Capital can serve as a catalyst and an accelerator for innovation and growth, spurring new ideas and driving economic progress, particularly among underrepresented groups. Investing in businesses that foster inclusion and diversity can reduce barriers to entry and enable more individuals to innovate.
Cat Hernandez, General Partner at The Venture Collective (TVC), joined us for a fireside chat to discuss challenges in today's market and share how she operates with a mission to drive capital into the right hands to reduce the layers of inequality in society.
The Investor Mindset
Every venture capital fund has an investment strategy, and as a founder, it is crucial to understand the prospective firm's investment goals. “Every investor that I know talks very openly about what they care about,” Cat says. “The importance here is knowing who wants to potentially invest in your business, whether they've invested in that category in the past, and whether there are conflicts in their existing portfolio.” It’s also important to know where a fund is at in its funding and deployment cycle and what founders say about their experience being backed by the investor.
Cat and her team at TCV look to invest in startups that are not only financially promising but are committed to spurring growth and innovation with diverse teams and entrepreneurs. “When I think about my role in the ecosystem, I am an underrepresented funder,” Cat says. “That means that a lot of capital doesn't go to people who look like me…and when I think about what we can drive in terms of change, it's about ensuring that underrepresented populations have access to the appropriate care.”
Before Cat and her team consider an investment, they first assess whether or not they believe the founders are mission-driven, aligned with their strategy, and have a commitment to building diverse teams. As I mentioned in my last blog post, firms that invest in diverse teams have been proven to outperform their competitors and be more sustainable in the long run.
“We want the most diverse portfolio, but that's driven not just because that's my personal preference,” Cat says. “It's driven by historical data that diverse founding teams outperform, and that if you put an emphasis on that early on, there's this proliferation of ideas and collaboration.”
Preparing for Investor Conversations
Investors need to feel highly convicted of the market, timing, and the resilience of your startup in order to consider an investment. “I don't like to rely purely on pitches as the only way to get conviction because that is where a lot of underrepresented and inexperienced founders fall short,” Cat says. “Just because you can be the best showman doesn't necessarily tell me that you are the best business builder.” Because so many great builders have struggled to nail their pitches and share their stories convincingly, we created the Ready to Raise Bootcamp to ensure they do.
While Cat and her team do not solely rely on pitches as a way to get conviction, at a minimum, they need to see an engaging deck, a solid financial model, commercial traction, and case studies that showcase the defensible part of your startup.
As a founder, you should be able to anticipate most questions from investors. However, this doesn’t mean that they expect you to have all of the answers. Be honest about what you don't know yet, share your hypothesis, and show what you're doing to get to the answers. If you’re not sure which questions to anticipate or the best responses to those questions, then join us for Pitch Practice.
The writing process is also incredibly important when conducting investor outreach via email. Do your homework, personalize your pitch, be strategic with who you approach, and ask questions. “Push investors to give you answers around whether or not they're actually interested and whether or not they're actually deploying,” Cat says. For example, what would it take to get you to a “yes” or what are the three things you think I need to demonstrate for my next investor call?
Additionally, when it comes to talent and fundraising, building and maintaining relationships is key. Investors are going to invest a heck of a lot in a new team member, and when there's a foundation of trust there, they are much more committed to the relationship.
Cat says that she has a few founders who she hasn’t backed, but who have kept her up to speed on their progress through monthly updates. She says that ”They probably don't send me the same monthly updates that they send their internal investors, but they send me something that keeps me intrigued. And so, in a scenario where I might choose to come into a round slightly later, I have then gotten a chance to get to know this company over a period of time.” If you’re not sure what a good investor update looks like, we have some great templates in the Angel Club Resources Library.
Limitations in the Current Market
Given current conditions, there is likely a lot more to come in terms of regulation, and as an investor, the more regulated the sector, the more friction there is at the earlier stages of trying to build these businesses.
Most firms see hundreds, if not thousands, of startups a year, and the need for capital is incredibly competitive. In addition to a concentrated opportunity pool, investors are also always fundraising themselves, and face their own hurdles when raising in the current market. “I think the thing that affects raising on the investor side is our ability to deploy,” Cat says. “We don't hold all the money that we raise, and so we have our own restrictions as investors that founders may not be aware of.”
As a founder, it is also key to consider where firms are at in their investment cycle. “Whether or not we're at the beginning of a fund cycle, or the end of a fund cycle has a lot to do with how we make decisions,” Cat mentions. “If we're at the end of a cycle, we are likely thinking about how we preserve the companies that we have.” While, as a founder, rejections can feel like a roller coaster, it’s important to remember that oftentimes it's not you or the business itself that is not investable, it's just that investors need to make choices, and often experience limitations themselves.
In addition to increased regulations, market leaders also anticipate consolidation that hasn’t been seen before. Cat says that “If you are already in the market, there will be companies that cease to exist. There will also be companies that fold into larger or more advanced companies.” There are only so many times you can go out to market as an entrepreneur. “If you are a founder who just can't help building right now, then you should go build it,” Cat says. However, if you are going to market now, there will likely be some challenges. To be successful, it is crucial to join forces with a larger entity, extend your runway, and foster relationships with new and existing investors.
While there are challenges ahead, Cat remains hopeful and mentions that “the nice thing about dry powder is that eventually, it needs to be deployed…We, as investors, have a responsibility to find opportunities and deploy money on a specific time horizon. And so, while we can take a break for a quarter here or there, we can't do that for an extended period of time or we cease to fulfill the responsibility that we have.”
🤓 Founders looking to pitch to investors, like Cat, can apply here to participate in our upcoming Pitch Practice on April 28th. Investors who want to get access to deal-flow that we get and share can sign up here. Not a member yet? Join now and expand your network through curated resources, events, introductions, and mentorship opportunities from globally recognized investors, founders, and experts in the inclusive Angel Club entrepreneurship community.
🎞 A full version of the recording, in addition to investor and media databases, playbooks, templates, and tools can be found in the members-only Angel Club Resource Library.