The HBO show, “Silicon Valley”, is a satirical look at the startup world, but there’s one important point that’s on the nose: raising venture capital is a dude-fest. Only 18 percent of startup companies funded in 2014 had a female founder.
While that figure seems woefully low, it actually represents dramatic progress: only nine percent of startups in 2009 had a female founder. So, 30 years after Aretha Franklin and Annie Lennox sang that ‘sisters are doin’ it for themselves’, we actually are in the tech world.
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My startup company, PolicyGenius, is part of that trend. We just closed a $5.3 million Series A round of funding. It was one of the most difficult things I’ve ever done in my working career (and I was a Pizza Hut waitress in rural West Virginia, so that’s saying something). The venture capital fundraising process has a steep learning curve. Here’s what I learned.
1. Get your performance metrics ready
Before you start pitching, you want to be operational long enough (even with just a beta product) to shape a compelling story about your performance. EquityZen did a detailed dive into what metrics are required for a Series A Round.
Generally, for the early stages (seed and Series A), you’ll want to show: 1) at least 20 percent month-over-month growth in users, customers or revenues, 2) a reasonable cost per acquisition in a paid channel (like advertising), and 3) a defensible estimate of your customer lifetime value (even if it’s just based on benchmarking and modeling).
When we started our Series A fundraising, we could show strong customer growth (#1) and actual customer lifetime value (#3). However, those customers found us through unpaid channels that don’t lend themselves to a cost per acquisition calculation (i.e., press coverage and original content). So we had metrics #1 and #3 but not #2 and we got consistently dinged by VC firms for that.
In hindsight, we should have started a couple paid acquisition efforts immediately after launch and brought on customer service staff sooner to help us manage volume. However, we were balancing the desire to push our metrics (and manage cash burn) with a long enough runway to fundraise successfully. Fundraising usually takes at least 3 months (and ours took 5), so it’s a delicate line to walk.
2. Line up your coaching staff
To save your yourself work (and panic), line up a couple of trusted and responsive advisors who can help you along the way with expert advice on things like reviewing your pitch deck, vetting investors and explaining how a right of first refusal works.
You’ll also face some time-sensitive decisions (like 48 hours to accept a term sheet) and don’t want to scramble to find the right person to give you the advice you need. I had a lawyer, a couple experienced investors and a few seasoned entrepreneurs on deck for advice.
3. Tell a great story
So much has been written about how female entrepreneurs, more so than their male counterparts, undersell their vision and focus too much on the details of their business model or their own competence rather than tell an inspirational story. Even if you know that, it’s easy to make that mistake. Hell, I’m a storytelling champion and I still made that mistake.
During our seed round fundraising, our deck and our pitch got too deep into the details too quickly. I talked about unit economics, assumptions underlying our financial model, industry dynamics, and my deep knowledge of customers – but you had to infer what my vision was.
We eventually raised $750,000 in our seed round, which fell short of our target of $1 million. Before our Series A fundraising, I re-assessed my seed pitch and realized what I was doing wrong: I was trying to prove that I was the smartest person in the room. What I should have been proving was that I was a leader who could deliver on an exciting vision.
So for our Series A raise, I turned our deck into a funny and visual story that centered on our vision, and I modeled my pitch to match. It worked! We exceeded our target of $5 million – and even had to turn down investors, which was a first for us.
4. Do some target practice
If you’re an entrepreneur, the good news is that there are approximately 800 VC firms in the US, all looking to invest. The bad news is that you will have neither the time nor the fortitude to pitch even a fraction of those firms. So here’s what you do: plan your hit list of about 30-50 firms to pitch.
Rule out any firms that haven’t made an investment in a company at your stage for the check size you’re looking for in the past 6 months – because many VCs will want to talk to you even though there’s zero chance they’ll invest right now.
Allow yourself some warm-up pitches with the lower-priority firms on your list. Your pitch will improve over time and with feedback; you’ll want to hit your stride with the highest-priority firms on your list.
5. Find a pattern of success
In Thinking, Fast and Slow, Nobel Prize winner Daniel Kahneman describes the two ways that the brain forms thoughts: 1) fast and subconscious and 2) deliberate and conscious. In both ways, we rely a lot on pattern recognition. And pattern recognition is important in VC pitching.
Why do you think so many entrepreneurs use the, “We’re the Uber for [insert domain here]” pitch? Because venture investors need a shortcut to understand your company, and that shortcut better remind them of fat, raging success.
So work that pattern recognition in your favor. Female founders, you don’t fit the successful male founder pattern, so you’ve got to think outside that. Your pattern fit could be: 1) the firm’s experience in your domain and 2) your connection to the firm.
In my case, four out of five of the VC funds who invested in our Series A round could be described as either: 1) led by an ex-McKinsey consultant or 2) focused on insurance. My startup is: 1) led by an ex-McKinsey consultant (me) and focused on insurance. You get the picture.
6. Get organized for due diligence
During the fundraising process, you’ll have a lot of VC discussions on parallel tracks. Some of those discussions will move into the due diligence phase while you’re still having early conversations with other potential investors. Due diligence is a time-intensive process, and you won’t have time to do that and continue pitching. So have your virtual dataroom ready before you even start fundraising.
Create a secure folder with the following files, neatly labeled and organized: financial statements, current cap table, employee agreements, material contracts (worth over ~$250K), intellectual property registrations, corporate & legal structure docs (e.g., bylaws, board consents, state filings & licenses), customer references, and relevant background info on your industry. If that’s ready, you’ll have one less thing to worry about.
7. Be prepared for a slog
The fundraising funnel can be pretty brutal. You may have to pitch dozens of investors and have hundreds of conversations before it’s all wrapped up. Over five months, my co-founder and I spoke to 40 different venture funds and had around 120 calls or meetings. We successfully closed with 5 of those 40 funds, for a 13 percent “hit rate” – or, seven no’s or dead-ends for every yes.
Even if you get to a signed term sheet (congratulations!), you’re still not finished. Unless one investor took the whole round, you’ll still have to pitch to close the round. Then you still have to negotiate all the transaction documents and chase down signatures and wires. In my case, it took three months to get a signed term sheet, then another two months to close the round and get back to work, building my company full-time.
One final note: this process can be grueling on your body as well as your mind. If you drink, you’ll start drinking more; if you eat, you’ll start eating more. So, find a good masseur with an affordable rate and go often, or become a familiar face at a nearby yoga studio. And get some decent sleep the day before each pitch.
The payoff? You’ll be able to answer a VC’s unexpected question without hesitation the next morning, proving (at least to yourself) that you are in fact the smartest person in the room. And you’ll have the energy to go do the next 20 pitches.
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