First Pitch to Final Term Sheet: How Many Investors Should You Talk To?

How many investors should you talk to when pitching for funding? The short answer? At least 30 to 40 individual venture capital firms or any other qualified investors. These qualified or accredited investors are entities with substantial financial resources available for investing.

They also have the necessary financial expertise to invest in complex investment opportunities that can generate rich returns. Before initiating your fundraising campaign, you’ll compile a list of such investors you can approach. You’ll also pre-vet them as a good fit for your startup and sector.

How Many Investors Should You Talk To? The Long Answer

When founders plan their funding strategy, they typically align it with the runway they have remaining. This is the cash remaining in the company to continue operating for the next six months. The goal is to complete the campaign and get money in the bank before the reserves run out.

The time frame for running a successful campaign depends on its growth stage. For instance, a seed-stage startup could take around six to 12 months to raise funding. However, a company seeking a Series A round could do it in 9 to 18 months.

Although the estimated time frame can vary because of several variables, you should plan for at least 20 weeks. You’ll also factor in the possibility that negotiations fall through and investors pull out. If that happens, you’ll go back to the drawing board to contact other investors and restart the process.

When you have a limited runway, you can’t run the risk of the company’s reserves running out. At least 38% of startups fail simply because they were unable to raise money in time. This is why you should be ready with a pool of potential investors, preferably categorized according to suitability.

You should be running a multidimensional approach that will raise your chances of getting money in the bank. Maintain open communication lines with multiple investors to ensure your campaign is a success. And, the optimum number is 30 to 40 or 50, as your fundraising consultant will advise.

When compiling this list, you’ll undoubtedly evaluate investors based on the value they can bring to the company. But that’s not all. Before sending out pitches and contacting them, you’ll categorize them according to priority. Here’s how.

How to Categorize Investors

Sorting potential investors into categories like A, B, and C helps you identify prospects that are a great fit. This strategy enables you to calculate how much time to spend (read: follow-ups) on each. Don’t lose sight of the need to manage your calendar efficiently for the best results.

Many founders make this critical mistake of creating a pitch. They get introductions from people in their network and contact friends. Next, they send out proposals and then additional information via a data room, hoping for a term sheet. Then they sit back and wait. As a result, they may end up talking to the wrong investors.

Getting an email with a request to access your data room is NOT an assurance of a term sheet. You should be careful about the investors with whom you share this crucial resource. Instead, you’ll share it with those who are genuinely interested.

If you’re wondering–how many investors should you talk to?–that’s a good starting point. You’ll sort investors according to different factors. Basic criteria include:

• The industry-specific expertise investors can provide
• Relevance to your growth stage and size
• Geographical location
• Funds investors are likely to have available, depending on their firm’s lifecycle.

But the more crucial criterion is investor interest. You’ll zero in on those who demonstrate interest by asking for follow-up meetings and spending time in the data room. Of course, you’ll verify that the person you’re taking to is a key decision-maker. They should have the authority to finalize the deal.

Always remember that if investors are not engaged, they are unlikely to offer a term sheet. Look for signals like references getting back to you, saying they had investors calling or emailing about the company. Or, investors reaching out with further questions about your pitch or data room.

Category A, B, and C Investors

At the onset of your fundraising campaign, you’ll have three categories of investors: A, B, and C. You’ll also add qualified venture capitalist firms, bringing the tally to at least 40 investors. These are angels and lead investors who have previously backed your startup and may be interested in follow-up rounds.

Keep in mind that storytelling is everything in fundraising. In this regard, for a winning pitch deck to help you here, take a look at the template created by Peter Thiel, Silicon Valley legend (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that founders worldwide are using to raise millions below.

Category A

Investors in Category A should meet the criteria listed above in terms of location, relevance, and expertise. The most important condition is the availability of adequate dry powder. You’re looking for venture capital firms that have raised a new fund in the last 3 to 4 years.

Keep in mind that most firms have a lifecycle of around 10 years. Though, this may extend to up to 12 years, depending on market conditions. If you’re looking to raise a funding round worth $5M, the VC fund should have reserves of at least $100M.

However, if your estimated round is $15M to $20M, the fund should have at least $400M, in reserve. VCs may not allocate more than 5% of their fund when backing a company for the first time. That is, if the total fund size is too small. Their allocation per year may also depend on several other factors.

Accordingly, you’ll have around 8 to 10 investors in this category. You’ll dedicate all your time and resources toward connecting with these entities. Focus on getting introductions with someone at the firm and researching to gather as much information as possible.

Restricting this category to a maximum of 10 options enables you to concentrate your resources toward landing them. You could also publicize that the company is conducting negotiations with the investor.

This strategy can create a Fear Of Missing Out (FOMO) impression and raise the chances of success with alternatives. That is, in case the deal doesn’t pan out. If investor interest starts to wane, you can move the investor to Category B.

