Anatomy of a VC Investment: What to Expect in Your Fund Raise Process

Fundraising is an important part of most entrepreneurial journeys. If you are an entrepreneur, the standard process followed by many venture capital firms is well worth knowing. While every case is unique, having an idea of the key stages means you will have a sense of where you really are, what you have achieved, and what is left to achieve in order to secure funding.

To keep this post as useful as possible, I have not written-up exactly how we do it at my own firm, but I have instead tried to break the process into eight stages that many firms will go through.

One: Pre-Raise

A good investor will know about you, your company and your market before you speak to them for the first time.

Good VCs track AppAnnie, Alexa, Linkedin, GitHub, ProductHunt and similar services to spot interesting companies and monitor trends. They also keep up to speed with highly-rated angel investors, syndicates, seed funds and incubators to ensure they hear about the companies and founders who are impressing the other investors they respect.

On the entrepreneur side of the conversation, you can start early too. While you have to build your product and company first, it is worth spending some of your time with investors, before you actually need or want to raise money.

A good investor takes time to understand your business, and you need time to get to know if they are the right person for you.  

Two: Initiation of the Process

Depending on the situation, either the company or the investor can start fundraising process.

If you want to make the first move, you should ping a personal note to the investors that you already have a relationship with, signaling that you are thinking of raising money. For those you don’t know, avoid a cold email and either build a quick relationship (meet in person at an event, etc) or use your network (angel investors, employees, friends) to get warm introductions.  I wouldn’t give a huge amount of information away via email too – it is always more powerful to give your ‘pitch’ in person or even over the phone.

Sometimes an investor who has been tracking a company closely (in some cases they are already an investor, in other cases, not) will pre-empt a fund raising process.  Nakedly, this is because they are excited by your company and want to own part of it before it gets bigger or is better known. You need to decide if this aligns with your needs too.

Three: Early Process

If a VC is interested, a number of people at the firm will now get to know you. Expect to go through your deck two or three times as you meet a combination of Partners, Principals, Associates and Analysts.  Be sure to know what each of these people do and how they will play into any final decision-making process.

During these meetings, you will be answering a lot of questions on your background, your team, and what the company and its products do. Be prepared for people to dig deep on the specific challenges that face your sector. If you run a delivery marketplace, you’ll be asked about unit economics; if you’ve built an advertising technology company, you need to know about what Google and Facebook are doing; and if you the CEO of an open core software company, you’ll be asked about your engagement with developers, and your conversation rate to premium software.

After you have run this gauntlet of questions, your answers will be reported back to the firm. An internal discussion, sometimes enhanced by external expert opinions, will take place. Ultimately this rolls up into a decision of whether they want to dig deeper.

Four: Deep Process

More than one partner usually gets involved at this stage. Usually just two, but sometimes (in smaller firms) all of the partners will participate. You will be expected to go into a huge amount of detail, so ensure that you know the finer points of your company and your market.

The objective of this stage is to really get to know each other. If an investment occurs, you may work together for many years to come and so, for both sides, it’s important to get a feeling of how that could work.  

Articulating goals, hopes, and concerns is important – it is way better to have these understood and agreed upon at this stage, rather than discover them further into the relationship.

Typically there will also be a lot of third party due diligence and the investor will probably ask for references – both on the founders as individuals, and from customers and partners of the company.

All the while, the Partner you’re spending most time with will be preparing a much lengthier investment memo or dossier that contains all of the information that has been gathered, along with her view on each aspect.

Five: Partner Meeting

You will be invited to meet the whole team. This may be over videoconference, but more usually it will be face-to-face and, wait for it, you’ll do your pitch again.  Expect lots of questions.  Many of these are factual in nature – understanding the product and the company – but many are also posed in order for your potential investor to better understand you, your team and your personalities. The way you answer the question is as important as the answer itself.

Feel free to ask your own questions.  You should already know one of the partners extremely well, but will the rest of the firm do for you?

At the heart of a great investor/entrepreneur relationship is a mutually respectful, two-way dialogue.  Today is the day to start that dialogue.

Six: Term sheet

Assuming you impressed the team at the partner meeting and the firm has decided to invest, you will be issued a term sheet.

