You wouldn't know it from all the funding announcements these days, but raising capital is tough. Even for those entrepreneurs that do raise, the process is time consuming, risky and can result in mistakes that are hard to recover from. If you are planning to raise venture capital this year, here are my top five suggestions for maximizing your chances to raise from the right investors and on the right terms.
Be a sniper
The worst thing you can do is pitch every investor you meet. The best investors are highly specialized. They go deep in one or two areas. Do your research upfront to identify which funds and, most importantly, which partners within those funds do deals in your sector and at your stage. This upfront planning allows you to be a highly targeted sniper vs. wasting time and energy trying to engage people with very little chance of success.
At the risk of belabouring the point: If you know a partner in a firm but that partner doesn't invest in your sector, then you don't know the right person. Keep working to find the right partner.
Build relationships for the long term
Think about the decision to invest in a startup. If I invest in your company then I am in it for the long haul. Unlike public stock markets, I can't change my mind. There is no market for me to sell the shares. We are stuck with each other. Given the long term and illiquid nature of VC investments, the decision to invest in a startup is ultimately a huge vote of trust. I am betting on you to take my money, hold onto it for years and return it many times over.
Here's the thing with trust: It's earned over time. So, in order to build trust and credibility, start building relationships with investors long before you actually start fundraising. Mark Suster from Upfront Ventures talks about this in a great blog post 'Investing in lines not dots'. Essentially he's looking for multiple touch points over time to build trust. If you come to an investor, tell them what you're doing to do and then come back six months later having done that (or more!), then you are building serious trust.
Run a tight process
All too often I see founders in talks with one investor only to find out that they're not interested, so they move on to the next investor. Remember, investors are paid to take meetings with you. Having a first meeting with a VC means nothing. The best way to maximize VC interest is to run a tight 'roadshow' process. Hit all potential investors at the same time. Have a 'data room' of backup diligence materials ready to go. Try and generate time pressure and competition by forcing potential investors through a timeline and towards a term sheet (offer to invest in your company).
Timing is (almost) everything
This may be the trickiest suggestion to implement. Over the years I have found that the best outcomes and best transactions involve equal parts of luck and timing. As I mentioned before the decision to invest in a startup is a huge vote of trust. To get to that decision, an investor will be looking to remove all possible risk and get comfortable with the remaining risk.
What this means is you want to de-risk your company as much as possible before presenting to investors. You want to prove that you have product-market fit, customers that will pay, customer acquisition channels that scale, etc, etc.
The intuitive thing to do then is to postpone fundraising as long as possible. But, if you're losing money (like most startups are) then you need to make sure you have enough cash in the bank ('runway') to run a successful fundraising process. If investors know that you NEED the money they either lose interest, or offer you lower valuations.
Nothing makes an investor want to invest more than if you don't need the money. That's probably a separate topic. But suffice it to say, timing is (almost) everything.
Have a Quarterback
Even in good times, venture rounds can take months from start to finish, pulling your focus away from the business at the exact time you need the most focus on it (when investors are looking at your performance). It's a tough balancing act.
There's no replacing time spent between potential investors and company founders, particularly the CEO. That's a two way street. You are assessing investors at the same as they are assessing you. So, you can't outsource the process. But you can and should have someone in your corner to give you as much support, expertise and leverage as possible. Whether you engage an investment bank, have a full time or part time CFO or even just have mentors and advisors with deal experience make sure you don't do this alone.