Many founders also tend to include top-tier VC firms like Sequoia Capital, Khosla Ventures, or Index Ventures. Attracting their attention is highly challenging, which is why you’ll focus on investors more likely to back your company. And those who you’d want to have on board when scaling the company.

Category B and Category C

When working out how many investors should you talk to, factor in at least 8 to 10 in Category B. The final Category C should have the remaining 20 to 25 options. You’ll move on to options in Category B in case your top investor choices don’t demonstrate the desired interest.

Keep in mind that your investor categories are not set in stone. In fact, this list is highly dynamic and changes as the fundraising program progresses. For instance, moving a seemingly uninterested Category A investor to Category B is only temporary.

It only means that you can divert fewer resources toward them, but also keep them on the back burner. You can always circle back to them by targeting someone else in the firm or during later funding rounds. Similarly, a Category B investor could show exceptional interest in the company.

You’ll quickly move them to Category A and concentrate your limited resources on clinching the deal. Ramp up negotiations aggressively and offer to make available your advanced data room that can prompt a term sheet.

At the same time, try to maintain similar stages in your negotiations within a particular category of 8 to 10 investors. Targeting a smaller pool of, say, just 3 to 4 firms lowers your chances of running out of time. You could be left with no money to run operations and without a term sheet in hand.

Similarly, vet investors carefully and be absolutely sure you want to work with them before sending a proposal. When you do receive a term sheet, you should be ready to negotiate conditions and finalize the deal. At this time, you can’t ask investors to wait while you consider more attractive options.

Venture capitalists are incredibly busy people with multiple investment opportunities, and don’t appreciate delays.

Starting with Category B and C or Category A? What’s Preferable?

When starting your fundraising campaign, consider talking to a few investors in Categories B and C. Try sending out proposals and delivering the pitch to hone your skills. Their questions and interactions will help you refine the deck and learn from your mistakes.

You will be better positioned to present to Category A investors and snag that elusive term sheet. If you’re wondering how many investors should you talk to, consider approaching at least 4 or 5. At the same time, conduct research on market conditions to assess VC investor sentiment.

If market conditions are good and more companies are getting investment, that’s a good signal. You could consider targeting investors who are actively participating in deals within your sector.

The key factor influencing the number of investors you approach or maintain interactions with depends on their interest. Are you looking for more information about how to measure investor engagement? Check out this video in which I have explained how it’s done.

How to Assess Investor Engagement

This is a crucial skill that entrepreneurs should develop. Learn to read the signals that the investor is interested and likely to offer you a term sheet. If you note a lack of engagement, it’s better to turn your attention to other investors.

Here’s what you need to know:

• The initial meeting at a venture capitalist firm is typically with an associate or partner. The real crunch comes when you’re trying to get a follow-up meeting. Most investors will make a decision within a few weeks. Others may not contact you for updates about the company’s progress before the next 9 to 12 months.
• VC representatives could be super friendly, but you’ll get a follow-up meeting request only if they are interested. If they ask questions, that’s a signal they’ve spent time evaluating the information you presented. Investors are busy people and won’t spend time on a proposal unless they see potential in it.
• The investor is definitely interested if they reach out to the references you’ve provided, including customers and vendors. If they ask to see a product demo or request further financial details, that’s a positive sign.
• If investors ask for access to your data room, don’t count that as a win. Be wary about the data you make available, since they could be using it to do a comparative analysis. Instead, ask about the specific information they need and provide just that–but in a follow-up meeting.
• Don’t write off the investor if they don’t respond to emails or requests for a second meeting. Nudging them gently with reminders shows persistence. However, you should back off if you get even a soft “no.”
• Understand that investor rejections are not always about your company not being a viable investment opportunity. At times, they may not have the time or bandwidth to dedicate to your company in terms of providing guidance. They might circle back at a later date. Meanwhile, keep talking to other investors to get that term sheet.

Getting Investors Interested Again

As explained earlier, it’s preferable to target and concentrate your marketing approaches on a select group of investors. When working out how many investors should you talk to, focus on those few. If they don’t respond or signal engagement, try other strategies.

• You may have inadvertently contacted the wrong person at the firm. Check with your contact and single out a key decision-maker or expert by identifying them by name. For instance, a go-to-market professional who can better understand your product and its market.
• Offer to present a demo of your product and its features to interest investors.
• Get your team involved. Ask the investor if they would like to meet members of the core skill sets running the company.
• If you’ve shared the data room, add more in-depth information to convince investors that the company is a worthwhile investment. Invite them to check out the updates.

Don’t Slack Off On Your Efforts

Raising funding for your company takes dedicated efforts, which means that you can’t slack off. Keep up the momentum by reaching out to other investors and requesting follow-up meetings. At the same time, maintain your focus.

If an investor has initiated due diligence, focus on providing them with the necessary information. But also talk to others in case the deal does not finalize. Similarly, don’t assume that the term sheet guarantees funding. Continue talking to other investors until you sign the investment agreement.

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