A term sheet is a high-level document that sets out the proposed investment, the valuation of your company, the terms pertaining to the investment and also what you can expect from the firm in addition to the financing. Often these are only one or two pages long. I’ll cover term sheets and what to expect in a future post.

If everyone is happy, all parties sign the term sheet.  At this point everyone is signalling that they want to do this: you are almost done.

Seven: Post-Term sheet diligence

This part of the process is highly detailed, but straightforward. The diligence will involve lawyers, accountants and security, identity and technology experts who will ensure that everything you represented during the early part of the process was accurate.  Assuming you didn’t lie at all, you should have nothing to worry about. Minor misunderstandings are common and usually cleared up quickly.

In parallel, longer documents will be drafted to detail the basic terms contained in the term sheet. Lawyers lead this part of the process but it is key for both the entrepreneur and the VC to remain engaged.

Eight: Close

The Promised Land. When the diligence is completed, and no major questions have been raised, the documents will be signed and the cash will be wired. And then it starts to get really interesting…








Firing Someone for the First Time – Five Critical Steps

As a new CEO, it is only a matter of time before you have to fire someone for the first time. Nobody starts a company to fire people, but the reality is that it is rare to run a company for any real length of time without having to do it.

There are many different reasons why you might need to do this. There are a variety of performance reasons and, particularly in fast-growing companies, there is the issue of people who simply don’t scale—some people are a lot better at starting companies than they are at leading large teams.  I’ve written about a variety of these groups and their characteristics before so I won’t repeat that all here.

I am also not going to talk about laying people off or making them redundant, which is a related but actually very different process. Today I’m going to focus on the steps you need to take before firing someone for the first time. For obvious reasons, it’s a subject that is not commonly discussed, so my intention is help CEOs and founders find their way along a path full of potential difficulties, embarrassments and awkwardness.

Step One: Get the Legals Right

It might sound like a simple point, but put it this way: if you get the legal aspects of firing someone wrong, it could have a catastrophic effect on both your business and the individual concerned.

The legislation surrounding firing people is well defined in every jurisdiction.

Popular culture leads us to believe that firing people is hardest in France and Germany, and comparatively simple in California and New York. This is a commonly held fallacy – the process of firing people is tricky all over the world, as it should be.

So before you engage with the employee in question, hire a lawyer who knows what they’re doing, and who has done this before. Nailing the legals will save the process from spiraling out of control, will protect you from racking up a large legal bill as you fix a mess later and help to ensure that the leaver doesn’t exit with a very sour taste in their mouth.

Step Two: Put Yourself in their Shoes

You need to be very honest about what you’re about to do: you are firing someone. No matter how considerate you are, and how understanding they are, the person you are about to fire is going to have a bad day.

Remember a few things: the person you’re firing is talented. You hired them for a reason. They obviously exhibited something that you, or a member of your team, valued very highly only a few months or years prior. They haven’t lost that spark, it’s just going to shine brighter somewhere else.

Therefore don’t make it more awkward than it already is. Consider things that will matter to them: have the conversation in a neutral location, and pick a time of day when they won’t be under the watchful eye of their colleagues, who will know that something is amiss. And, above all, be ready for the fact that it’s going to be a tough conversation for them and, unless you’re a robot, you.

Step Three: Think about Yourself

I don’t want people to start shaking their fists at me, so by way of caveat: being fired is, quite obviously, the worst part of the deal. But having to fire someone is also awful.

Nobody who has founded a company enjoys having these conversations – save for a few organizational sociopaths who belong in clichéd HBO workplace dramas.

It is unwise to go into these meetings without considering how this is going to affect you. Give yourself some time to rehearse the conversation, and consider how this will impact you emotionally. Of course, these conversations rarely run exactly according to the ‘script’, but this will help guarantee that there are fewer surprises for both of you.

Also, remember that what you are doing will make things better for you, better for the business and, even though it may not feel that way at the time, it will—in the long run—make things better for the person who is leaving the company too.

Step Four: Be Helpful

There are very few occasions where it is inappropriate to be helpful. Unless circumstances are dire, feel encouraged to provide accurate and fair references; and help them, in whatever way you can, to get their next job.

