I’ve always loved Joel Spolsky’s post on Fire + Motion: it sums up in just two words the basic playbook of most startups (and many big companies as well): move fast and break shit.
There’s another pair of words that I find myself repeating all the time in conversations with founders — Scarcity + Urgency — and they hold the same magic for “growth hacker” activities like sales and fundraising as Fire + Motion do for product and marketing.
Yesterday I spotted the following in Galen Ward’s Twitterstream (Galen is founder + CEO of Estately, a Founders Co-op portfolio company):
Scarcity and Urgency are two of the most powerful levers available to the growth hacker, because — like other cognitive hacks — they trigger deep emotional responses that override rational decisionmaking, enhance perceived value and inject momentum into situations where inertia and procrastination are the norm.
The twinned power of Scarcity and Urgency have been on my mind lately because — as I was reflecting last week — the Fall fundraising circus is now in full swing; hundreds of (mostly) high-quality companies are making the rounds on Sand Hill Road hoping to spark the imaginations and loosen the purse strings of the venture capital community.
Despite what you may have read or heard, venture capitalists are generally not stupid people: they have above-average pattern recognition skills, are good at math, and possess powerful bullshit sensors kept in peak form by a daily regimen of entrepreneur pitch meetings.
However — as Daniel Kaheman and Amos Tversky demonstrated over decades of brilliant experimentation — venture capitalists are just as susceptible as any other human to the common cognitive biases to which Galen referred.
When some good is perceived to be scarce — in short supply, or better yet, completely unique — it is automatically assigned a higher social and monetary value. Since not everyone can have one, the folks that can acquire new status among their peers, and the rarity of the good demands a higher price than its similar but more common substitutes.
If the availability of that good is also constrained by time — available today, but perhaps not tomorrow, or ever again (at least at the current price) — its value is compounded. The rarest diamond in the world may be precious, but its value changes little from year to year; to maximize the value of scarcity you must add velocity — the faster the better.
What does all this have to do with raising money for your business?
If you want to capture the hearts, minds and wallets of jaded professional investors, you need to do at least three things extraordinarily well:
- Be rare
Being the 4th — or 10th — entrant in a market crowded with lookalike competitors (mobile photo sharing, anyone?) puts a massive and entirely unneccessary barrier between you and the investors you’re looking to win over. It actually doesn’t even matter if you’re the best of those 10; unless your effort is clearly, massively, irrefutably better than the others you will still probably fail because the market is too noisy for the customer to make the right choice. Be scarce, one-of-a-kind if you can.
- Be valuable
Being the only entrant in a trivially small market is even worse than being one of the lemmings in a big and crowded one. In the second case you’ll just be seen as slow and unoriginal; in the first you’re more likely to be branded a fool, which is a much harder label to shake. If you’re going to pick any fight at all — at least one that you want venture capitalists to care about — it better be a really fucking big one.
- Be about to get away
Venture financings occur in step functions (e.g., Seed, Series A, Series B, etc.), each step has finite capacity (e.g,. $500K, $2MM, $10MM), and once each round is closed the opportunity to invest usually doesn’t open up until the next step is reached. The more successful the company the bigger the change in value between steps, and (not coincidentally) exits often occur just as the next step approaches, making it impossible for late entrants to participate. The process is practically built out of scarcity and urgency, and smart entrepreneurs can use that dynamic to tilt the table ever-so-slightly back in their direction.
If you’re planning to raise venture money this fall and you haven’t kicked things off just yet, here are a few ideas to consider to increase the perceived scarcity and urgency around your raise:
- Drop everything and raise: Don’t try to fit your fundraising in around your usual day-to-day coding, hustling, recruiting and ping-pong-playing routine. Play to win at fundraising like you do at everything else in life and make it your obsession until the docs are signed and the money’s in the bank.
- Polish your pitch: Asking for VC money is product development, storytelling and performance art all rolled into one. Your pitch deck and demo are work samples — right or wrong you will be judged on both style and substance, because both reflect on your skills and values as an entrepreneur. Similarly, the narrative you weave about your team, opportunity, competitive landscape and the journey ahead must be factual, emotionally compelling, exciting, and even funny (risky, but extra style points if you pull it off). Build your materials and story with the same care you bring to your product, and try them out on as many “critical friends” as you can before you take your first meeting. You will stand out as a result.
- Compress the process: Because you’ve dropped everything to do it — and because it will get you better results — space your pitch meetings as tightly together as you can stand (and VC schedules will allow). Your goal is to get every interested firm to pay attention at the same time — and hopefully to drop their term sheets at roughly the same time. If you’re lucky and good enough to have multiple offers, you want to be able to compare people, culture and terms in parallel. You also want the interested firms to understand — in the nicest possible way — that they need to discuss, decide and act quickly if they want to participate in the round. Urgency counts.
- Be yourself: Never forget that asking a VC for money is inviting them into your life and stuff in an intensely personal way for years to come. No matter how much money they have, you *do not* want them to accept this invitation on false pretenses — not only will it make the next 3-5 years of your life a living hell, it will also radically reduce the odds of either of you ever making any money in the process. Sell all you want — I’d be embarrassed for you if you didn’t — but sell from the heart: there is nothing more rare and valuable in the world than an honest man.
Another exceptional post, Chris!
Thanks for reading, Marcelo!
Great post Chris! Also a great reminder for folks that getting good at something (product marketing) often has a halo effect on other things (fundraising).
Thanks for the note, Kav — there’s a strong connection between excellence in product + storytelling and excellence in fundraising.