Until the end of 2021, the venture capital world was completely foreign to my context. Since then I've had the chance to raise investment and interact with investors, which has given me a better understanding of how this moves.

For someone who has never gone deep into the topic, it can sound unreal that someone is willing to invest millions of dollars in a company that is just getting started or barely has any revenue.

In this post I'm sharing the things I've been able to learn, knowing that I'll surely need to revisit it and iterate as I remember and learn more.

Should you raise capital?

I'll start here because I think it's a question most founders never ask themselves, and they don't analyze it in depth.

I think most of us get carried away by the news we see on social networks, where every day people celebrate the companies that raise millions of dollars, get into Y Combinator, become unicorns, and all that. At least that's been my case.

This gets amplified by stories of founders like Mark Zuckerberg, Elon Musk, Jeff Bezos, Bill Gates, etc.

Even so, I'll tell you that you probably shouldn't do it. I say that after living both sides (starting a business with and without capital) and co-founding Torrenegra Organization, where we supported more than 100 bootstrapped companies, from the ones just starting to those generating more than $50 million dollars a year.

I also learned it from Alexander Torrenegra, who built two bootstrapped companies: Bunny Studio, which is still active and cash-flow positive, and Voice123, which they sold to a private equity fund in 2021.

On the other hand, he's now building a company where he invested $10M himself and raised another $10M USD. He's also an angel investor in companies like Cornershop, Viva Real, Platzi, Kiwibot, Liftit, and many more—and he's in venture capital funds too.

And last but not least, I've talked about it a ton with Emilio Jácome, one of the friends most obsessed with the world of venture capital and private equity, who has worked at different funds.

From all of that and many more conversations, I've learned in depth why it doesn't make sense to raise capital in most cases.

Lastly, because most people don't stop to think about the pressure that will fall on you once you raise money.

The (wrong) reasons most people want to raise capital

These are the most common things I hear, though I'm sure there are many more.

  • To build the product. Today more than ever, you don't need technical knowledge to build a minimum viable product. In fact, you don't even need a minimum viable product to start generating sales.

    It sounds unreal—I thought so too—but pre-selling is one of the best ways to validate whether there is demand for your product or service.

    People talk a lot about Product-Market Fit, but in reality we should talk about Product-Market-Channel Fit, because many times it's the channel that fails.

    The channel is your acquisition source (email, performance marketing, content, etc.) and the messaging—what some people call product marketing.

    In the vast majority of cases, unless you're really doing DeepTech or selling to governments, if you as a founder can't land at least 2 to 5 customers in pre-sales, something's off.

  • To quit my job and go full-time. I totally get that some people can't just quit one day and try to build a company.

    But you shouldn't. It's not a requirement. I did it—over and over again—but keep in mind I was between 25 and 29, with nobody depending on me financially.

    That said, again, you shouldn't quit. Work nights and weekends. You don't have to build a huge company while you still have a job; you just have to get to your minimum salary so you can go full-time later.

  • To spend on social ads. Just no. You're going to end up burning money. No one will invest in you, and whoever does is being very naive, seriously.

  • To register the brand and similar things. Forget about it—it doesn't matter.

I get that from a founder's point of view this all feels like real justification, but the truth is that most of us should only be worried about getting customers—people who pay.

And that's important to clarify: a user is not the same as a customer. A user might use your product or service, but until they pay you, they're not a customer.

Why is getting customers important?

  1. If you're reading this and wondering whether you should raise or not, odds are you're still pretty amateur in this game. You likely don't already have relationships with investors, so the real question is: could you raise capital even if you tried?
  2. Given the first point, something that will help a ton to raise capital is having traction—in other words, sales.

So whether you raise money or not, you should absolutely get sales.

Fundraising

With all that said, let's finally get into raising capital.

If there's one thing you should take from here, it's that every investor you talk to is evaluating whether you can be an outlier—a company that becomes gigantic.

Less than 1% of companies get there. And to see the reality, you can go to Y Combinator's website where they say they've invested in 5,000 companies that together are worth over $800 billion dollars.

But the truth is that fewer than 10 companies generate most of that value (DoorDash, Coinbase, Airbnb, Reddit, Instacart, Stripe, etc.). That's 0.2% of all the companies they've backed.

So for someone to invest in you, they have to truly believe you can be part of that 0.2%.

The main mistake we founders make is showing up with a tiny vision. Saying you'll get to $10 million, $50 million, or even $100 million in revenue isn't enough.

So, how can you show through different interactions that you could become that kind of company?

Investor rejections

It's important to know that investors have zero incentive to give you direct, honest feedback. That's why you'll usually hear things like:

  • I love it, but you're not at the stage we invest in.
  • We need to see a bit more progress or traction.
  • Who else is investing?

Basically, it's a hidden way of saying no, and all of it stems from the fact that, deep down, the person doesn't believe you'll be able to build a massive company.

But since they aren't fortune tellers, they don't know if in a month, a year, or five you'll end up building something huge. So they want to leave the door open.

Most founders take rejection personally because it feels like they’re saying no to them—not the company—and they get offended.

If you want real feedback, and only once they already have a positive perception of you, say something like:

"Alan, I know I probably have a lot of red flags for you right now. I'd love to hear your candid feedback so I can understand what we should improve from your perspective."