Remember that this person isn’t going to disappear, and they will usually hang around the same industry for a long time. They will talk about your company, and if you help them on their way out, they are far more likely to remain comparatively positive.

The one footnote here is that you should talk to your lawyer first. In rare situations, you may be prevented from doing some of the above due to legal constraints.

Step Five: Think about the Rest of the Team

It is understandable to consider only yourself and the person you’re firing, but you have to also think about your entire team.  This step is the one that I find most rookie CEOs forget to address the first time.

You may have already considered those who work closest with the person who is going to lose their job. Often you won’t be able to talk to them ahead of time, but commonly you will have your immediate plan of action ready to go: you know who will step into the breach in the short term, and whether you’re hiring a replacement.

But you need to share the news with the team at large. If your company is still a size where it is realistic to hold an all hands meeting, do so. Address the team, express regret, and take time to explain that why the course of action that has been taken was the right thing to do.

Your team will benefit greatly from the closure that this process affords. It is far better for your staff to hear an honest explanation, rather than to regurgitate water-cooler rumours that the CEO hasn’t been brave or visible enough to quash. 








7 Benefits Your VC Should Provide

There’s a new person in your life. It’s probably a guy. He probably wears chinos with a blue shirt. He’s probably standing awkwardly next to the coffee machine in the kitchen of your startup trying (and failing) to make small talk with your backend server team.

The primary reason startups take venture capital is because of just that – the capital. But entrepreneurs should expect their investor to bring a whole lot more than just money to the table.

Every entrepreneur can expect their venture investors to bring seven main benefits to the table. If you already have venture investors, you can use this article as-is. If you are currently considering fundraising, reverse it and ask prospective investors if they are able to support you in these key areas. If not, ask yourself if you’re talking to the right people.

  1. The Long Haul – Mileage may very, but you can assume that your Series A venture investors will be on your board for five to nine years. That’s about the same length as the average marriage in the US.  In other words, it’s a long time. This means you need to build a relationship.  

Like any relationship, you need to start with a positive attitude and work to dispel any niggles in the early days. I’ve seen entrepreneurs immediately slap a new investor with unexpected terms after a term sheet is signed. I’ve seen investors turn up to the first board meeting and demand that every aspect of the business is run a different way, before they attempt to understand the company’s current cadence.

My advice to both is: go slower; there’s plenty of time, you should take it.

  1. The Network – Venture capitalists tend to be networking machines. Their success often depends on it, and the day to day reality of their work means that they meet up to 10 new people every day. In addition to this sheer level of ‘exposure’, VCs occupy a unique position as a ‘gateway’ to new technology and cutting edge industry trends. This means that they are usually able to lean on people they don’t know and often get a meeting if needed.

Before every board meeting or conversation, think of who you need to meet. Use LinkedIn and discover who your investor knows, and ask them to put you in touch. As an entrepreneur, you should exploit this network unashamedly!

  1. The Next Round – It may seem early, but at some point, you may have to raise another investment round. This may be another private, venture round or a public offering. As most investors focus on particular ‘stages’ of investment (seed, Series A etc), they are likely to have worked with companies at a similar stage to yours, who went on to raise additional funding.

Use that experience. Ask your investor what your next investor is likely to look for. Ask for access to presentations that worked well in the past (assuming confidentiality can be lifted or sensitive information redacted), and – most importantly – before you start your next fund-raise process, ask to present to your existing investors. Their feedback will be invaluable. I’ve had a couple of portfolio companies miss this opportunity, and I won’t let another make this mistake.

  1. The Critical Hire – The typical venture investor usually has a slightly higher level understanding of any given company. Therefore, venture investors are genuinely rather good at painting the big picture of the company. This can be super-useful when convincing that critical, senior hire to join your company.  This is one of my personal favourites. I’ve helped a number of CEOs on this, and nothing feels more awesome than knowing you’re helping build the team.
  1. The Critical Sale – Similar to above, sometime you will have a large potential customer that needs some extra reassurance from someone who, ultimately, has your company’s (financial) back. I have found this to be especially crucial for enterprise software companies. As you can imagine, if you’re selling your solution to a large corporate customer, they often need convincing that you are not going to go bust in the next year. Your investor is often the most authoritative voice on this topic.
  1. The Counsellor – No investor or board member can tell you what to do. That is the great (and also terrifying) thing about being a CEO.  The buck, ultimately, stops with you.

