I wear two hats one as a general partner of a couple of seed stage VC funds, the other as an occasional angel investor. Wearing my angel-investing hat, I wanted to highlight an issue that I encourage founders to be careful about when pitching. There are variations on the theme, but essentially it's a line that goes something like:
“…we've talked to some VCs who are really interested, but they tell us we are too early for them to finance our round. So we are raising a small seed round now to hit the milestones they want and then will raise our A round. Its often followed by, we just need $[insert here, but typically $100k - $500k] for  months to hit our milestones…”
So what's the problem with this pitch to an experienced angel investor? When I hear this, I'm thinking:
1. The way you have pitched it to me says you struck out with VCs so now are turning to angels as a backup strategy.
2. From your voice, tone, body language, it feels like you really want the VC money and angels are just a stepping-stone to get the VC round.
3. You are probably new to the process of raising money from VCs. You miss reading the buying signals, and are possibly confusing interest with a genuine desire to finance your startup. It's the job of a VC not to miss out on a potentially good deal, so the process can be full of we're interested signals rather than an outright no.
4. The likelihood of raising money from any of the VCs you are talking to is probably very low. Not impossible, just unlikely.
5. So not only is there high seed stage risk (product, market, team), there is very high financing risk on the deal. It's unlikely you will hit the milestones in the time frame you're thinking and the most likely outcome is that you need to approach your angel investors around the table for more money, which will set up a potentially challenging discussion and negotiation.
6. Even if the scenario plays out that short money leads to solid metrics, which then leads to a VC funding the next round, the way this has been pitched, it doesn't feel like there is the basis for a strong partnership.
Ok, so what can you do? Its perfectly fine to test your concept with VCs with large funds to get a range of feedback on various elements of the business like “is it fundable?”, “where are the key risks?” “what other analogs have they seen?” And if you're not getting them to bite on the seed round now, recalibrate your funding strategy for angel investors. But when you do that I'd suggest:
1. Pitch to angels as partners not just a means to get the VC round. This will comes across in your slides, voice, body language and how you frame your overall financing and de-risking strategy.
2. Consider if there a better financing approach. Is it possible to operate on a small amount of money for say 12 18 months, which will give you enough time to experiment, learn, adjust, and de-risk the opportunity? This seems like a more attractive proposition to an angel investor and if it works out, there is a good probability that a larger VC raise will be done at a decent up round valuation.
3. If angel financing is not available for 12–18 months, is it possible to work with the angel investors to do a small seed with agreed testing/learning/milestones that will lead to them funding another round?
Approaching experienced angel investors in this way will hopefully result in them leaning forward instead of backward, and being much more enthusiastic about finding a way to work together. What do you think? Any lessons learend from navigating the angel and VC funding?