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WFH Has Made it More of an Insider’s Game to Secure Venture Funding

Emergence Founder & GP Gordon Ritter shares how enterprising founders can adapt to the new unwritten rules of fundraising. 

VC activity may have climbed back up to pre-pandemic levels, but that statistic masks an important development: COVID has changed the rules for startup funding.

On one hand, the pandemic has sparked some positive founder-friendly developments. For starters, it’s dramatically easier to get in front of VCs because they’re taking substantially more meetings than before. Before the pandemic, most early-stage investors sat down with entrepreneurs a few times each week, but right now, most investors are engaging in back-to-back 30-minute conversations all day, every day. In addition, the pitch-to-funding timeline has accelerated—by as much as 50% by my estimates—now that meetings are more efficient, and travel has been eliminated.

Despite these changes and the flush of capital flooding into the venture ecosystem, it has not become easier to get funding. It’s only different. In short, many VCs have responded to the pandemic by replacing depth with volume, spending on average 20% less time year-over-year reviewing each pitch deck. Most of that volume—including many strong teams with promising ideas—will never get funded. Who is getting funded: insiders.

Venture capital, especially at the early stages, has always been an intensely relationship-based business. Early-stage investors are betting as much on the team as they are the idea—often even more so given how often early startups pivot—and as such, early-stage investors have historically invested a lot of time and energy into getting to know teams before writing checks for them. Because they’ve always built relationships through the kinds of rich interactions that take place over coffees and dinners, many VCs aren’t comfortable making big bets on people they’ve only come to know through whiplash-inducing, back-to-back 30-minute Zoom sessions. It’s obviously possible to build meaningful relationships fully virtually, and people around the world are doing so, but it takes more creativity and human-centered planning than many VCs can devote to these sessions.

In pursuit of what they consider to be lower-risk investments during a tumultuous year, many VCs are doubling down on entrepreneurs they already know and trust or who already have secured venture funding and are therefore already known and trusted by other VCs. This is one of the reasons that so much of the pandemic’s venture dollars have poured into later-stage startups and bigger funding rounds.

This decreasing share of first financings is making it tougher for early-stage startups to get off the ground. Most of the few early-stage founders who are managing to get funded by VCs right now are insiders. By that I mean that they held important roles at one of the top tech companies, or are well-known by seed and angel investors, well-regarded entrepreneurs and other influencers within the cohort of Silicon Valley. Researching contacts and references on founding teams has always been part of investors’ jobs, but right now references are being used to supplant what used to be the in-person relationship building courtship. Naturally, they are prioritizing references from contacts they know and trust. Regrettably, this can enable unconscious bias.

The result is that founders with enough of the right connections to venture establishment are getting funded, with many VCs piling on. Others really aren’t. That’s unfortunately one of the reasons why funding for female founders has dropped to a three-year low and a reminder of the importance of diversity in venture capital.

Fortunately, being an “outsider” who lacks close connections to the venture ecosystem is an obstacle that can be overcome. Below, I have captured the top advice I have been sharing with entrepreneurs who are looking to fundraise.

Do your homework.

Don’t use the same pitch deck and the same talking points for every VC. This is a job interview for a role that could last 7, 8, 9 years or more. If you want investors to get to know who you are, do the courtesy of showing you’ve truly taken the effort to get to know them. Before meeting any investors, read their blog posts, contributed pieces and press interviews; review their social media feeds; and get to know their investment theses and priorities. Your best match investor will approach your sector with perspectives and insights consistent with your own. 

Engage what network you have.

While it helps to have a referral from a well-known Stanford professor, serial entrepreneur or super-connected Seed Investor, it’s not a requirement. But you do need former classmates, partners or co-workers who think highly of your skills, potential and domain knowledge. Before pitching investors, let your network know what you’re up to so they’re not surprised if someone contacts them. Remember that a lot of VC diligence takes place through backchannels; VCs figure out who you know and ask them about you, whether or not you listed them as a contact. Be ready for that, and make sure your professional connections are as well.

Establish relationships early.

Don’t reach out for the first time just as you’re needing funding. Early-stage investors greatly prefer that you build relationships with them early, well before you’re ready to fundraise. The nice thing is that since so many VCs are taking meetings now, it’s a great time to build those relationships. Use that time to get to know the investors, to discuss what you’re working on, to show that you’ve done your research on them, and to explore whether you share similar perspectives.

If you live in a tech hub, leverage your proximity.

If you happen to live in a tech hub, leverage that to your advantage. Set up in-person, outdoor, socially distant walks and coffees with VCs. Most entrepreneurs aren’t doing this right now; doing so can provide differentiation and opportunities to build richer relationships.

Use your pitch time judiciously.

Before the pandemic, the first pitch meeting would have been with a principal or VP. Now, it’s likely with a general partner, too. Use the time carefully. These 30-minute meetings are stacked, so there’s no wiggle room. Your presentation should be a crisp 20 minutes (or less) to allow sufficient time for discussion.

Long stagnant, the rules for startup fundraising are being upended. Paradoxically, while the pandemic-induced changes are opening up pitch meetings to a broader, more diverse cohort of founders, the people actually getting funded are unfortunately by and large insiders. But with some ingenuity, perseverance, and of course a great idea, any promising founder—regardless of where they went to school and who they know—can earn a shot at funding their dream.