What does your startup need before you should try seeking venture capital?
Getting your startup venture-funded can seem like the holy grail for entrepreneurs. The news media and tech blogs can make it sound ridiculously easy to come up with an idea. Flash a PowerPoint and bank hundreds of millions of dollars and hit a billion-dollar valuation. In reality, there can be a lot more to be prepared to successfully raise money from VCs.
Are You At The Right Stage?
Although this changes over time, venture capital firms tend not to participate in funding startups until later rounds. Some VCs will fund early-stage startups at the seed round. Though, this generally means much smaller checks than you’d expect. They’re probably going to take a bigger piece of equity than you planned on.
Traditionally VCs are coming in after friends and family, and angel investor rounds. They are looking to write bigger checks for startups that already have a product, traction, and some metrics to base their decision on.
There are some exceptions. Especially for enterprise-level startups that need to raise a lot of money to get started. Or, when entrepreneurs are on their second, third, or fourth company, and have already delivered VCs significant returns.
So, if you are just starting out as a first-time entrepreneur, your first stop is probably a pre-seed round, friends and family, an angel investor, or applying to a startup accelerator. Then, building up to a VC-led round in the next 12 to 24 months.
A Powerful Story
I recently interviewed the co-founder and CEO of fashion startup Tamara Mellon on the Dealmakers Podcast.
Even though she went to university to study communications and journalism, had a successful exit as the CEO of Backcountry, and has raised $90M for her current company, she says she wishes she had the time to go back to school to better her writing and storytelling skills. It is that important.
She says that even before you try to lay out one slide, you should have a great story and narrative written out.
It’s a lot harder to reverse engineer your deck or fill in the story around the bullet points when you are pitching live. Start with the story.
Make sure your story is authentic and matches your desired brand. It should obviously connect and resonate with your employees, customers, board, and fundraising advisor.
It also needs to connect with your prospective investors. It may be a fantastic story for customers, but if VC partners can’t relate, then you are going to be facing a lot of glassy-eyed and bored stares when you are trying to present.
For example, if you are trying to raise from tech VCs in San Francisco or New York, you have to convey the tech side to them. That’s what they understand. The opposite is also true in other stages.
Most start out too technical when their early investors are novices who care more about mission and customers. Strategic corporate investors can expect something different again.
Make sure your story matches, and you are highlighting the right points in the right order for who you are pitching in this round.
The Pitch Deck
There’s no just winging it at this stage in startup fundraising. Even if you already have personal connections at these firms and they want to give you money, they still need a deck. If you are raising cold from the crowd, your deck is even more important.
Storytelling is everything in fundraising. Being able to capture the essence of what you are doing in 15 to 20 slides is the key. For a winning deck, take a look at the pitch deck template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Contacts Or Introductions
As much as it is often made out that successful fundraising is the result of ninja-like Tweeting or email abilities, genius business ideas, or just being in the right place, it is far more about people. It’s about personal connections and relationships.
Overnight success is months and years in the making. If you’re hoping to raise venture capital in 24 months from now, you should already be making those lunch meetings now.
If you don’t have the personal network you need to reach these investors yet, try through your current investors. Or, hack your way there with a good advisor or consultant.
Even though VCs are typically looking for a lot more meat than friends and family and early-stage angel investors, you still have to have the right team.
Not just a smart team of passionate founders with some domain expertise. That may have been enough for your seed round. Once you are moving into your Series A, B, and C rounds, investors are looking for a real business.
They are looking for strong management and an accomplished executive team with real operational experience. A team that doesn’t just know your industry space, but also how to take the company to the next level in a big way.
You may not have it yet. That’s okay. This is the time to start fixing that. In fact, it is good to just get comfortable with having to evolve your organization for each round.
Big Market & DIfferentiation
Of course, if you want big money, you’ve got to be in a big market and have a big opportunity. You also need to be differentiated in the market. It’s even better if you are doing the hard things which will keep you differentiated.
Your Investor Profile
Make sure you are prepared with a shortlist of what you are looking for in the ideal investor who is going to add the most value. Who are they? What experience should they have? Who should they know? What do they care about? What is the status of their fund?
Remember the money is just a nice way to have a bonus for bringing in the right investors.
Alejandro Cremades is a serial entrepreneur and the author of The Art of Startup Fundraising. With a foreword by ‘Shark Tank‘ star Barbara Corcoran, and published by John Wiley & Sons, the book was named one of the best books for entrepreneurs. The book offers a step-by-step guide to today‘s way of raising money for entrepreneurs.
Most recently, Alejandro built and exited CoFoundersLab which is one of the largest communities of founders online.
Prior to CoFoundersLab, Alejandro worked as a lawyer at King & Spalding where he was involved in one of the biggest investment arbitration cases in history ($113 billion at stake).
Alejandro is an active speaker and has given guest lectures at the Wharton School of Business, Columbia Business School, and at NYU Stern School of Business.
Alejandro has been involved with the JOBS Act since inception and was invited to the White House and the US House of Representatives to provide his stands on the new regulatory changes concerning fundraising online.
Disclaimer: This content does not necessarily represent the views of IWB.