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Picking the right Venture Capital Fund
Raising capital is a continuous process. When was the last time you heard successful entrepreneurs say that they were looking forward to making presentations to venture capital firms. Yet, each year, entrepreneurs successfully raise money for their company. A venture capital firm reviews hundreds of business plans each year, hears pitches from entrepreneurs and funds a very small percent of those companies.
Given these odds, what can we observe about the successful entrepreneurs? Well, most importantly, they know how to sell. So think of fund raising from the standpoint of a sales process!
Choosing the right audience
As with any good sales process, the best outcomes come from being prepared and asking good questions. Most VC’s have web sites that will help you identify their investment strategy, individual partner backgrounds, focus of investment, investment criteria and other information. There are a wide variety of variables that may make a particular VC firm appropriate to your needs and you need to decide.
Generate leads
In selling, a lead is equivalent to an introduction. Venture capitalists are much less likely to invest in companies that do not come by referral from someone they know. These can be Angel investors, corporate attorneys, accountants or friends and family. If you haven’t already found a well-qualified local attorney or accountant, go find one. Understand which firms cater to the start-up companies and are therefore tied into professional investors.
Start early
While many variables will effect how it will take, it is reasonable to expect that raising a first round of venture capital investment will take a minimum of 6 months and as long as nine months, or more. You can assume that it will require pitching a minimum of a dozen VC’s and probably substantially more. Approach this in waves, allowing feedback after a few presentations. Assume a very low closing ratio. Track the investor (prospect) through the various stages of your sales cycle. Here are some good milestones that mean increasing commitment by the investor:
Introduction and sending the business plan or executive summary – the first step.
First pitch – if you make it to this point you’re doing better than most.
Due diligence- if prospective investors begin to make phone calls, this is a very good sign. Be sure to follow-up with your references to see what they were asking about their perceived interest level. Were they positive or looking for reasons to pass? What were the issues raised? Plan to overcome these objections in future meetings.
Second meeting- the timing of this will depend on the firm and the particular partner style.
Full partner pitch – This is the equivalent of the short list. Be sure to get feedback as to how the partner meeting went.
Term sheet – This may take days or weeks after the full partner meeting and their decision to move forward. The process of negotiating a term sheet is best done with a qualified attorney.
Syndication – depending on the firm, the amount of financing, and other variables, there may be a process of finding a co-investor. This can be trivial or a whole other sales cycle.
Closing – this is where you learn a lot about your prospective investor/partner. Be sure to have a good attorney and to remain focused on the ultimate goal: closing. This stage may take a month or more.
Request feedback
As you progress through these stages it is critically important to know where you stand and the objections may need to be overcome. This means getting feedback. It is remarkable that over half of the entrepreneurs that are invited to give a pitch (already a select minority) never call back. They neglect to follow up or solicit feedback. This is a first test of your entrepreneurial skills. After all, raising money requires sales skills. You need to close the business and this means asking for feedback, and ultimately, for the money.
Create urgency
The best outcomes in fundraising generally result from creating a sense of urgency. Most investors are literally overwhelmed with options for where to invest. The challenge is to rise above the rest. The hottest deals manage to create a sense of urgency on the part of investors. So what do investors want to see? Among the characteristics most valued are: Experienced management – a seasoned team may be the biggest variable in the fundraising process. Add a proven CEO and your odds just jumped up. Market momentum – nothing works like real customers. Short of paying customers, prospect references work well. More is better. This will reduce due diligence time by VC’s dramatically. Term sheets coming- if others are showing real interest, this may ignite the firm.
Close, close, close
Raising money from investors is selling at its highest form. It puts you under extreme scrutiny by a variety of skilled analysts and spreadsheet experts. But, if you’ve identified the next big market, recruited a core team of proven professionals, built an interesting product or prototype, and found the right investors, success is sure to follow.
No one said this would be easy, and it isn’t. But the best entrepreneurs know how to sell and to build confidence in themselves as executives. As in any sales process, stay focused and have several alternatives in the pipeline.
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