The Fine Art of Capital Raising from Perspectives of The Insiders
Should there be one thing that entrepreneurs hate more than anything, it is probably raising funds. From the most eminent venture capital fund managers on down to some of the most successful start-up entrepreneurs around, the task of drumming up financial support tends to one that is considered the most strenuous of all.
Nevertheless, for many, fundraising is kind of what being an entrepreneur is meant to be about. Then, rather than regarding it as an emotionally-and-mentally-drained chore and letting it undermine your determination, let’s appreciate it as a golden opportunity to sharpen your entrepreneurship mindset. And beyond any doubt, one old yet super-powerful path to fast track your success, especially when it comes to venture capital raising, is to observe and adopt the winning tips and tactics given by the distinguished figures playing around within this sphere.
Pivotal Practices on Raising Venture Capital for Your Startup: From the Eyes of the Insiders
Founders who raise the most capital are ones who see their startup through the lens of potential capital providers, but how? Here is what they do prepare!
Tip #1: Clarify First If You Work to Be High-Impact or Small-Business Entrepreneur
Some will call themselves an entrepreneur. Yet, unless you manage to map out a pretty clear idea going in what your aspirations are, you could find yourself flailing around like a ship without a rudder.
As Paul Jones, former Silicon Valley resident with Cooley Godward and current Chair of the Venture Best group for Michael Best and Friedrich explains it, "You have to know going in what you really want; because you can't have it both ways. If you go into high impact venture-backed entrepreneurship; you're trying to build a business that's going to scale and make people wealthy. And you’re not going to be your own boss for long. Whereas a small business entrepreneur wants salary security and to be their own boss. So, you really need to ask yourself which world you’re trying to be in. Are you trying to be a business owner who’s well respected in the community; has a nice income and runs his own shop or are you trying to create the next Microsoft or Twitter? You have to choose because these are two very different rides.”
Tip #2: Focus on Relationship Building Within the Venture Community, Which Really Matters
Have you been an entrepreneur before and obtained some years of experience? Even if your answer is "No", don't panic. There do exist a plethora of approaches you can adopt to reach out to the entrepreneurship crown.
And one super-powerful approach amongst them is to “put yourself in an environment where you can get exposure to good deals and successful entrepreneurs. There’s an incredible training ground out there. Go to conferences with pitches by entrepreneurs. Find a place to work where the company works with high impact entrepreneurs. You have to be willing to go and do it and realize you’re not going to get a big paycheck - but at least you’re in the game.”
Furthermore, should you be looking to build a business with venture funding, there is a high possibility that you will be a fundraiser for at least the next five years of your life. Hence, networking and a strong focus on relationship building really matter when you're trying to make your next raise.
Then, what if one entrepreneur turns out to be a natural introvert? A great way to keep investors engaged is to add them to a newsletter of monthly/quarterly updates. Even if you do not receive a note back, chances are your targeted investors will read your update. Understanding that, let’s be 200% sure to shoot over a thoughtful and quick news mention or a cool new feature release, which is an excellent way to remind investors of you and your business. Additionally, it’s more than crucial to keep relationships going, even when you aren’t seriously looking to raise money quite yet, or are too nascent for the investor’s target stage.
Another noteworthy point is that the venture community is shockingly small, therefore, don’t “burn bridges”! Any “burned bridges” or broken relationships may eventually come back to haunt you, particularly when you are looking to establish your credibility and raise funds.
Tip #3. Build Your Own Team & Get a Mentor
Now that you’re on the path to superstardom, then it’s high time to nurture your own team. As Paul Jones shared on his experience, “money follows people. The majority of VCs I’ve worked with over the years would say the most important thing is the team. Also, in my experience, the proximate cause of most startup failures is because the team is not up to the next task. It’s usually at those various pivot points where a team proves dysfunctional under stress and implodes because of it. So, your team is of paramount importance.”
One of the smartest players you can find for your team as an entrepreneur is a mentor, coach, or counselor. Let's "get counsel and be very careful about who it is. Not to confuse the fact that someone who can run a billion-dollar corporation does not necessarily mean they're a good adviser for your startup. So really find people who have experience and wisdom in the trenches of the kind of thing you're trying to do. The CEO of some Fortune 500 company is not a great person to be an adviser. They might be a great person to leverage for money - but they're probably not going to have a lot to tell you about the realities of building your high-tech business on a shoestring."
