Closing a round of venture funding is extremely hard work. Many entrepreneurs fall at the first hurdles, either making mistakes approaching investors or during their first pitch meeting.
For those entrepreneurs who are invited back for a second meeting and start to engage more deeply with a VC, new challenges start to present themselves. Every round is unique. Myriad internal and external factors impact the outcome. Some things are within your control, many are not.
To give yourself the best chance of a positive outcome, here are some tips that apply to every round.
Raise as early as you can. Going out to raise when you are nearly out of cash is a bad idea. Investors will sense your desperation. You run the risk of getting a low-ball offer. Ideally you should have at least 12 months’ cash in the bank when you go out to raise. The process will likely take 6 months so that gives you 6 months’ breathing room. If you have less cash in the bank, you need a back-up plan.
Have a back-up plan. What is your Plan B if you cannot close the round? This is a question that you should answer before you go out to raise. A credible Plan B will make you feel more confident in your interactions with investors and they will pick up on that. Examples of a Plan B include a smaller internal round of funding underwritten by your existing investors or a significant cost cutting exercise to extend your runway by several months without the need for more cash.
Get your house in order. Before you engage with the first investor, you need to get everything in perfect order. All the relevant paperwork for the company should be put together in an online data room, logically indexed and labelled so it is intuitive to navigate. Sample indexes are available with a quick Google search. Ensure any corporate housekeeping you have been putting off is completed – missing, incomplete or unsigned contracts (or corporate filings) create a bad impression. Delays fixing issues take time and increase the risk that something occurs to prevent closing. You should also ensure your team is setup to keep running the business and building momentum while you are focused on raising.
Create a robust process. In an ideal world, key phases of a funding round would be neatly batched together. First, second and third meetings, expressions of interest, a period for deeper due diligence (including reference calls), and then finally a deadline for term sheets. In the real world, it is extremely unlikely early stage venture deals can be stage managed this tightly. However, you should aim to keep all investors on a similar timetable. Getting an offer too early can create a difficult situation – take the offer and you may be underselling yourself; keep it open and the investor may feel like their offer is being shopped, which may damage the relationship.
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Have a long list of investors. You will receive many passes. You need to have a sufficiently long list of pre-qualified investors that you can keep refilling your top 10 without running out. We often structure this as a top 10, next 20 and long list. Statistically it is extremely unlikely you will successfully close a round if you only speak to a handful of investors. Do the groundwork to identify the investors who seem to be the best fit for your company. Be emotionally prepared for rejections.
Know who writes the checks. Figure out whether the people you are speaking to have the ability to make decisions and how influential they are in the fund. Often entrepreneurs will spend a lot of time talking to a single person in a fund – who is universally positive – only to then meet a partner or investment committee who quickly says ‘no’. This can be a real time sink. Ask early on what the investment committee process and timings are like for each fund who is showing interest. Optimize your time around the funds who are showing the highest level of engagement with your company.
Maintain competitive tension. Entrepreneurs often ask how a start-up should be valued. The short answer is that it depends on what investors are prepared to pay for it. You must have a competitive round to generate the best valuation and terms. In most cases, you need a competitive round to sufficiently motivate an investor to issue a term sheet at all. Competitive tension should be created naturally because you have a great business, a long list of investors and are running a tight process. Do not be tempted to create false interest – it will get discovered, and creates a bad impression.
Keep information flowing. As your relationship with an investor deepens, so should your communication. Switching from email to WhatsApp for us can be a key moment. Other investors will have similar behaviors. Ensure that you keep interested investors updated with the progress of the round. Share updates and information regularly. Respond quickly to messages from interested investors. Many entrepreneurs start a Q&A document where they write down all questions from investors with their answers – that can be highly effective.
Do not say ‘no’ too early. Your round is not closed until it is closed! Rounds go from struggling to oversubscribed back to struggling in a flash. If you have enough interest to close, go ahead. But consider holding off saying ‘no’ to any investors that are not coming into the round until after it closes. You never know whether you will need them to come in at the last minute. If you do say ‘no’ and subsequently need them, chances are they will have moved on.
Instruct knowledgeable lawyers. Your law firm should be experts at dealing with venture investments. Check their credentials and take references. Big brand firms who deal with bigger ticket deals may seem alluring, but they generally do not understand how smaller deals work. Overly aggressive firms trying to justify their higher fees can really slow down a deal and make it painful. A venture round nowadays is rather commoditized and should be simple and inexpensive to get done.
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