For many entrepreneurs raising venture capital is an intimidating and exhaustive process. Statistically low success rates are usually no contributor to the fundamental optimism that raising capital requires. To add to that, the early stage scene is always known for its information-asymmetry between investors who are very clear on certain indicators and entrepreneurs for whom this is simply not daily business. Hence, for this blogpost we bundled some best practices and common mistakes that emerged from years of representing start- and scale-up ventures.
1. Decide whether venture capital is right for you
Simply not all deals qualify for VC funding. Realizing this timely can save a lot of time and effort. In general VCs are looking for companies with a highly scalable business model, a clear exit path and willingness to give up significant ownership along the process. Not matching these criteria does not mean you cannot run a successful business. There are a lot of great companies that don’t fit the target.
2. Work out your capital ask
Investors will not write a blank check, so you will have to define how much money you are going to ask for and how you are going to spend it. The basic thought process is this: define a critical milestone in the next 12-36 months, calculate your net burn rate during this period plus a couple months extra as a time buffer to raise the next round of capital and then ask for enough capital to sustain this runway. When calculating your burn rate, don’t just plug numbers but use logic and assumptions behind them. So replace an over-simplified hockey-stick curve for a revenue model that illustrates your growth path, unit economics etc. Same goes for the expense-side.
3. Do your research
Before engaging with investors, take the initiative to research their experience (deals/exits) and history. Having this context will allow you to communicate more effectively during the process. Plus it will show that you have done your homework and signals that you will approach your venture with the same thoughtfulness.
4. Take your time
Raising venture capital is undeniably demanding and not something that happens overnight. It is a process, not an event. An average investment trajectory from preparation stage until closing easily absorbs hundreds of C-level hours over a 9 to 15 months’ period. Therefore it is key to have adequate time and resources (runway) available to run this process. Investors will have a lot of questions and will lose interest if responses take too long or are inadequate (see next tip).
5. Keep the process alive
Time kills all deals. Therefore, handle the investment process like a sales funnel, always aiming for progression to the next step. Ask questions early-on to assess investors: is this the type of investment they would like to lead? Do they follow-on? How does their decision making process look like? From there on onwards- quarterback the process. Assign roles, ask for timelines, set up weekly meetings. Also, create a reason to close: push towards a specific date to create urgency.
6. Work on a lead
There may be rare exceptions, but in general you will need an investor who will lead the funding round. In general practice, the lead investor will take a significant stake in the round, move your term sheet and due diligence forward and will help you to fill up the round. Securing a lead will be a vote of confidence towards other investors to join the syndicate (or to “co-invest”).
7. Start data room preparation early
Trying to set-up a virtual data room while the investment process is in full-flight often causes time or quality issues. Focus on getting your organizational documents ready early on. A properly structured due diligence process can add much value to the company and ensure a good start to the founder/investor relationship. Plus, a first-time-right data room will send a signal that you are thorough and organized. On the flipside, if key information is missing or unclear it is very likely due diligence will be more probing.
8. Address key risks and contingency plan
It may be tempting to present your company roadmap as if everything will be smooth as silk. The fact is that reality will often look different. This is not an immediate deal-breaker. VCs are not risk-adverse, they are in the risky-bet business for a reason. They are however wary of unidentified or overlooked risks. So be able to address your key risks and show you have a plan to overcome them.
9. Save up good news for middle of the process
Think about stuff like: launching new product features, closed partnerships or won industry awards. Sharing this information at the right time will underpin once again that you are a good investment opportunity and help you gain momentum in your investment process.
10. Get a warm introduction
When approaching VCs, cold calling or e-mailing should be your last option. Try to search for common contacts in your network and secure an introduction. This could be an existing portfolio company, an investor, credible advisor or other industry partner. If no obvious link can be found try to establish a relationship via networks, summits, events or Linked-in. Preferably also try to reach out to the right partner/investment manager for your area.
1. Downplay competition
‘No one can do what we are doing’ is not a phrase that adds to your credibility. Encountering competition is not a weakness. It is a part of business and shows there is a business case. What is important is to have detailed information on the competition (you do not want an investment analyst googling up 5 competitors that you were unaware about). Secondly, you don’t have to rank superior in all aspects. But you should be able to explain very clearly what your competitive advantage is, how this relates to your target group and how to position your unique value proposition.
2. Lose etiquette
Although raising VC sometimes is a hot-boiled and stressful process, it is advisable to maintain an air of professionalism. In your investor approach there is a thin line between being passionately persistent and aggressively spammy. Also expect investors to try poke holes in your story. This is the nature of the process. Instead of getting defensive, show genuine appreciation for their feedback and openness to navigate and adapt parts of the plan. If you receive a rejection, learn from it to strengthen your equity story and appreciate the feedback.
3. Over-complicate the pitch deck
A lot of entrepreneurs have the tendency to pack too much information into a pitch. Try to keep it simple. Quickly and articulately communicate your value story. Be able to explain everything from concept to go-to-market in a max. 10 minute pitch. Leave time for questions -see it as an opportunity to engage with your prospective investors and learn their point-of-view.
4. Use too much jargon
Don’t assume that VCs know what you are talking about. VCs look at a broad range of propositions, and you are the true expert in your field. Therefore, try to avoid overly use of slang and dense technical explanations. Restrict yourself by explaining what you do, why you do it (which pain do you solve) and what makes you the best in the field.
Being an early stage company – not everything is smooth as silk, and there will be plenty challenges involved. Instead of trying to cover them up, think about a solid plan on how to tackle them. Also, don’t hide bad news- let your (prospective) investors know when it occurs. There is a difference between being pleasantly optimistic and being completely off-par.
6. Take the first money you get
Raising venture capital means getting involved in a long term relationship with your investors. You are literally giving up a part of your company, you will sit in board meetings with them and there will be expectations and different opinions. Therefore, choose your investors wisely and think about their role and contribution from a relationship-perspective, rather than solely a money-perspective.
7. Don’t create a reason to wait
When trying to reel in investors it is easy to drop some pre-release news like “Big company X will sign a purchase order within a couple of weeks” or “We will be launching a great new release of the product soon”. But the most likely reaction of a VC will be that they wait to invest until it happens.
8. Raise between milestones
In venture capital raising funds after reaching a significant milestone or value inflection point is standard practice. Unless your company is acing it in other departments, raising between milestones might miss the required momentum and this easily translates into a hit on your valuation.
9. Low balling your funding need
Although it might seem that a lower capital ask equals a higher chance of funding, this usually is not the case. Asking for too little money shows inexperience and in general investors don’t shy away from serious tickets. They have raised dedicated funds to handle them and often operate in syndicates to share risks. Also, it is better to ask for adequate funds to attract top talent and accelerate to your next milestones rather than deliver mediocre results against a lower funding amount.
10. Pitch your ideal VC first
Your first pitch will never be as smooth as the later ones. Rather practice your pitch on some Tier-2 names on your list to get it bulletproof before taking a meeting with your dream-candidates. Even better is practicing the pitch with some people from your network who are able to provide solid feedback before pitching at any VC at all.