Tip #4: Build Passion into Your Pitch and Focus on Your “Focus” Every Day
The hardest job you will have as an entrepreneur is to keep your passion alive – no matter how hard it may come to be, it is your responsibility to bring that passion every time you pitch. This is more than just for investor meetings, but for when you pitch employees or candidates. Undoubtedly, the fact that you are always passionate about your core values keeps engagement and retention high and keeps employees from checking out. Similarly, investors wish to know that building your company is your passion, and exactly what you want to do for the rest of your life.
To do that, one of the most crucial things as a founder is to define a clear focus and to ascertain no one lets you deviate from such a focus - hone in on focus from everything from product roadmap to metrics. Besides, every single part of your company should be aligned with your end story and goal. In that vein, a big red flag for investors is a lack of focus. You must be able to speak intelligently about your mission and goals, focusing on which metrics you measure as well as grasping a comprehensive understanding of the market and its nuances.
Plus, what should be noted is that whereas your current goal is to fundraise, you need to be careful not to run your business as such, which means just running your business like raising money instead of pursuing the original core values and focus. Then, for instance, let’s not tell your employees that you need this particular story to be told when raising capital, whether it be a Series A or B or otherwise. After all, no employee wishes to be working at a company, which is always running to raise the next round.
Tip #5: Try to Grasp Your Investor’s Perspective & Understand Their Investment Decision Criteria.
“It's shocking how few people ask what is my investment criteria.” – Courtney Broadus, Spider Capital Partners, Broadway Angels.
When it comes to pitching to your investors, it shouldn't feel like a monologue of 20 facts listed by order of importance. Be sure to make pitching a dialogue, which entails pre-qualifying an investor. It's a "must' to quickly establish the investor's investment criteria. Before going into your full investor pitch, try to see whether an investor can provide the minimum capital you're looking for, and if they invest in your sector. Also, whereas investors decide whether to invest depending on specific factors that vary by stage, obtaining some insights into how they arrive at final decisions can empower you to gear up for the next funding round.
Before your company has generated any revenue, investors may probably question whether the startup is targeting a market that has strong potentials to grow big quickly and whether its founder has the potential to be a great CEO. As one startup begins to gain a handful of early customers, investors may then ask these early customers how satisfied they are with the company and its product, how likely they are to come back and buy more from the company, and whether they consider the company's solution as broadly useful for many potential customers.
Or, once these investors have observed the current success of your business, they are going to seek signs that the company has been built on a scalable business model, thereby it can expand speedily whilst its expenses spent on production/service provision, marketing, sales, and customer service drop and accordingly the profit driven by each customer relationship grows.
Afterward, perhaps, the investors will provide funds based on the size of the market opportunity, the demonstrated ability of the business to scale efficiently - which can be measured by a declining cost of customer acquisition, a high customer retention rate, the startup's ability to sell more to existing customers; and its previous record of setting and exceeding quarterly business objectives. And ultimately, these investors are likely to buy the company's stock if it persistently exceeds revenue and earnings expectations while raising its forecast and investing successfully in future growth trajectories to sustain rapid revenue growth.
Tip #6: Learn the Lingo and Stay Updated on The Venture Capital Scene
But, to take a few steps back, as soon as you jump into the game of seeking a venture fund for your startup, it’s more than imperative that you grasp the fundamental understanding of this game. Getting “mixed up” over the terminology and what’s going on in the world of venture capital is a real deal killer.
From Jones’ standpoint, it’s a “should” to “take some time with the lingo and figure out what’s going on. How do venture deals work? What is the real valuation? I mean most of the entrepreneurs I run into these days, they just don’t know what the valuations are in the market and when they do, they will compare themselves to an entrepreneur in Silicon Valley. But by the way -- that person has made a half billion dollars for themselves and his investors. What have you done? So, I think a lot of it is just learn the lingo. Know what convertible preferred stock is. Know that you don’t go to a venture investor and give him some high valuation number. You’re a startup with no prior experience in the venture world. That’s just a reality.”
In addition to learning the lingo, it’s a prerequisite to know your space. “It’s not good enough to have the best web commerce company in your backyard. You have to go out and really figure out who’s in your space or near your space everywhere. Not just insular in your own little environment. I see so many entrepreneurs who just aren’t aware of what’s going on in other parts of the world even though it’s easy to find out these days with technology and the Internet.”
Tip #7: Decide Whether You Wish to Sell Metrics or Sell Your Big Vision.
Always bear in mind that your ultimate goal when negotiating with investors is not to have people join your “religion”, but to convince them that your business is one worth investing in, and will make your investors’ money. Given that, depending on your business area and the stage in which your business is, you may need to determine whether it’s better to pitch the hype or your strong metrics.
