Raising venture capital is daunting. Rarely do we hear successful
entrepreneurs tell us they were pleasantly surprised or delighted by the
process of making the rounds in Palo Alto or Sand Hill Road. Yet, hundred=
s
of entrepreneurs successfully navigate the perils of fundraising each yea=
r.
The odds, of course, aren't good. My firm, for example, reviews thousands=
of
business plans each year, hears pitches from hundreds of businesses and
funds less than one percent of those companies with whom we meet.
What can be learned from successful entrepreneurs? Well, most important,
they know how to sell. And they know how to market themselves at a high
level to sophisticated investors. If we think of fundraising as a marketi=
ng
process, what lessons can we learn?
Qualify the audience.
As with any good marketing process, be prepared and ask good qualifying
questions. Preparation is straight forward, though remarkably uncommon. M=
ost
VCs have web sites that will help you identify their investment goals,
portfolio of companies, individual partner backgrounds, stage and focus o=
f
investment, average investment amount and other parameters. A wide variet=
y
of variables may make a particular VC firm appropriate to your needs. Don=
't
waste time with low probability prospects.
Work the leads.
A lead is equivalent to an introduction. Venture capitalists are much les=
s
likely to invest in companies that don't come by way of someone they know.
Leads can come from angel investors, corporate attorneys, accountants, or
friends and family. If you haven't yet found a well-qualified attorney or
accountant, go find one. Understand which firms cater to startups and,
therefore, are tied into professional investors. Direct mail as a lead
generator won't work. Neither will telesales. VCs require a relationship
sell.
Build your pipeline.
While many variables are at play, it is reasonable to expect that raising=
a
first round of VC investment will take a minimum of three months and as l=
ong
as nine months, or more. Assume that it will require pitching a minimum o=
f a
dozen VC's and probably many more. Approach this in waves, allowing for
course correction and the benefit of a learning curve. Adjust your pitch
according to feed back. Assume a very low closing ratio. Track an investi=
ng
prospect through the various stages of your sales funnel. Here are some g=
ood
milestones that measure increasing commitment by an investor:
(1) Introduction and sending a business plan or executive summary-the fir=
st
step.
(2) First pitch-if you make it to this point you're doing better than mos=
t.
(3) Due diligence-if prospective investors begin to make phone calls they
become a qualified prospect. Be sure to follow up with your references to
see what they were asking about and gauge their interest level. Plan to
overcome these objections in future meetings.
(4) Second meeting-the timing for this will depend on the firm and partne=
r
style.
(5) Full partner pitch-you are now under serious consideration by an
investor. You are on the short list. Qualify your audience by quizzing yo=
ur
sponsoring partner hot buttons or unresolved issues. Be sure to get feedb=
ack
as to how the full partner meeting went.
(6) Term sheet-the Promised Land. Getting to this point may takes days or
weeks after a full partner meeting. The process of negotiating a term she=
et
is best done with a qualified attorney.
(7) Syndication-depending on the firm, the amount of financing and other
variables you may look for a co-investor. That task can be trivial or ind=
uce
another whole sales cycle. Given the potentially serious politics involve=
d
in deal syndicates, discuss them during the qualifying phase.
(8) Closing-non-trivial. This is where you learn a lot about your
prospective investor/partner. Subtle deal points not covered in the term
sheet may perplex and disturb you. Be sure to have a good attorney and to
remain focused on the ultimate goal: closing. This stage may take a month=
or
more.
Solicit feedback.
As you progress through these stages it is critically important to know
where you stand. Remarkably, well over half of the entrepreneurs invited =
to
give us a pitch (already a select minority) never call back. By that I me=
an,
they neglect to follow up or solicit feedback. That action, or lack of on=
e,
is a simple test of entrepreneurial skills. After all, raising money
requires sales skills. You need to close the business, which means asking
for feedback and, ultimately, the money.
Create urgency.
Most investors are literally overwhelmed with options for investment. You=
r
challenge, rising above the clutter, is familiar to marketers. So what do
investors want to see? Among the characteristics most valued are experien=
ced
management and real customers. Short of paying customers, prospect
references work well.
Close, close, close.
Raising money from investors is strategic selling at its highest form. It
requires you to navigate the waters of multiple decision makers, with
mysterious, or unknown decision-making processes. You put yourself under
extreme scrutiny by a variety of skilled analysts and spreadsheet jockeys.
But, if you've identified the next big market, recruited a core team of
proven professionals, built an interesting product or prototype, and batt=
led
the forces of inscrutable investors, success is sure to follow.
Overall, no one says getting funding from VC firms is easy, and it isn't.
But the best entrepreneurs know how to sell and to build confidence in
themselves as executives. Like all good sales and marketing processes, fo=
cus
and have a bunch of alternatives in your pipeline.
Tushar J. Mehta
email: [email protected]
voicemail: (206) 405-2335