Nitty Gritty Advice on Raising Venture Capital
As founder of online privacy protection company Reputation.com, Michael Fertik knows a few things about raising venture capital. Over four rounds, his company secured $65 million in funding from some of the biggest names in the business. He recently penned a piece for the HBR blog network offering practical tips for entrepreneurs looking to follow in his footsteps--and founders of firms interested in venture capital should sit up and take note.
What advice does Fertik have for those who are green when it comes to the world of VC firms? Among his many suggestions and are these rules for those new to raising money:
Never start your fundraising process by meeting the top funds first. When you are ready to raise money, scratch Sequoia, Kleiner, and maybe one or two other top dogs off your preview list. It's hard to overstate the herd mentality of the venture community. If the top guys pass, everyone below them will be too afraid to do otherwise. Get your practice reps in with easier audiences.
Don't respond to inbound inquiries from anyone but a partner. Many entrepreneurs are excited or flattered when they hear from associates or analysts at venture funds. Don't be. An "associate" at a venture fund is not a venture capitalist; she is an outbound prospector. Junior members of VC teams are paid to source information about companies. Their job is to make contact, extract information from you, get a PowerPoint deck, and build a profile of your business and industry. They are not qualified or authorized to do deals. If a junior member of a venture firm recommends your company to her superiors, it may actually be a negative signal inside the fund rather than a positive. Wait to connect with partners. (Depending on the firm, exceptions can be made for individuals carrying the title Vice President or Principal.)
Ignore post-ding feedback. If a fund decides to pass on your deal, discount any feedback the firm representative gives you. Her only goal in this circumstance is to avoid having you go ballistic about her on TheFunded or a comparable site. She will easily lie to accomplish this goal, and her stated reasoning for saying "no" will fall into one of a half dozen "avoid an argument" categories designed to let you down without hating her or having grounds for calling her an imbecile should your business succeed. Feedback you should heed more closely is from funds that are expressing genuinely positive interest in your company, but who are urging you to develop your business further, move in direction X, or fill gap Y in your executive team.
If you find these tips useful, there are eight more worth reading in Fertik's complete post. Or, if you're in the market for more advice on raising funding from experienced entrepreneurs, Ben Kaufman, founder of Quirky, has plenty to say on the matter over on his company's blog. Kaufman just raised a $68 million dollar round, but rather than strut and back slap, he's more inclined to refocus and remain cautious. You should do the same if you ever find yourself in a similar situation, he advises.
"I hate glorifying start-up financing and… it disgusts me when fellow entrepreneurs gloat about how much money they’ve raised as part of their 60-second elevator pitch. In the eye of the public, and specifically the tech community, funding is thought to mean much more that it actually does. The world views funding as a badge of honor. I view it as a scarlet letter," he writes before sharing one of his favorite quotes on start-up life. What is it?
"Congratulating an entrepreneur for raising money is like congratulating a chef for buying the ingredients."