Nearly every tech entrepreneur engaged in fundraising complains that he or she doesn’t have time to run the business because of all the steps to get from hello to cash in the bank. Investment bankers refer to this as the “process,” but they are seldom players until you get well beyond Series A. It takes about a $1M fee to turn on the machinery of a quality IB, and that suggests something close to a $20M raise. They are great at managing all the details of such a process; they have bodies to throw at it, the ability to dress up the story, and possible connections to relevant investors. They may accept most of their fee contingent on success, provided that they are registered Broker/Dealers. But this is by no means an activity where you can cut them loose, start baking the cake in the oven, and then show up when it’s ready to be served. You and your entire management team will always have the ultimate responsibility to sell the deal to your desired investors, to produce a mountain of due diligence documents to solicit an acceptable term sheet, and to close the deal.
Let’s review a few key milestones in such a process:
- Do a thorough financial analysis, looking ahead a few years, to convince yourself and your prospective investors that your company can achieve a value that matches your dream and their return expectations. In particular, pay close attention to equity retained by you and your co-founders. In the modern era of convertible notes, I’ve seen companies go a note too far and end up with way too little founder equity. Sometimes desperation forces a quick note to pay the bills; but stacking those up can decimate your personal share of the outcome.
- A corollary to the above is figuring out how much money you should raise, whether you want to tranche it so you can raise more at higher valuations as you demonstrate successes or, alternatively, you want to oversell, if possible, to create a comfortable cushion. Any of your advisers should be able to keep you level-headed on this question. You have to look at the deals getting done around you, particularly those in your space, to make sure you are in a competitive range for the investor market you are shopping. In general, it’s often easier to raise more money than less when you are early enough to have a relatively spotless record and are able to sell the vision. Investors are more comfortable when their money is accompanied by enough other money to reduce the risk. But keep in mind that the most expensive money you will ever raise will be the early money, and tech VC’s will expect to see $10 coming back to them for every $1 invested.
- Once you have your numbers in shape, it’s time to build a professional deck around them. You know the general rules – 15 slides or so, easily readable, tell a story, evoke positive emotions, present you and your team as winners, make sure potential investors can see exactly what’s in it for them.
- Now the fun begins – identifying potential investors and getting them interested in your deal. I have advised a company with a spreadsheet of more than 350 prospective investors, and the deal got done. Those names came from the sheer effort of wringing every lead out of every accessible investor network in the land. On the other hand, I have seen other deals that had several hundred prospects and no takers. The best process, in my opinion, is one that has skillful lead generation, is able to focus energies on genuinely likely investors, and doesn’t have to boil the ocean to find the right financial partner.
- Keep in mind my standard maxim that it’s not who you know but who knows you. The more you have built trust in any way among qualified investors, the more likely you are to get the support you need. Clearly, if it’s not your first startup rodeo and you have a successful exit behind you, this task is much easier. Keep in mind that any good work you perform in your community also counts mightily in your favor. People notice in any setting who demonstrates the ability to get things done.
- And, I personally have had very good luck with serendipity. But this only works if you expose yourself to serendipitous moments. Of many, my favorite was the time I showed an early digital media system, years before the Internet became widely known, at a rather small computer show in Washington, DC. The EVP of Rupert Murdoch’s News Corp stopped at my display and said “Ben, you have exactly what I want.” I had no idea what he had in mind, but I said “Yes, Sir,” went straight to NYC and had a contract in a day or so. That ultimately led to the sale of our business to News Corp. We developed the Expedia of the stone age using PC’s and laser video discs, helped mightily by the fact that News Corp at the time owned all the print media in the travel industry. I was personally in the right place at the right time – exactly as I planned, right?
- Now that you have your prospect list, the next steps are straight out of the sales 101 textbook. You have to work the list by finding the right contacts, getting the warmest introductions you can, and pushing your way to meetings with the ones that show some interest, even if you must meet by Zoom. (Deals are getting done now without any direct personal contact. Don’t be bashful about Zooming.)
- Getting meetings is an important milestone. It shows that whatever you are pitching in some way matches the investment thesis of your pitchee. You have survived the quick brush offs like “great idea, but too small a deal for us” or “we’re not comfortable with the space you’re in” or “we’re too busy with other candidates to evaluate your company right now.” Your very first live (or virtual) meeting may well be with some of the senior partners who must bless a deal for it to proceed.
- There follows an intensive period of due diligence. If you are dealing with a fully staffed VC firm, you may have to educate a newly minted MBA to the point of keeping your hopes alive at the partner level. Here’s where the simplicity and clarity of your presentation, particularly the financials, will take you far. Investors at all levels are lazy. They react much better when the model is clear and concise, and they don’t have to recreate it themselves to double check your work.
- Assuming you pass the due diligence phase satisfactorily, and no adverse surprises have beset you — I once got hit with a trademark lawsuit while driving to a closing. Considerable dancing was required. — it’s time to round up your lawyers and get busy closing the deal. Circumstances can change in a blink, so the final closing becomes your Job One.
- You’re on your own to figure out how to have a fancy closing dinner over Zoom.