However, a good investor is an experienced soul, and will have been through many similar trials and tribulations that you find yourself battling against. Some will have done it all before themselves – which is one of the reasons our firm has always had a healthy balance of entrepreneurs on the team – and others will have seen it as an investor with other CEOs.  The good investors spot the patterns, and are able to be a thoughtful and engaged listener as you talk through an issue and decide how to deal with it.

On a human level, this can be a rewarding part of the investor/founder relationship – of course there are many conversations on things like pricing strategies, marketing ideas or human resource issues, but the most memorable conversations are always personal. Dealing with an employee who is facing a difficult situation at home, working through the tough steps that need to be taken when a founder exits a company, and confronting failure – whether this is of a person, a team, a product or even the whole company. These things are tough, but they all happen, and a good investor will be by your side when you confront them.

  1. The Exit – whether you’re selling to another company or taking your company public (which may or may not really be an exit in itself) good investors will have experience of this. Again, the best firms will have a mixture of people who have done it with others, and those who have done it themselves. I took my company public so I can talk people through my experience on a personal level, but one of my partners advised on over $500B of IPOs and M&As over his career as a banker which gives him an entirely different perspective on the process. Great firms will have investors with deep experience in this area and be able to bring it bear when you hit that point of your company’s progression.

The best entrepreneurs are resourceful beings who pull in whatever they can from those around them. While that has to be balanced in the case of, say, employees, where there is an obvious power differential, I always encourage CEOs to exploit their venture investors. Let’s be honest, we are perfectly capable of taking care of ourselves!

Of course the investor starts by providing the capital your company needs to grow, but the right kind of investor should deliver a whole lot more too.








5 Reasons Why Selling is the Key Skill Founders Need to Learn

Welcome to Mentor Mondays! Today, Suranga Chandratillake is back sharing his wisdom on why founders need to sell. Suranga is a GP at Balderton Capital, the founder and former CEO of blinkx, and a mentor with the Techstars Berlin Accelerator.

Some roles at a startup attract a lot of attention.

It goes without saying that everyone wants to be a ‘Founder’ and, whether a Founder or not, other jobs high on the hip list include CEO, Lead Engineer, Head of Product, and any job title that includes the term ‘Growth Hacker.’

However, a role that is consistently under appreciated is that of sales. Too often the ‘Head of Sales’ is given a lowly status that carries a slight whiff of pariah.

This is a huge mistake.

Speaking as an entrepreneur: selling is the single most important thing that a Founder must be able to do.

Speaking as a VC: I couldn’t consider backing a team where there wasn’t at least one natural-born-killer salesperson on the founding team. In fact, on many of the best teams, there’s more than one.

What Selling Actually Means

In my mind, there are three key components to sales in the broadest sense of the word:

  • First, is the creation of a narrative that enables an audience to instantly connect with and understand the values and journey of a company, while providing a basic introduction to the product (or to whatever is being sold).
  • Second, there’s the actual delivery of this narrative in a variety of contexts to a variety of people – from during an elevator ride to a crucial new hire or during your three week IPO roadshow to detail-oriented investors.
  • And, last but not least, there’s the closing – asking for and getting engagement as a result of your delivery of your company’s narrative.

And by engagement I mean anything like making an actual sale to a client, securing investment from a VC, persuading a top-level hire deciding to join your company, or something completely different. Just anything where you’ve had to sweat to persuade a valuable party to choose you ahead of the competition.

How Selling Fits into the Job of a CEO

One of the things that makes selling so important (and therefore so useful) is that it is critically important to multiple stages of a company’s growth.

1) Early days – hiring

In the early days of most companies, one of the hardest things that any Founder faces is hiring.  Chances are that you can’t afford to pay big bucks – or even average bucks. And you don’t yet have a successful company, brand or product that people want to be part of.  All you have is your ability to sell the vision.  

