A lot of first-time founders and startups are going out to raise money these days. It’s pretty hostile territory at the moment.
And they usually start off awful, I mean really, really, really bad. Their only experience of this kind of finance is usually limited to their own personal finance stuff – applying for mortgages, car loans, personal loans etc.
Let’s get one thing straight before we start – A VC has as much in common with a Bank Manager as Sex in the City has with the Die Hard movies! (I feel like we should have a deeper discussion about that comparison at some point!).
A bank manager (and their process) is built for as close to 100% risk avoidance as they can manage. They want to lend you money, earn as much interest as they can over the duration and then once you’ve paid back, if it’s been a good deal, they’ll probably try and lend you more.
On the most basic level, raising money from VC’s is far more akin to taking on a new business partner in the business. A great VC is your new wingman, having your back, while introducing you to new opportunities, talking you up at every opportunity.
Never forget: it’s in every VCs interest for your business to grow, the more you grow, the more their investment in you is worth.
(1). Remember where the money is coming from.
Despite the snazzy dress sense of Dublin VC socialites such as Will Prendergast, Conor Stanley and Ian Lucey please, please, please remember that the money you’re seeking is coming from a fund, not completely from the VC partner’s pockets, a fund that just like your current efforts, someone had to go out knocking on doors to raise. And just like the expectations placed on you to deliver a return if you take their money, the VC partners have to deliver a return to their investors or they’re out of business and back to buying their clothes in Pennys.
So keep in mind a few things.
(a). They’ll invest primarily in areas that they know and understand best. Their knowledge of an industry will help them make their own predictions on success and they’ll be most comfortable working in areas that they don’t need to go out and learn about. So stick to pitching VC’s that have history in your space. If they don’t have a track record in your space then help yourself out by including extensive industry space information in your pitch – help them understand what success will look like in your industry space.
(b). The bigger the fund, the bigger the expectations. Everyone loves having a ‘household name’ fund as an investor but for most of the big funds anything less than a $100m exit will be considered a very poor use of investment capital. Be very clear about expectations, how big do you see the business getting and how does that relate to other companies in the fund’s portfolio.
(c). Human nature states that how far they are into the lifecycle of their fund will dictate their current approach to risk. If their fund is maturing then you can be damn sure that they’ll be starting to think hard about how they’re going to return to their investors so they will be far more likely to use remaining funds to double down on existing investments, than take on new ones.
(2). It’s a Partnership, stupid!
Here’s where most first time founders go wrong. They think that once the fundraising process comes to an end and the cheque clears, they go their separate ways, with the occasional update to keep the investors happy.
With investors, if you’re doing it right, you share openly all news, good news, bad news, you frequently ask for help (see below), you keep very open, very regular channels of communication with your investors and that way there’s no panic and no surprises. The absolute master of investor relations is Pat Phelan, my former chief at Trustev.
If you try to hide stuff from investors, they’ll find out. Remember they’re usually among the most connected people in any ecosystem and they’ll hear rumours, whispers, all the gossip, everything – if they’re on your side, they’re your best defence. If they hear something that you should have told them, expect it to become a major problem.
Remember investors are trying to manage a portfolio of dozens, sometimes hundreds of investments. The more open and transparent your chain of communication with them, the more likely it’s going to be a good relationship as you’re saving them a huge amount of work in keeping track of you.
(3). These guys are smart, very, very, very smart.
So when a VC asks for a business plan, financial projections or other documentation, in my experience, it’s usually more so that they can judge how fiscally responsible you are, how you are at managing money and how good you are at reporting than believing the actual numbers that you show them.
Even when discussing spaces that aren’t in their field of expertise, most VCs grasp the principles very quickly so they can be a huge resource for any CEO in being an independent, but still connected sounding block on pretty much any issue. Their perspective is usually fairly binary – good for the company or bad for the company, so it can often be incredibly helpful.
(4). You cannot ‘fool’ an investor out of money.
Due diligence – two words hated by every entrepreneur because it’s where all the problems start if you’ve been ‘fluffing’ or padding anything. A deal is on the table and then the deep digging starts. The books are opened, the technology and code are opened to experts, every single thing comes out in the wash, every number gets examined and all it takes is one lie or one exaggerated number and the house of cards falls over and you’ve burnt that bridge forever.
(5). Please remember Dragon’s Den and Shark Tank are entertainment shows.
This one is a bit tongue in cheek but with an important underlying message – fundraising is an exceptionally complicated process – legally, financially and psychologically – it takes months, not weeks. The deal has to work for everyone, investor and startup and nothing is done or certain, until everything is done and certain.
(6). Learn everything you can about their business.
If you want a real hands on (eyes on?) look at the sort of stuff that goes down during a fundraising process, I’d recommend reading up on how Rand Fiskin and Moz handled themselves during their fundraising adventures. First up is Rand’s extremely detailed guide on Moz (then SEOMoz)’s Venture Capital Process.
Then read, “What I l Learned About Sales But Foolishly Forgot When Raising VC” which points out the obvious, the process will be so much easier if you’ve focussed on a product and built your business so that it’s attracting interest.
Then read the brilliant “Misadventures in VC Funding: The $24 Million Moz almost raised” where Rand prints the actual email exchanges back and forth between him and potential investors. A mentor of Rand’s and cofounder and CTO of Hubspot, Dharmesh Shah, wrote this great public post with various bits of advice for Rand that are just pure gold.
The world of VC finance is challenging at the moment. Global economic uncertainty is having multiple effects on the funding environment for LPs and VC funds, which trickles down to startup funding.
So never underestimate the time it’s going to take to close a successful fundraising process, its always going to be measured in months, not weeks. And even once investment is agreed, dont start spending yet, as the time between an agreed investment and funds being in a bank account usually surprises everyone.