Category Archives: fundraising

5 questions to ask every VC (at the beginning and end of the first pitch meeting)

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Raising money from VC’s creates a long-term relationship, so you may as well get a good understanding of each other and set up the foundation for a strong two-way dialog.  The VC needs you as much as you need them, so the discussions should feel balanced where you’re learning about each other on equal footing.  So, I suggest these questions to begin the first meeting and one important one at the end before you go.  Getting started…

I’ve done my general research on the firm but tell me a bit more about the current fund? They should answer with the fund size (e.g. 200M), when it was raised, total invested to date, the remainder left for follow-on investments.  Have they had any exits from the current fund (which companies, you can research later to find out how much they invested and likely returned)?  Does the fund has any specific theme or stage focus (seed, Series A…)?   Depending on the answers, you can get a sense of how likely they are to do new investments (you) and how the fund is performing so far (are they looking for some swing-for-the-fences (they have already done well on something or are very confident) or need safer bets).  If early in the fund life (they usually invest aggressively in years 1-4, then follow-on with good companies years 4-7 and need to return the fund in years 7-10, but are likely going out to raise new funds around year 5-7 depending on how it’s all been going) you get more latitude in both their interest and time to make the company work.  So, understanding where you fall in their overall cycle is important.

For  the last few investments you (partner) or the firm did, can you tell me about the dynamics?  This should include their check size, did they lead or follow someone else, how long did the process take from first meeting to a funding decision?  You are looking for a clear process, a timeline of 4-6 weeks (or less).

Can you tell me how the firm makes decisions?  This should include some generic dialog about the # of partners, who decides on what, when they have meetings (most on Monday’s) and how many deals they have in progress right now.  Make sure you have some sense of the pecking order of the partner you are working with and how many other people you will need to convince.  New guys have a harder time doing deals or they likely take longer as they want to satisfy everyone and/or doing safer bets, so tenure, rank and the recent success of the partner matters.

Is there any area where you think you/your firm adds unique or disproportionate value?  Most VC’s give you a bullshit answer about a big network, ability to connect you with X or Y and some help with building out your team.  If you hear some good specifics, you can be done with this question.  If you get vague answers (highly likely), you can press one further with, “If I talked to 2-3 of your CEOs (currently funded companies) what would they say is an area where you have been especially helpful?”  Again, you’re looking for some specifics and preferably in areas where you need help to grow your company.

Now do your pitch…keep it shorter than you think it should be (~30 mins), pause for questions along they way…don’t read your slides…focus on customer traction and specifics…make sure they know how much you are raising and where you are in the process… then…time to go for the close…

On a scale of 1-10, 10 being you’re going to give me term sheet Monday with no questions on valuation, based on what we’ve discussed, how would you score this opportunity? You’re likely to get some squirming on this one but wait for an answer.  If you sucked, you are likely to get a 5 or 6 (they are being kind and not telling you it’s really a 3).  7-8 is pretty good and you’re not likely to get a 9 or 10, but if so, awesome for you!  I usually follow this up with a “what would we need to do/focus on to get you to a 9?”  This pins them into quantifying the aspects where you need to improve, at least for their investment criteria.  In some cases, they will ask for things that you do not plan to do and be OK with that as VCs vary widely on their criteria which can be affected by many things, some in your control, many not so much.

With the answers to these questions in hand, you should have a very good sense of the likelihood of next steps or an investment.  With issues around fund dynamics, you’re not likely to change that (unless you are a 9 or 10).  For the areas to improve, keep the investor updated when you make marked progress in these areas, usually around customer traction, shipping product or team additions.  Regardless, this dialog has demonstrated that you have an interest in them, that you can ask specific questions and understand how the relationship might blossom.

Creating a perfect seed round with Leads, Follows and Random investors

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For a startup, raising a seed round is a daunting endeavor.  Techstars Seattle Demo Day is looming and I recently finished mentoring the teams at the Kaplan EdTech Accelerator so advice on fundraising is top of mind. I’ve written about fundraising before here and here, but I recently saw Brad Feld (who is awesome and was an investor in my last company) give a great talk that added a few great words to the lexicon – Leads, Followers and Random investors.  So, borrowing from Brad and adding my own ideas, here are a few things to consider when putting together that perfect seed round.

