What Mistakes Do VCs Make When Fundraising? | by Mark Suster

A few weeks ago, I had the pleasure of talking to Samir Kaji on the Venture Unlocked podcast about a wide range of topics that we as venture capitalists think about everyday, including:

• How to build a generational firm — retaining partner talent and finding the complimentary networks and skillsets firms need to succeed over time
• The state of venture today and how COVID crammed 10 years of technological change into one accelerated year
• The human psychology of decision making and one book I think every VC should read
• How to get LPs to become true believers and why I think data rooms are where deals go to die

And much more. You can listen to the entire conversation above or via this link, but I also wanted to highlight one topic we discussed that I feel strongly about, which is how I think enterprise sales and venture fundraising are basically the same muscle. Let me explain.

One of the common mistakes I see startups as well as VCs make is spending too much time on top of funnel prospecting. Why? Because it’s comparatively easier to have a first meeting, meet each other, share stories, etc. than it is to start narrowing down and doing the work to close the deal, or risking hearing a no. But here’s the thing — it’s not just startups who do it. We all do it on this side of the table too. LPs, VCs, everyone. We love first meetings! It’s the mid and bottom funnel that’s hard.

In fact, I wrote a previous blog post on “Why Successful People Focus on the Bottom End of the Funnel.”

I counsel first-time VCs (as well as founders) to have mid-funnel strategies to get from first LP meeting to close and to put a disproportionate amount of time into this area (I say more about this on the podcast starting at timecode 27:41). Like any enterprise sale, you want to think from the perspective of the buyer and what they need to feel confident about the decision to buy a stake or ownership in your fund.

Here are the three rules I think about in any sale, whether it’s enterprise sales or when trying to move LPs to a decision, there are three keys you need to be able to answer:

• Why buy anything?
• Why buy me?
• Why buy now?

Why Buy Anything?

When raising a first fund (or a fifth or even a tenth), it’s all about establishing your core target market and finding out who is in the market for what you are selling? Whilst there are a wide range of LPs and you could have first meetings for months (and many VCs do), there is probably a much smaller number of LPs who want to invest in a fund your size, with your focus, and whose minimum or maximum check size lines up with what you’re seeking.

So I encourage first-time fundraisers to qualify, qualify, qualify. Do the legwork to find the people who want to buy specifically what you’re selling. Research everyone who has raised a comparably-sized fund and find out who backed them — that’s your target market. Every other conversation will be wasted time, and just like an enterprise startup, wasted time is an existential threat.

Why Buy Me?

OK, so you’ve found your target LPs who invest in funds at your stage. Now it’s time to convince them why they need to invest in your fund, when they could invest in other funds with more proven returns or partners. And again, just like in enterprise sales, this is all about differentiation — what makes you different and complimentary to all the other funds in their portfolio? What’s your unique selling proposition?

For Upfront, it’s about Los Angeles. We invest 40% of our dollars in Southern California firms — and even though by definition that means the majority of our dollars are invested outside the area, that still makes us meaningfully different from the ten other Sand Hill Road funds this LP might be speaking with. We’re definitely not a “regional investor” but we do have some comparative advantage in a good portion of our deals.

It’s critical to stand for a firm differentiator and here’s why: it shines a clear spotlight on whether you are or are not a good bet for this LP. If you do everything that every other firm does, in the same ways, why should they buy you? And yes — a firm differentiator means that not everyone will buy into your thesis but that’s okay. You don’t need everyone, you just need a few core believers and having a hard “why buy me” pitch makes it easier to find and convert those leads.

“Why buy me” is also a good time to leverage references and external people who can vouch for you, who can champion who you are and why you’re a good bet. Everyone loves to know that someone else has bought first, and LPs are no different.

Why Buy Now?

This can be the hardest of the three rules to sell whether you’re in enterprise sales (“why buy this now when I can wait until you have more traction, more logos, more product features?”) or whether you’re raising a fund (“why invest now when I can see how your first fund turns out and come in for the next one?”)

This is all about creating scarcity and being willing to walk away, but doing it with a smile on your face. For Upfront, we raise consistently sized funds and have been fortunate to have LPs with us fund after fund, whether in our core A fund or our growth funds that support some of our most promising investments. That means there’s not a lot of room to bring in new investors down the line, and hopefully that’s true of first-time funds as well — they do so well that the second fund is oversubscribed. Any customer, whether an LP or a big enterprise buyer, needs to know that there’s a chance they could miss out.

You can hear more about these three rules and more in my conversation with Samir — it was a fun one to do and I hope you’ll enjoy it as much as I did.