors would not be able to know with 100% certainty whether or not they could be held liable. They also cannot predict whether some local authority will knock on their door demanding some information or even a full audit.

For a global VC, putting his money in Brazilian companies with an unknown legal model, and with unpredictable future regulatory changes, is an additional risk. And startups are risky enough.

4. Understand the terms and their implications

We know: just like incorporation, you also want to end the investment negotiations as quickly as possible to get the case and finally focus on making your startup grow. 

But stress is not an excuse to sign papers without understanding everything that's written. Do your homework on tricky clauses commonly found on term sheets for Seed rounds. 

And, if you can't find what's written on the term sheet you received, don't be afraid to ask the hard questions directly to your potential investors. VCs actually like to see that you are thinking about the long term. 

"Be conscious of every term you are accepting and their consequences. We like to see founders who understand these implications the terms have on their companies", Antonia says.

‍5. Don't downplay the risk of your startup

In your pitch presentation, you might be tempted to assure investors that the business will do well, and use conservative metrics to make sure they deliver on that promise.

But the thing is that they're looking for a startup to invest in a venture, not on public equity. VCs know there's a good chance that your business won't keep afloat. 

On the other hand, they are also expecting your business to bring a big return if it sails. Some VC firms even work on a "fund returner" basis: one bet should pay off the whole amount raised for a fund.

"Being conservative turns off investors, so don't obsess about minimizing the risk involved. Instead, say there's a high probability it won't work out, but if we get it right we'll transform the industry", Brian says.

‍6. Build a relationship with investors

Just like you had to build a relationship with other founders to eventually get an intro, you also need to get closer to potential investors. You might need to have a bunch of talks before getting anywhere near to really knowing a VC, not to mention getting his investment proposal. Jeeves got an investment from a16z after talking with them for a year, for example.

“Expecting to go to a meeting and getting out with a check is like going to a bar and expecting to leave out married”, Jonathan explains.

Jonathan, Dileep, and Brian point out a valuable way to build trust with these investors: when you say you're going to do something, actually deliver on it. Brian would share a goal with his investors and meet the next year to show the progress.

“As an investor, you want to make a decision based on a movie and not on a picture. The best thing that can happen is when you talk to a founder, they tell you something, and three months later it is done”, Jonathan agrees.

Even if you end up receiving a no after all the relationship-building, don't burn your bridges just yet. It doesn't necessarily mean that you will never get a check from that VC – you might just need to work on some parts of your business. Deliver on it once again, and reconnect.

‍7. Ask for more feedback (and really learn from it)

You'll only know what you might need to work on if you're open to receiving feedback from investors. It doesn't matter if you received a yes or a no: always ask for as much feedback as VCs can give you, and both investors from your industry and from outside.

Double-clicking on feedback is a massive green flag for investors. “I like when founders ask directly for feedback. All founders have to be open to listening”, Antonia says.

But you can't stop at asking for feedback: actually be interested in hearing it. Sometimes, investors will provoke you to see how you react to the feedback, Jonathan says. 

So don’t get defensive. Instead, stay curious and ask for the real deal, no BS. Oh, really? Why do you think it will be a hard go-to-market?

On the other hand, you don't want to actually execute everybody's suggestions. Antonia says founders usually treat VCs like they know everything. In reality, you should only take what makes sense, and don't take what doesn't. "Think for yourself and take your own conclusions from the conversations you've had."