First some definitions;

Leads – Usually professional investors, who write > 5 checks/year at $100-500K/deal to fund startups.  They are experienced in the dance, the terms, know lots of other investors…and know how it all works.  They negotiate with the entrepreneur and help set the terms for a round.

Followers – These are majority of the investors you will meet.  They either don’t have the time, money, expertise or fortitude to lead a round. These people usually have a day job and are investing as a hobby, a way to engage with startups or to support the startup community.  If they are “active” they usually do at least 4-5 deals/year.  I am a follower and am very clear about it with companies but many other investors are not so clear.

The overall fundraising process should be planned (e.g. I hope to close by the end of the year), with a solid understanding of how much you want to raise (e.g 750K-1M), with what vehicle (e.g. convertible note) and under what terms (e.g. 4M cap, 18-month term and 20% discount).  Much more on terms here and in Brad’s book Venture Deals.  The clearer you are, the faster the round will likely come together.  

With this plan, you have a sense of the amount you need from a Lead investor, usually >25% of the total raise.  You also have a starting point for negotiation when you get the lead investor in the room. Now your job is to go find the LEAD!

In a best case, you will also have some idea of the domain expertise (e.g. “marketing tools”) and/or functional experience (e.g. content marketing, channel sales, product development…) of your desired investors and you can ultimately create a “tapestry” of people with complementary skills and backgrounds to add to your company.

When you start talking to investors, spend time asking questions to determine a good fit.  Ask them directly;

  • How much do you normally invest/company?

  • How many deals/year?

  • What thematic areas are you most interested in?

  • When you invest, how do you like to engage with the company?

  • When you have invested in the past, were you a lead or a follower?

  • In addition to the money, how else do you like to help your companies?

An experienced investor (the kind you want) will be totally comfortable with these kinds of questions.  They too are about expediency, getting to a YES or NO as quickly as they can and not wasting their or your time.  Depending on their answers, you will get a pretty good sense of the kind of investor they are and in the best case, how likely they are to invest in your space and whether you think they can really help the company.

Assuming you think there is a good fit, continue the discussion about the business, opportunity, specifics…to get to a “yes, I think I would like to invest”.  If they are a Lead, you can start working a term sheet, if they are a Follow, “collect” them for later and communicate this to them, something to the effect of “Hey T.A., I am really excited to work with you and I think you could add real value to our company.  Right now, I am focused on finding our lead investor to get to solid terms, but I would love to pencil you in for (X, depending on their answer to normal check size) for the round, how does that sound?”  At this point, consider them “soft-circled” and get back to finding the lead.

Followers are not likely to become leaders, no matter how much you try to convince them.  Too many entrepreneurs spend way too much time trying to make this conversion happen.  If someone, who has not lead before, wants to step up, probe on experience, skills, desire… and plan to invest more time with them and your lawyers to get to a solid term sheet, but this is not the desired path.  You really want an experienced Lead.

After many meetings, you are likely to end up with a collection of Followers and finally, a LEAD!  Woot!  Get to a term sheet, get the Lead committed and then start closing the Followers.  Depending on where in the process you found the Lead, you may have a long or short list of potential Followers.  Part of the job of the lead, is to bring more people to the table and in most cases they have many people who they’ve co-invested with before.  Ask for introductions and use their leadership to close other people.  Assuming the lead has 25-50% of the round, Followers might close out the round or at least get to 75% before you need to go back to the well and look for new investors.

But wait, there’s more.  As you you diligently move through your known prospects, getting people to commit, “random” people will show up and express interest.  These are likely people who have heard about you from some other investor, another entrepreneur, a press article…but they feel random.  As these investors are coming late in the round, you should have momentum with lots of others signed up, closing these Random investors much more quickly.  Otherwise, rinse and repeat the process above, but be OK with Random happening.

Finally, fundraising is a sales process so you need to keep momentum going with lots of prospects, closing when you can and continuing the conversation with others being clear, consistent and regular with your communications.  Focus on the right things, the right people, the right process and you will close those Leads, Follows and Random investors to fund your own next big thing!