Investors buy a video, not a photo

Imagine you're an investor. Out of nowhere, someone comes up to you at an event and pitches you for 20 minutes, asking for money. You know nothing about them beyond that conversation. Would you invest? Probably not.

Now imagine you're one of the founders of OpenAI and you have an employee who joined when the team was just 10 people. Over the last five years you saw them give it their all, do things that seemed impossible, and have a massive impact at OpenAI. Would you invest? Probably yes, because you have a five-year video of them, not just a snapshot in the form of a single meeting.

That's what fundraising is like. You should be building relationships before you try to raise capital, because it's very rare that you'll raise money without any previous relationship.

The best ways to turn a photo into a video are:

  1. Mentorship sessions.
  2. Investor updates.
  3. Building in public.
  4. Warm intros from other founders the investor already trusts.

If you ask for money, they'll give you advice. If you ask for advice, they'll give you money.

Along the same lines, in Silicon Valley there's a saying: those who ask for money get advice, and those who ask for advice get money.

It's because, through mentorship, both sides can evaluate whether there's real value in the relationship. This applies especially with angel investors.

The best part is most founders are very receptive to giving advice or mentorship because, just like they're helping you, someone helped them before.

But you have to be good at cold emails and messages. It's not about asking for mentorship just because; you need a clear ask for the other person, and it should make sense with their area of expertise.

I see this all the time: a founder asks a well-known entrepreneur for BioTech advice even though that entrepreneur has never worked in BioTech. That just shows you didn't do your homework.

Know your strengths

It sounds obvious, but most people have no idea what their strengths look like from an outsider's perspective. Those strengths can be:

  1. Track record. Universities and companies you've been part of that carry prestige.
  2. Traction. How fast you're growing month over month.
  3. Unfair advantage. The things you have that would be very hard to copy. For example, Bad Bunny has a huge audience he can use as a distribution channel and plenty of connections in the music industry, so a music company of his would be interesting.
  4. Vote of confidence from people you've worked with. This is even more powerful if you come from a big, well-known company. If you worked at Airbnb, ideally your manager—or even one of the founders—should be writing you an angel check. It shows you did great work and that someone with that reputation, who saw you execute, trusts you.

There are other things tied to your personal situation that basically show you're not risk-averse and that you'll dedicate your life to this. You can, for example, read my investment memo here.

Know your weaknesses—and make them obvious. Run an anti-pitch.

No business is perfect—not Elon Musk's, not anyone's.

Every business and every team has weaknesses. Anyone in their right mind knows that.

The mistake founders make is trying to hide them, trying to look perfect. That makes you look naive rather than experienced.

The best way to tackle your weaknesses is to make them obvious yourself: point out what's tough about the industry, and then also show that you've thought through how to mitigate that risk.

Financial projections don't make sense

If an investor asks you for a financial model, it's for two reasons:

  1. Either they don't get it and you should run the other way.
  2. They want to see how big you're aiming.

No financial projection comes true. Like people say, Excel is the land of dreams.

The data room doesn't matter

If an investor asks for a data room, I'd think twice.

It's more standard in ecosystems like Latin America, but to me it's ridiculous to ask for dozens of documents from an early-stage company (anything under $5M USD in annual revenue).

Especially in San Francisco—if someone is asking for a data room when you're early, ignore them.

Do due diligence on investors

Just like an investor can dig into you by talking with previous bosses or peers, you should do the same.

There are plenty of horror stories you won't uncover unless you actually do the research.

The investor isn't doing you a favor

This is one of the biggest challenges for first-time founders. We feel like whoever invests is doing us a favor by giving us money—because it feels like free cash.

Something I've learned from people at Ivy Leagues and, more broadly, the United States mindset is that you have to be a bit cocky. You can hear it in this episode with Palantir co-founders Joe Lonsdale and Alex Karp.

You're giving the investor the opportunity to invest in your company. They're not above you or below you. You're equals.

Ask other founders for feedback

Founders usually have a lot of empathy for another founder because they've already lived through the process and know how exhausting it can be. That's why they'll give you more transparent feedback, so you don't waste time.

Before you even try to charm an investor, get feedback from them first and iterate on the first versions of your pitch deck and your narrative.

The pitch deck is just a formality

Startup competitions that turn pitches into a circus have made us believe that a pretty deck will raise the round.

And yes, it's important that your deck is well done, but what it really helps with is getting the first meeting.

Investors invest in teams, not PDFs.

Take advantage of accelerators and fellowships

If you don't have connections, in my opinion accelerators are a great trampoline. In a short time they tell you whether they'll invest and help you grow your network.

In this post you can find 50 programs around the world.

Take it seriously and build a rigorous sales process

Finally, the other key thing: this isn't a part-time or once-in-a-while process. If you really want to raise capital, you should dedicate yourself to it full-time and run a rigorous process.

The most common mistakes are:

  1. Not segmenting which investors could actually be a fit.
  2. Not knowing your company's value proposition for the investor.
  3. Not knowing how to communicate that value proposition to investors.
  4. Not putting in daily intensity into the process.

In short, not running a sales pipeline.