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Fundraising’s Cold Start Problem

Jason Yeh
March 4, 2022

Over the last decade, the number of tech startups has skyrocketed. Access to technology like mobile computing devices and platforms that allow products to be built with less or “no” code and for cheaper has been a major driver of this trend. One fantastic result is seeing people from different backgrounds venture into the space, both in the United States and around the world. It's an amazing thing, and I'm excited about the evolution of entrepreneurship globally.

One frustration that many newcomers to the startup world have is around the difficulty in attracting investment capital. While the media reports on large amounts of capital invested at record levels, many new founders don’t understand why fundraising isn’t as easy for them.

What may seem on the surface to be quick and careless actually requires significant consideration. It’s true that there are huge amounts of capital in today's market and the processes are quicker than ever, but that doesn’t mean investors are recklessly allocating capital.

The twitterverse loves throwing around the exaggeration of”$100MM checks in 48 hours with no diligence by Tiger Global.” In reality, Tiger spends millions conducting significant amounts of analysis before they ever make an offer.

It’s all about conviction

Even though competition is pushing investors to be more aggressive than ever, they still do everything they can to gain conviction in the investments that they make. 

Another way of describing “conviction” is comfort. Are they comfortable making the investment? Comfortable with the founder? When an investment is made quickly, that usually means a significant amount of work has gone in well before the fundraise to make investors comfortable. On the other hand, many founders who fail to fundraise are frustrated newcomers who expected to attract funding quickly even as unknown quantities.

I call the experience of those failed founders the cold start problem.

Warming up to avoid cold starts

Andrew Chen, the general partner at Andreessen Horowitz, recently released a book titled The Cold Start Problem. His book very specifically addressed this issue at startups trying to build network effects, in which the value of a product or service grows as more users participate. This idea is that on day one, without any network to start, it is very difficult to build a network that enables new products & services to scale. This dynamic also exists in fundraising. In fundraising, the cold start problem is the opposite of momentum. Thus, fighting the cold start problem within fundraising is all about, as you might have guessed, warming up the process.

When you're fundraising with momentum, each instance of traction feeds off of each other. One great meeting leads to another great meeting. People talking about how great your company is leads to others speaking highly of your company. A great introduction leads to another great intro and other meetings. And finally, term sheets lead to more term sheets as word of your momentum spreads and FOMO kicks in. 

Learning how to start the process of creating momentum is the name of the game in fundraising, and it's all about warming up the process. Warming up the process can take time, depending on what your starting point is. 

Here are a few examples of actions that warm up the process: 

  • Intro calls with investors before raising capital (to learn, not to pitch) 
  • Building up your network – which you can work towards even starting from nothing: Build social capital for the future instead of trying to extract value right away.
  • Building an Angel Army – taking on smaller investors who add to your network add to your credibility and add to your ability to drive awareness. 
  • Angel invest yourself. This is an example of helping the community & engaging the community. If you have the wherewithal to be able to put small checks to work. You start becoming a node that people know and start warming up the environment for investors to want to connect with you. (btw I fully realize not everyone has the resources to do this)
  • Simply build - the more traction that you can create within your company the more value that your company drives. The more excitement your customers have for your company the warmer your the start of your fundraising process. 

Five years ago, Mark Suster wrote a post about lines not dots where he described the process of creating relationships with investors that allow them to make comfortable decisions. While I still believe in that process, today's fast-paced world also requires you to light a fire to avoid a cold start in fundraising.


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