 

The startup fundraising cookbook (8 steps to raising a solid round)

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I do a significant amount of startup mentoring and I’m often asked about fundraising. Like many things, I’ve tried to develop a process and decision-making criteria. There will always be exceptions to every rule and the odd startup that can raise a round without much preparation, but the vast majority will require focus and discipline to get it done. Here’s what I recommend.

1. Pick the right time – In my opinion, there are only 2 good times of the year to raise money, spring (February-June) and fall (September-November). For the other times of the year, most people who have money (angels and VCs) are off vacationing in fancy places, and getting them to make decisions or coming to consensus is really hard. So, decide when you will be ready to raise money. Your story and pitch should be ready in early February or September depending on which window you’re targeting.  Redpoint’s Tomasz Tunguz has some data to support this and suggest the fall is the best window.  Work your plan backwards from this timeframe.

2. Pick the right amount – early stage funding tends to come in 3 flavors: angel, seed or Series A. Angel rounds tend to be $250-500k, seed 500k-1M and Series A 2-5M. There is some variance depending on the stage of the company and the specific investor, but for plannings sake, decide on an amount. How much you should raise depends on a few key things: what you need to take the business to the next level (usually 12-18 months runway) and your overall progress compared to all the other things the investors can fund.  You can also check out Tomasz’s  post (can you see I am a fan of his) which describes the right amount to prepare you for a Series A. Most good angel or seed stage companies have some working product, a small, but growing amount of users, maybe some revenue, a solid founding team… and if you don’t have these, it will be hard to raise a round.

3. Find the right investors (before you need to raise money) – once you’ve picked a timeframe and a general amount, you can start building a list of prospective investors. Focus on; a) Geography – Depending on where you’re based, there are likely investors in your geography who are active (at least 4 investments/year). Look at other companies in your area that have recently been funded (at the same stage) and who invested in them. b) Domain – every company has a “category” they’re working in and it can often be expanded to fit into two or three categories. For example, Rival IQ, which provides competitive analysis for companies (my current company) is a b2b company focused on “marketing tools”, “analytics”, “social media” ,“business intelligence” and “competitive intelligence”. With the categories, start listing all the companies who’ve been funded and by whom (investors). Crunchbase and AngelList (which share data) are great for this work. You should end up with a list of companies, their current investors, locations of the investor, amounts invested, and timing of the investments. Combine the lists (geography, category, comparables),  and you will end up with a solid list of investors who are likely to invest in your space, in your area and at your stage. Rank them by who you like best, who has best success and/or where you have connections or history with the particular firm or partner. Separate into “A” (guys you really want) and “B”(people would be fine, but not the best).  The B list will be your pitch practice guinea pigs. I tend to have groups of 10-15 investors in A and B.

4. Understand the marketplace – this involves knowing the competition and market comparables. I tend to use a combination of Rival IQ  (quick and easy competitive analysis on positioning, seo, social stats…), a MindMap and a spreadsheet for this work. I basically want to compare a) who’s in the space that directly competes with me, b) who might as we grow and c) who might if we get really big (or who would buy us or the competitors along the way).  This will give you another list of companies and investors and start to arm you with; “we are similar to X (recently acquired company where investor did well), but unique in these ways…” Investors are great at pattern matching and you need to illuminate the relevant pattern that you fit in. This list will also inform you of the level of acquisition and metrics you might need to move from level to level. Below is a snapshot of a MindMap I did for my recent Rival IQ fundraising.RivalIQ fundraising mind map

5. Draft your “story” – considering the timing, the amount, the investors, the marketspace and your own plan of what and how you want to attack the market, you can determine what kind of story you might want to tell. There are various levels and different kinds of progress that can support an investment, and different investors will care about different things in these early days depending on the kind of business you have. For example, when I was raising money for Gist (my last company), we had some investors who were deeply interested in the product (Brad Feld/Foundry), and some others who were more interested in our monetization, and still others more interested in our viral growth of users. All of these are reasonable, just different, and would have required a different story (and proof) of our progress. For Rival IQ, we wanted to tell a story about “validated customer demand” so we targeted >30 paying customers by Sept 15. We also wanted to keep showing customer growth and breadth in demand (verticals, geography…) and, while our story included a strong team, a big market, a cool product, we led with “validated customers” with reasonable $ and $/customer and targeted people who liked that story. Pick your own story and start building supporting data, metrics, comparables… to support it.