Strong metrics that are “eating” the competition mean that you may not need to sell the dream, since real metrics reveal that the business is working. Nevertheless, putting yourself against the competition can be tricky, especially if they are large companies. And understandably, investors will be disengaged if you pose yourself as a scrappy team of 5 or 6 taking on a company of 200 or even more.
Insider’s Perspective: Raising Too Much Capital or Raising It Too Early? - One Great Mistake
No matter how tempting it seems to be, fundraising too early or too much may turn out to be the gravest mistake for startup founders. When it comes to startup fundraising strategy, it’s imperative that entrepreneur is patient and conservative; and Hillel Fuld, a successful tech marketer & startup adviser, put out five goods reasons to explain:
#1. An Entrepreneur Should Wish to Define the Terms Themselves, Rather Than Letting the Investors Do So
The earlier you raise capital, the less control and ownership you take towards your business’s direction and growth trajectory – in other words, the less you have on the terms at which you raise said capital.
Understandably, almost every single investor has one thing in mind, one end goal, which is to return their money to their limited partners. You are focused on raising a few million for your startup, yet don't forget the fact that the investor you are pitching also has investors who gave them significantly more money so as to invest and yield maximum returns. Hence, it is your responsibility to convince that investor that you are going to craft a flying success story in the foreseeable future and your product will also help them return their money.
Then, the problem arises when you come to the investor super early - with no validation or traction, the risk for that investor is significantly higher. If you do convince them to take out their checkbook despite the high risk, high chances are that you’re required to give them the leverage to write the check on their terms. Or to put it simply, you are put in a tough situation when you need that investor more than he/she needs you. That will never be a good place to be in, particularly as regards negotiating financial terms, and the result will be terms that are aggressively in the investor's favor.
#2. Don’t Ever Let A “Down Round” Ruin Your Progress
In addition to raising too early, raising too much might also leave you in a predicament.
For those who are not in the know, a "down round" refers to the situation when you raise a round of financing at a lower company valuation than the previous round. Obviously, this is never a good outlook for your business, since it indicates that instead of growing since your last investment, the company is now worthless.
But, how in the world this could happen? This could be attributable to either the fact that your performance was undeniably poor and the company really is worthless, or that in your previous round, you raised at a valuation that was unjustified and then spent a year trying unsuccessfully to justify it.
After all, rather than overpromising, it’s wise to raise conservatively, raising at a lower valuation based on real revenue and not just some random number you chose.
#3. If (Just in Case) You Fail Before Raising Money, You Will Sleep Better at Night.
Beyond any doubt, it’s dreadful that your startup ends up experiencing failure, yet failing with your own money at stake, compared to failing and losing your investor's money, is a whole different level.
The statistics speak volumes that a large proportion of startups did fail – and most of these early failures result from the lack of ability to gain traction. For some, they choose to “pick their own entrepreneurial brain” and gain traction without someone else's money, if they succeed, then go raise - but if not, no harm is done to someone else.
#4. The More You Have to Show, The Less Time You Will Waste Looking for Money.
For entrepreneurs, especially those with businesses in the infant phase, time turns out to be the most valuable asset. The last thing you wish to do is spend the whole six months seeking money. Putting aside the fact that you simply cannot afford to, it’s definitely much wiser to spend that time perfecting your products/offerings, gaining some initial critical mass, then go raise capital, and things will move significantly faster.
#5. Bootstrapping Path Is Also A Viable Approach to Fuel Your Startup
Everything else aside, the ability to bootstrap, to follow the Guerilla Style bootstrapping path, or to build your business without external funding, will train you as an entrepreneur.
No matter how tough it is, this will give you the ability to remain lean, to become productive with minimal resources, and in turn, it will give you the appreciation of every single dollar once you do raise capital.
Bootstrapping a startup business is a romanticized idea. Yet, whether what kind of business you’re in or whether eventually you succeed or not: everyone respects those who put in the hustle. For those who can pull it off, it may bring even more stunning rewards, which, though, doesn’t mean there aren’t any pitfalls.
The Bottom Line
The majority of entrepreneurs do understand that if the fundamentals of a business idea - the management team, the market opportunities, the operating systems, and controls—are sound, chances are there's money out there. Landing that capital to skyrocket your business is definitely challenging, with certain harsh realities that can seriously ruin your success. Entrepreneurs cannot escape them but can at least prepare for them, by fundamentally grasping what they are and adopting some handy practices proven by other distinguished figures playing around within this sphere.
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