Stop Building Relationships with Investors Before you Raise
When I fundraised the first time, I followed the number one piece of advice every first-time founder gets: “If you want to raise the money, you need to build relationships with investors many months in advance.”
I’ve since learned two things: The advice is BS, and only investors give it.
The truth is, investors don’t need more than three weeks to decide to invest in you. They can do it in a few days. That’s true for any raise between a pre-seed and a C round — between $500,000 and $50,000,000.
Even worse, building relationships can hurt your fundraising.
How premature relationship building is harmful
There are two critical ways in which building relationships early can negatively affect your raises:
- It wastes your time. You don’t need to build any relationships to fundraise. You need to have a great story and run a solid fundraising process. So if you don’t need to invest hundreds of hours, don’t! That’s time you can spend building your company. Time is your most valuable resource and becomes more scarce as you grow, and your responsibilities increase. Don’t waste it!
- It lowers your valuation. You should only tell your company’s fundraising story when it’s ready. At each stage of growth, this should take you at least 200 hours. Telling your story too early will give investors the wrong first impression of your company. That’s even more true in the early stages when your story changes constantly.
So why do investors give this advice?
If building relationships with investors can be so harmful, why do investors encourage it? There are two main reasons — neither of which favor startups:
- They get to collect more information. There is an inherent information asymmetry in venture capitalist investments. No one knows as much about your company as you. So investors want to meet you as much as possible to collect more information about you and the company. That helps them evaluate whether or not to invest.
- It’s their job. Investors only make a few investments. So how can they or their partners evaluate productivity in between them? The answer is by assessing as many startups as possible, which includes filling their calendars with meetings.
In this case, what’s good for investors isn’t good for founders. Don’t waste your time, and don’t hurt your valuation. Focus on building your company, perfecting your story, and running a proper three-week fundraising process to close your round.