And while some of the companies we work with are founded by very savvy business people, who could teach all of us a few things about raising capital, others are started by brilliant engineers with ground-breaking technology, but who don’t know how to approach the search for investment capital, in a new country in some cases. If you think you might be in that second category, here’s a roadmap that we’ve seen work well.
Build First. You should build as much as you can, and go as far as you can go with your company, using bootstrap funds or angel investment before you try to raise venture capital.
- Likelihood of Success. If you have a product and some initial traction, you will have a far better story to tell the investors than if you just have a great idea or you are several months into developing a prototype. As you may have heard, there are many great ideas, some of them very similar even, and what makes a difference is execution. The better that you are able to demonstrate the ability of your team to execute, the more likely it is that you will get venture funding. Also, if you have skin in the game (bootstrap funds) and have attracted angel funding (friend and family), there is a greater chance that the investors will take you seriously than someone who can’t even convince those close to him to invest and who isn’t willing to risk any of his own money.
- Valuation. The earlier that an entrepreneur brings in outside investment, the lower a valuation he can expect to receive, and therefore, the higher a percentage of his company he will have to give up for the same investment amount. Certainly a founder shouldn’t get obsessive about his ownership stake in the company in a way that will impede his ability to attract a strong team or investors. And certainly it is better to have a smaller percent of a larger (more valuable) pie than a greater percentage of a smaller pie. But if the founder has the resources to get more done prior to going out for capital, it is the smart thing to do in term of maximizing both control and ownership.
Get Organized. In preparation for raising capital, you should get your corporate house in order.
- Why? Being organized will show the investors that you are serious about your venture and you understand the rules of engagement. It will avoid conflicts about ownership of intellectual property and equity, which can destroy a young company and the prospects of getting funding. Finally, it will streamline the investment process and the investors’ due diligence review when you do find those willing investors, because you won’t have to do last minute corporate clean-up, scrambling to organize at the last minute.
- What to Do. If you haven’t already done so, you should (1) incorporate your company, (2) distribute equity interests in accordance with promises you made to your existing team and early investors, and (3) make sure that all intellectual property belongs to the company (and not individually to members of the team). An attorney experienced in working with startups will be able to walk you through everything that you need.
Research & Presentation Materials. To secure VC meetings and to succeed in them you have to be prepared. If a VC knows more about your space than you do, he will never invest. So make sure you do the research.
- What should I research? For sure, know the size of your market. Know who the players are, both as far as your competition goes and your potential strategic partners. Know what market share your competitors hold, exits your competitors have had, what funding they have raised, and at what valuations. Know your monetization model (even if you pivot later as many companies do). And finally, know the investors in your space, their strengths, their specializations, their reputation, and the stage at which they like to invest. When you meet with investors, they will invariably ask why you are interested in getting funded by their fund, and you had better have a good, very specific answer!
- Materials. Once your research is done, prepare an executive summary, a slide deck to take into meetings, and if you have the resources, a short video that demos your product. The video is to send together with your executive summary to investors. In this day and age of information overload, it will be hard to get an investor to read any materials you send with any amount of attention. Videos have a way of engaging the viewer and elicit an emotional response. Once thus engaged, there is a good chance that your executive summary will get a more thorough review.
Introductions. To get meetings with VCs, try to obtain warm introductions to the investors who invest in your space and in companies at your stage from your network. If your network doesn’t have the right contacts, don’t be shy and grow your network. Go to industry events. Read articles by industry savants and try to engage with them by commenting on their posts or sending them emails. Perhaps you will even be able to bring a few of them on as advisors. Talk to your lawyers, your accountants, your bankers. Utilize tools available to you, like alumni network groups, LinkedIn, or Facebook. Sometimes cold emails to a fund work, but that is the exception rather than the rule. Note that the best-regarded and most effective intros are from entrepreneurs that the VC has already funded. VCs are very busy people with a lot of noise being directed their way. So do what you can to make sure your executive summary gets placed at the top of the pile to the folks that you want to see it.
Relationship. Once you have had an initial meeting with a VC, don’t expect him to send you a term sheet. Remember that investors are in it for the long-haul. Would you expect a woman to decide to marry you after your first date? Before an investor commits millions of dollars to your venture and before he commits to supporting your company over the next 6, 8, or 10 years, he will want to get to know you as a person. You should want this as well! So treat each meeting as adding valuable connections to your network, connections that you should be willing to work to maintain. Don’t just ask for money. Ask for advice. Even if a VC does not invest in your company in your initial financing round, maintaining a relationship can pay dividends down the road when he invests in the second round or makes a valuable introduction because you’ve been keeping him updated on your progress.
A final note, to keep in mind that only a very, very small number of companies, generally believed to be between 0.1% and 0.2% of the companies that look for VC funding, actually secure an investment. So do the best you can, but have a contingency plan in case it does not pan out. Remember, that many highly successful companies were considered “unfundable” by the venture capital community!
Happy company making!
|Inna Efimchik, a Partner at White Summers Caffee & James LLP, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.|
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