Venture capitalist and seed investors could mean quite intimidating statures for a startup or an individual who is on a mission to raise funding for his project. Though I agree that every startup has to go through this intimidating, humbling, stressful and a thoroughly exhausting procedure, I completely disagree with the fact that raising funding is like a lottery. On the contrary, it is a game where the calm, well-prepared and focussed entrepreneurs trump over their competitors.
After years of studying the entrepreneurial ecosystem that consists of startups, angels, VCs, PE firms, and the like; I am of the opinion that potential investors are not waiting for your idea to invest in with a bag of money. Instead, these are the people who are looking to eliminate gassy and unconvincing ideas and projects depending on certain indicators consisting of underlying fundamentals and flaws. If you brave those analyses and survive the initial elimination round, they might well be influenced by your presentation to spend additional time learning about your company. The result could also indicate towards a silver lining of a potential investment.
The Unmissable Crux:
I believe that raising capital for your idea is like a quest for the Holy Grail, though, much more corporate than theological in its nature! This is a profoundly optimistic endeavour where you cannot get daunted and turn back even if there are strong winds to brave and uphill challenges to conquer.
The Dire Need for a Lead Investor:
Breaking down the procedure of fundraising, I have found this to be an immensely important point to take heed of. Except in rare cases called party rounds, you will need an individual or a firm that will lead the funding round and also help you syndicate the funding round.
The lead investor will in maximum probability take 30 to 60% of the round and gain a vote of confidence, apart from taking a Board sit and writing the term sheet delineating the voting rights, amount, price, etc. Since these investors are often intimate with other investors in the past, they will push your deal to investors or firms that suit the profile of the investment. They also help you integrate the back-channel feedback from the funding round and get your deal done, on which there might be some incentive to gain on their part.
In any case, the lead helps you to syndicate, but you should take the final call in picking the final investors and getting what you want, loud and clear!
Customer References are the Qualifying Face-offs:
The procedure demands VCs to call up your customers and understand the change your solutions have made. Since it will be a thorough and time-consuming part, you need to gain customer approval in advance. If you suspect tire-kickers or a lion’s share of the total round of funding, you might want to free your customers from attending unnecessary phone calls. Therefore, you might want to qualify the investors in advance asking if the customer referencing is the only thing that would nudge them to lead or invest. Otherwise, you might suggest knocking off other essential steps before advancing to the customer referencing part.
The 3P Framework:
In order to influence venture capitalists to invest in your idea, you need to increase your chances. This particular framework encompasses three significant agendas that you need to fulfil in order to qualify for the VC money.
3P stand for People, Paper and Process. These three are fundamentally quintessential for improving your chances. Each of these Ps comprise a set of questions whose responses and answers and the services your offer in return will determine how well qualified and prepared you are to approach the VC.
Even if the prior procedures and paperwork are handled by individuals or teams, it is not mandatory that they face the VC’s desk. The person providing a face to your startup or your idea or the person providing the presentation could be entirely different from those who have provided the momentum till that point.
This agenda comprises the entire list of essential documents you need to think about, ponder and prepare before approaching the VC. While initial round documents might comprise pitch decks, the further rounds will comprise term sheets, etc.
It will consist of every step you have taken, thought about or intent to take before approaching a VC. It might even push you to think whether VC funding is important for your startup and whether it is an appropriate candidate to be funded.
Jargon can always be a deal maker/breaker:
What I have learnt from my time with such funding procedures is that you should refrain from certain phrases and jargon while you are dealing with venture capitalists. Phrases like-
"All we have to get is to the top 1% of the market" or "No one is doing what we are doing" or "Our projections are conservative" or "Such-and-such research firm research firm predicts that our market will be 100 Billion USD in 2030" , etc. could be an instant massacre. Other deal-killer phrases that you might stay clear of nudge the VCs to hurry since others are interested in your ideas or try to entice them saying big names are signing your purchase orders shortly.
After being a little conversational about some of the salient points that will be critical before and during the funding rounds, let us advance to the DO’s and DON’Ts of venture capital fundraising.
- Fundraising could be a tiring process. But don’t miss out on the picture in hand while you try to view a bigger one. Don’t miss out on revenue while fundraising!
- Qualify the investor leads and VCs with rational questions that involve a lot of Why’s and How’s.
- Track the progress of fundraising.
- You need to gain commitment and the BATN procedure is a brilliant one to do the same. Understand the Budget(B)- whether they are investing in a venture of such a size and are they investing in a particular round of fundraising. Learn about the Authority(A)- as to the heads that make the decision. Comprehend the position of the VC in terms of fund life or Timing(T). Knowing their Need(N) for a specific type of investment or how it can lead them further will also do you loads of good.
- Provide swashbuckling leadership- quarterback your entire project!
- Ask for permission of documenting and sharing the meeting notes with other participants.
- Tag the individual task-owners, ask for timelines, set up meeting dates and manage legal expenses.
- Push towards a date when you expect the deal to close and put forth a clear reason to do the same.
- Elucidate the before and after situations- how your solutions impacted the lives of the customers. You need to dish out the stuff you are confident of to the investors.
- Ask for feedback. Initiating a positive feedback culture will always take an organization to unthinkable heights. Introduce this culture from the point an investor refuses you, take it positively, and work upon it.
- You should not hide anything that could impact the deal or hurt the VC’s sentiment later. If one of your key resources is lost, or you have suffered a legal threat, be open about it.
- You need to draw the line before optimism becomes a delusion. Self-awareness is a superb trait and possessed by people who are destined to be greats in their fields. Stay self-aware, but not overconfident. Know your numbers thoroughly. Prediction and forecasts should be rational. Stay clear from sandbagging and blowing up your numbers.
- Pre-release news and the likes are reasons to wait. Remember, time kills a lot of deals. So don’t create unnecessary delays.
- Don’t be “too transparent”. Yes, it is something you need to remember quite well.
With these formulae in mind, take it easy and go ahead and try to nail the VC funding! Tough nut to crack, I’m sure, but not something uncrackable.