Over the past few weeks I have met several startups who haven’t spend adequate time thinking about the process of raising VC funding. When I asked some of the questions below, the company executives really didn’t have the right answers. If you are dependent on VC funding, then you need to put as much effort in your fundraising as you do on closing deals/customers. As a startup you should know whether customers want/need your product/service, you also need to think about whether VCs want/need to invest in the product/service that you are providing. If your business will be dependent of VC funding, you should be spending time on this topic before you even start working on your product/service. Below are questions you need to have answered before you start your new company:
1) Do you need to raise capital for your company to get to profitability? – If this is no, then you are don’t need to read the rest of this blog post. If you are startup that doesn’t want to raise vc funding, see this good interview with the executive at 37Signals, a company that is profitable and has not raised VC funding.
2) How much money will you need to raise from VCs to get to profitability? – this is a critical question, as it will determine what type of investors you need to meet to get your funding. If the answer is $1M or $5M or $10M or more, then there are different investors you should be approaching based on the answer. If you don’t know which investors to approach based on the numbers stated above, then see the answer to question #3 below.
3) Are VCs investing in your sector? – If VCs are not investing in your sector, then how do will get funding? Well, how do you know? You need to speaking with investors in your sector, CEOs in your sector who have recently closed on VC funding, and service providers who spend time in your sector.
4) Are you at point where you have made enough made progress to get VC funding? – A lot of times, companies approach VCs when they are too “early”, which means the company has not made enough progress to get funding. Again you need to know at what stage VCs invest in your particular sector. Refer to question #3 above.
5) How do you plan to reach VCs? – This is one of the biggest challenges in the fundraising process. Some believe the funding just happens serendipitously, really? You need to develop a network of VCs before you start raising capital. How do you do this? Well, you need to be at relevant events where VCs are present. You can also need to network with companies that have received VC funding, this will provide an opportunity to get an introduction from the particular portfolio company to the respective VCs. You need to leverage your service providers. If your lawyer, banker (disclosure: I work at SVB), accountant, advisers are not connected to VCs, then you need to think about why that is. If these particular people are not in the VC ecosystem, then you might need to find a replacement. Read point #7 below.
6) What sort of exit expectations do you have? – If as a company, you are satisfied with a $50M exit (acquisition/IPO), then a large VC fund ($300M+) is not likely to be a good fit for you. You and your investors should be well aligned on exit expectations, otherwise this can lead a terrible situation down the road, where you get an offer for an acquisition that is deemed to “small” by your investor but is satisfactory for you, awkward to say the least! Read this blog post, some VCs would not have been satisfied with Mint.com, which was acquired for $170M.
7) How many VCs do you need to meet with to get funding? – on average, companies need to connect with 30 VCs to get to situation where they receive several term sheets. If you only have access to 5 VCs, then you really need to be scrappy and figure out how to find a lot of other relevant VCs. You could raise funding after approaching 5 VCs, but this rarely happens, and you need to have more VCs to connect with. Read point #5.
8) How much time to you want to spend raising capital? – On average, companies spend 6 months raising VC funding. The 6 month span, starts with your very first meeting with a VC to time the money is in the bank. Once you meet the right VC for you, the process of closing on a round with that particular VC should be about two months long. Part of fundraising process is to develop a relationship with the prospective VCs. So ideally, you have already met some VCs prior to the time when you need to be fundraising. One way of doing this is to meet with VCs on an informal basis, where you are looking for guidance from the VCs. This means that you are not pitching the VC, but are asking them questions about got-to-market options, pricing, etc. Sometimes, you are too early for VC funding, you need to determine this very quickly. If after meeting 10 VCs, they all say you are too early, you are either talking to the wrong VC firms (see point #3 and #6) or you are indeed too early so make some progress with your company or your team could be lacking in some areas. Sometimes, when VCs say you are “too early”, it is a code for saying, “we don’t like you” or “we don’t think you are fundable”, etc.
10) Ready to pitch VCs? – see my blog post on creating a presentation for pitching VCs. You can also visit the sites above, some of them have tips on raising VC money. In addition, see a dashboard that I created the should be used to organize your fundraising process, this is similar to a sales pipeline, so use a similar process.