“When an investor pass on you, they won't tell you the real reason,” said Tom Bloomfield, group partner at Y Combinator. “At the seed stage, frankly, nobody knows what's going to happen. The future is very uncertain. What they are deciding is the perceived quality of the founder. When they pass, what they are thinking in their mind is that this person is not impressive enough. Not strong. Not smart enough. Not hardworking enough. Whatever it is, 'I'm not sure this person is a winner.' And they'll never tell you that, because you'll get upset. And then you'll never want to make them again.

Bloomfield should know – he was the founder of Monzo Bank, one of the brightest stars in the UK startup sky. For the past three years, he has been a partner at Y Combinator. He joined me on Thursday at TechCrunch Early Stage in Boston for a session titled “How to raise money and come out live.” There were no mince words or drawn-out punches: just real talk and the occasional F-bomb.

Understand the Power Law of Investor Returns.

Venture capital is at the heart of the model. Power law of return, a concept that every founder must understand to effectively navigate the fundraising landscape. Abstract: A small number of highly successful investments will generate most of the VC firm's returns, and offset losses from many investments that do not pan out.

For VCs, this means a constant focus on identifying and backing those rare startups with 100x to 1000x return potential. As a founder, your challenge is to convince investors that your startup has the potential to be one of those outliers, even if the odds of achieving such great success are as low as 1%. be

Demonstrating this great potential requires a compelling vision, a deep understanding of your market and a clear path to rapid growth. Founders must envision a future where their startup captures a significant portion of a large and growing market, with a business model that scales efficiently and profitably.

“Every VC, when they're looking at your company, isn't asking, 'Oh, this founder asked me to invest $5 million. Should it go to $10 million or $20 million?' will?' For a VC, it's as good as failure,” Bloomfield said. “Batting singles is literally zero for them. It doesn't move the needle in any way. The only thing that moves the needle for VC returns is home runs, 100x return, 1000x return. .

VCs are looking for founders who can back up their claims with data, traction, and a deep understanding of their industry. This means clearly understanding your key metrics, such as customer acquisition costs, lifetime value, and growth rates, and explaining how these metrics will evolve as you scale.

Importance of an identifiable market

A proxy for the power law, the size of your addressable market is: Having a clear understanding of your Total Addressable Market (TAM) and being able to articulate it to investors is critical. Your TAM represents the total revenue opportunities available to your startup if you want to capture 100% of your target market. It's a theoretical limit on your potential growth, and it's a key metric that VCs use to evaluate the potential scale of your business.

When presenting your TAM to investors, be realistic and back up your projections with data and research. VCs are highly skilled at evaluating market potential, and will quickly spot any attempt to overstate or exaggerate your market size. Instead, focus on presenting a clear and compelling case for why your market is attractive, how you plan to capture a significant portion of it, and what unique advantages your startup brings to the table. Concentrate.

Leverage is the name of the game.

Raising venture capital isn't just pitching your startup to investors and hoping for the best. It is a strategic process that involves creating leverage and competition among investors to secure the best possible terms for your company.

“YC is very good at (creating leverage). We basically gather a bunch of the best companies in the world, we put them through a program, and at the end, we have a demo day where the best in the world “The auction process is basically for investors to invest in and invest in companies,” Bloomfield summarized, “and whether you're doing an accelerator, trying to create that kind of pressure situation, This type of high leverage situation where you have multiple investors bidding for your company is really the only way to get the best investment results for you.

Even if you're not part of an accelerator program, there are still ways to compete and leverage among investors. One strategy is to have a strict fundraising process, set a clear timeline for when you'll be making a decision, and let investors know in advance. This creates a sense of urgency and scarcity, as investors know they have a limited window to offer.

Another tactic is to be strategic about the order in which you meet with investors. Start with investors who are likely to be more skeptical or have a longer decision-making process, and then move on to those who are more likely to move quickly. This allows you to build momentum and create a sense of urgency around your fundraising.

Angels invest from their heart.

Bloomfield also discussed how angel investors often have different motivations and rubrics for investing than professional investors: they Typically invest at a higher rate than VCs, especially for early-stage deals. This is because angels typically invest their own money and are more likely to be inspired by a compelling founder or vision, even if the business is still in its infancy.

Another important benefit of working with angel investors is that they can often provide introductions to other investors and help you build momentum in your fundraising efforts. Many successful fundraising rounds start with a few key angel investors, who then help attract the interest of larger VCs.

Bloomfield shared an example of an era that slowly came together; Over 180 meetings and 4.5 months of intense slogging.

“That's actually the reality of most rounds that happen today: You read about a blockbuster round in TechCrunch. You know, 'I raised $100 million in Sequoia-type rounds.' doesn't so much write about 'I made it 4 1/2 months and finally closed my round after meeting with 190 investors,' Bloomfield said are like And a lot of that depends on angel investors.

Investor opinions can be misleading.

One of the most challenging aspects of the fundraising process for founders is navigating the feedback they receive from investors. While it's natural to consider and consider any advice or criticism from potential backers, it's important to recognize that investor feedback can often be misleading or counterproductive.

Bloomfield explains that investors often do deals for reasons they don't fully disclose to the founder. They may cite concerns about the market, product, or team, but these are often just superficial justifications that lack a more fundamental lack of conviction or relevance to their investment thesis.

“The advantage is that when an investor gives you a bunch of feedback on your seed-stage pitch, some founders are like, 'Oh my gosh, they said the market I'm going to is not developed enough. Better go and do it.' But it misleads people, because the reasons are often murky,” says Bloomfield. “You can end up derailing your entire company strategy based on some random piece of feedback that an investor gave you, when really they're thinking, 'I don't think the founders are good enough,'” Which is a harsh truth that they will never tell you.”

Investors are not always right. Just because an investor has passed on your deal doesn't necessarily mean your startup is bad or lacks potential. Many of the most successful companies in history have gone through countless investors before finding the right fit.

Be careful with your investors

The investors you bring on board will not only provide the capital you need to grow, but will also serve as key partners and advisors as you navigate the challenges of growing your business. will go. Choosing the wrong investors can lead to wrong incentives, conflicts and even the failure of your company. Much of this can be avoided. Doing thorough due diligence on potential investors before signing any deal means just looking at the size of their fund or the names in their portfolio and really looking at their reputation, track record, and work with founders. Finding a way to do it.

“80 percent of investors give you money. That's money. And you come back to run your business. And you have to figure it out. I think, unfortunately, about 15 percent to 20 percent of investors There are those that are actively destructive,” Bloomfield said. “They give you money, and then they try to help, and they're rude. They're too demanding, or pressure you to take the business in a crazy direction, or They force you to spend the money they have given you for a fast job.

A key piece of advice from Bloomfield is to talk to the founders of companies that haven't performed well in an investor's portfolio. While it's natural for investors to boast about their successful investments, you can often learn more by examining how they behave when things don't go according to plan.

“Successful founders are going to say nice things. But middling, singles, and strikeouts, failures, go talk to those people. And don't get an introduction from an investor. Go and do your research. Find these founders and Ask how these investors fared when times got tough,” Bloomfield advises.