Raising venture capital is a daunting process.
You’ve spent months, if not years, working to turn your dreams into a reality, and now it all hinges on finding that one investor who believes in your company and team as much as you do and if you’re lucky, also brings value to the table.
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So you pack up your bags and head to Silicon Valley for your weeks-long gauntlet of in-person meetings with investors, often infamous for their candor and ease with which they crush or create startup dreams, to seek the one partner that will change everything for you and your venture.
Aside from having a killer idea and a walk to back your talk, there are a few things you can do to make sure your time in the hot seat finds you returning with a signed check in hand and a new partner to share the adventure with.
When the Augury team headed to the valley in search of funding, we returned just three weeks later with just that: a respectable Series A round with a partner that shares our vision and the satisfaction of preparation paying off.
Here are some tactics to that got us there, and hopefully will help you too.
Create Pressure (Even If It’s Artificial)
The first realization, after meeting with a number of VC partners is that, for better or worse, they’re only human. Pitching a company for funding is like sales – it’s more about building trust and building leverage than what you’re selling.
With that in mind you want to try to shift the power balance in your favor. The VC has all the time in the world to make a decision, and your company is probably in dire need of cash. Assuming you won’t get funded anytime soon, they can sit on the sidelines and wait until you achieve more progress and lower their risk.
Like in sales, you need to create artificial pressure – “Order now, and you will get not one, but two co-founders, all this for the low, low price of $2M pre-money!”. Everything you do in your effort to raise capital should be done with the idea in mind that you are prepared and in control and that VCs – other VCs than the one you’re talking to right now – are knocking down your door with term sheets in hand.
In the words of Sun Tzu, “Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win.”
Have a Battle Plan
Securing funding isn’t just some willy nilly thing that you go into hoping for the best and seeing what comes your way – at least not if you’re going to do it right. Think about raising capital as a battle and enter with a strategy in hand. By the time you’re done planning, you should have victory already in sight.
Start off by researching potential investors by looking not only at firms, but individual partners within firms, according to their previous investments and markets of interest. Make a spreadsheet of all your potential investors and appropriate contact information.
Then get in touch with CEOs of the companies they previously invested in and get the inside scoop, not only on how you might best approach that particular VC, but to see if you can get a personal introduction as well. Much like restaurant reviews, we may all look to Yelp, but we trust references from our friends and social networks more. The same goes for VCs.
Prepare for Battle
Once you’ve done your due diligence and set out a battle plan, you’re well on the way, but now it’s time to prepare your team, your deck and yourselves for the questions you’re about to have to answer.
First things first, study up on investment terminology and the various milestones by which you’ll be judged. The last thing you want is to walk into a meeting just to sit down and ask for a lesson on the differences between convertible notes and equity rounds. VCs are going to have expectations and you should know where you stand in terms of these expectations before they ever even ask.
For example, when we raised our seed stage investment, we were a team of two engineers. We knew we had to be prepared to answer questions about how we planned to build a sales team. Afterall, sales is not exactly the strength of an engineer.
Rather than waiting for the question to arise, we added a slide to our deck addressing our perceived weakness and introducing our sales advisor. Not only did we answer the question, but we showed our savvy by answering it before it was asked. It worked wonders.
In terms of specifics, there are a number of financial, user, or customer acquisition milestones that traditionally accompany each round that you should also be aware of.
The first thing you’ll want to do is go in with at least the next six quarters of detailed expenses, revenues and assumptions at the ready, with explanations on how you will reach the next round’s milestones. Again, for any missed milestones, be prepared to answer.
For example, a company seeking a seed round may need to show a basic product and initial traction. With Augury, we didn’t have the 5,000 monthly users you might expect of a successful consumer product, but we had signed on a Fortune-500 partner and that was enough to validate us.
In the seed round, you’re selling the team more than the product. When you get to the Series A round, on the other hand, you might be selling the fact that you’re actually able to deliver on your promises. VCs may expect to see something along the lines of $50k of monthly recurring revenue or prolonged customer adoption.
Knowing the most common milestones and where you stand in relation to them can take you miles further down the road toward a successful investment round.
Now, before you ever step foot into a VC firm or even book a meeting, you’ll want to carefully craft your pitch and make sure it resonates. Go out and practice on your friends and with VCs who aren’t in your target audience.
Building an effective pitch presentation is a subject for another blog post, and many have been written, but in short, make sure you can describe what you do, why you do it, and how you’re going to win without so much as a stutter.
A pitch, however, is a living organism – it evolves from pitch to pitch based on the reaction and feedback you receive. At the end of each meeting, go back and note what worked, what didn’t, and prepare for the next. (Which questions are often asked? Where do you get the most pushback?)
While you should hone your pitch before ever setting a meeting, the process never ends until you have that check in hand and you’ve closed your round of funding.
Divide and Conquer
Now it’s time to take all your preparation and put your plan into action. But how?
The valley is a very small place and venture capitalists are competing with each other to invest in the best deals. Use this to your advantage – be sure to articulate a set timeline in the first introductory meeting.
In our case, we made sure to create an artificial sense of pressure by first organizing a round of meetings with myself in New York and Silicon Valley over the first two weeks and then a series of follow-ups with my cofounder on the third week.
These meetings, however, all had to take place in a predetermined span of time because he was flying in from Israel. Could he have flown in earlier and stayed later? Of course, but then there would have been no pressure to meet and decide things quickly.
With one meeting after another, we ensured that we got a yes/no answer as quickly as possible. Getting to a quick “no” is invaluable to you at this stage, as it allows you to focus your energy in the right directions – but be sure to ask for feedback on why you were turned down.
Update your spreadsheet with color codes and summaries after each meeting, as well as action items. It’s easy to get lost when you have three meeting per day and no time to digest.
By the end of our third week, we had at least two, if not three meetings with the leading candidates. This gave us enough confidence to push everyone towards a term-sheet while mentioning the traction we were getting – without naming names, of course.
In the end, it was a mixture of keeping the pressure on and being well-prepared that had us leaving Silicon Valley with a term sheet for our Series A in hand.
Follow these steps and you can too.
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