6. Connect and test, refine, test – start making connections with funded founders (who know investors) and with the targeted investors (from your list), and testing your story/hypothesis. Unfortunately, this is the hard work of finding ways to get introduced by people who know the investors and will vouch for you. This is a major value of accelerators like Techstars. I would start with the “B” group  and test the story. Get short meetings with something like “I am doing X, plan to raise money in the (fall) and wanted to start building a relationship with you now. Given that you have so much experience in this space having invested in A, B and C, I wanted to get your take on Z (very succinct problem you are wrestling with).”  Be very tight, very narrow on your questions and listen. What did you think of the response? Was it helpful, specific, logical…and did it help you make a hard decision? If you like the feedback, say thanks and ask if they want to receive updates on your progress. If not (and you will get lots of weak and non-specific answers or advice), say “thanks, that’s valuable input and I will consider that as we move forward” (whether you will or not). In any case, try to limit the first meetings to 30 minutes and let them ask you to stay longer, otherwise you both can get back to your email. If there is strong interest, ask what specific kinds of progress (metrics, growth, product, team…) they have seen from their last 2-3 similar investments at your stage. Try to quantify what you should look like in the future and then you know what to work towards and how likely it is to achieve.

Side note: good investors will not likely invest in you if they are already invested in one of the other players in the space.   If you contact them, be very upfront if you think there might be a conflict.

7. Send regular updates – I suggest sending a monthly investor (or prospective) investor update. Bcc people on the list. This is likely to be about one page long (email) and include key items like major wins, product updates, key metrics growth, team additions… It should also provide simple ways for these investors to help, like “looking for an intro to X guy at Twitter” or “looking for great blog posts on SaaS metrics or growth hacking…” Good investors want to help, but you need to make it really easy for them at this stage. Listen and respond quickly if/when they engage. Keep doing these even when you think nobody is listening as it shows commitment, communication skills, ability to build a tribe… You can send these to advisors you meet along the way too as they will often be your conduit to investors. I get about 15 of these every month from companies I’m helping.

8. Assemble the investor puzzle – when you are finally ready to raise the round, you should have a good idea of the potential investors. This may include the skills or domain expertise you really need to help the business get to the next level, and/or the people who have added lots of value along the way. Focus first on getting a lead investor, who will likely take 25-50% of the round. You can gather the followers later, but focus more on the lead as they will dictate terms, structure, timing…and you don’t want to need to go back to the followers over and over as things change. Secure the lead, collect a few followers and target 75% of the full round you want to raise. With this in hand, outline the specific areas where you are still lacking. For example, at Rival IQ we had our VC lead (Vulcan), our solid seed/CEO people (who can help us better run a SaaS company) (David Cohen, Startup Studio) and some people representing our customers (social marketers like Jay Baer and TerraLever) – that got us to about 85% of the round. We wanted more social platform players so we got someone from Facebook and then added the founder of Hootsuite, who has a trifecta of deep Twitter understanding, deep social and SaaS experience and agency background.  Boom!! We have 2-3 small spots left and we are being very targeted about who we want and why. The latter investors often come quickly once the leads are in place and fill out the overall puzzle for a great round.

Generally speaking, the round will take you 3-4 months if all goes well and will take the CEO 50-75% of his time. If done well you will end up with a collection of people who complement the business and the founding team. From there, your job is inform and activate them to help grow the business. Good luck.  And, once you get a live one, here are few things you might need to be prepared – http://www.tamccann.com/raising-startup-funding-7-things-you-need-to-be-prepared/

I also love this post, which is very specific and tactical
http://firstround.com/review/the-fundraising-wisdom-that-helped-our-founders-raise-18b-in-follow-on-capital/?ct=t(How_Does_Your_Leadership_Team_Rate_12_3_2015)