I have met many aspiring Founders who have a great idea, and ask us for initial funding so they can hire a technology person to implement it.  To me, anyone who has to have money first doesn’t get it.  A great founder convinces someone great who already has a well-paid job to give it up, and start a new madcap adventure.  I want to see that a founder has already convinced someone to make an irrational decision – as behind every irrational decision, there tends to be a great salesperson.

2) As you grow – raising capital

This is the point of the story when you come to see me, or one of my peers.  Most successful technology companies take at least one round of funding during their growth. Even if a company could be bootstrapped throughout, the competitive nature of their market often means that extra resource allows them to grow more quickly, and to win the race.

Selling is key in raising capital both because you have to sell the investor you are trying to land (obviously!), but also because any good investor is going to be closely watching your ability to sell.  The fact is, most investors know that you will have further rounds of investment in the future, and/or an exit of some sort. They will also know that Founders with great selling skills will be better at doing those things, and will get a premium on the company when it sells (no, that isn’t fair, but such is life…)

3) As you grow – actual selling

Whatever the model, if you run a for-profit business, someone somewhere pays you money.  

In the long run, you will employ a large, well-trained sales force to run this process, presided over by Sales VPs and Chief Revenue Officers. Alternately, if you offer an entirely self-service product, you will develop a complex system that allows people to manage their spending on your platform. But, before any of that, someone (read: you) needs to figure out exactly who is going to buy, what they are going to buy, how much they can be charged and, most importantly how they will be sold.

To hone in on this, ask yourself this question:

What is the core driver that gets a sale done in your business?  Without understanding that, you have nothing.  The task of identifying and crafting this core proposition is a key responsibility of the CEO and other commercial founders.  

The best way to begin to understand your core driver is to get out there. Knock on doors and pick up phones, and try to sell a bunch of different things in different ways.  Warning: most of your methods will fail.  There will be embarrassing meetings where people say no (or, more likely, they just avoid following up). There will be hours wasted in Starbucks and corporate reception areas, waiting for someone to turn up, only to get an email an hour late saying they can’t make it after all.  Suck it up – you wanted to be a Founder, right?

4) At scale – keeping it all together

When your company grows, it increases in complexity.  Hundreds of people, tens of offices, a thousand different drivers and intentions and agendas.  Over time you will have drift.  Even the best system for corporate goal management will fail.  Even the best designed leadership mechanisms can be undermined by a particularly negative member of the team.  At this point it falls again on the Founder to be equal parts ambassador and leader.  Move between all the groups equally, listen to the views, take everything on board, juggle competing visions and, ultimately, bring it all together with a clear narrative on where the company goes next and close everyone sufficiently that they put aside previous differences and follow your lead.

Sound tough? It’s tougher. Personally, I think this is the hardest type of ‘selling’ that a successful Founder will have to master as they build an organization. Unfortunately, it is also the most unavoidable and most important.

5) The end game

And then, at the end of it all, you will likely take your company public on the stock market or sell it, or both.  Again, you are looking a long and super critical sales process.

You will run into all manner of rules and regulations, you will work with lawyers who will fact-check every word you want to use to sell the business (I remember three six hour legal sessions as we put together the prospectus for the IPO at blinkx!).

Of course, the substantial business that you have grown will speak for itself to a certain extent, but the premium you attract, and the smoothness with which the deal goes off, will both be depend on your ability to sell.

Conclusions

There have been many successful companies who started out with only technical founders. There have also been some that started with no technical founders at all. Other great companies never had a founding marketer, and many more didn’t start life with a lawyer or an accountant on the team.

But what every great company starts with is someone who can sell.  If your team has been downplaying this skill, start focusing on it. If you don’t think you’re very good at it, start learning. If you’re leading, you’re probably selling.








What Job Titles Mean in Venture Capital and How to Navigate Them

This week’s Mentor Monday post is from Suranga Chandratillake, a mentor with our Berlin program.

Venture Capital can be an opaque industry. Everyone can read about investments and exits, but few are familiar with how it all works behind the scenes. This post will aim to demystify certain elements of the industry and, in doing so, shed light on how founders and CEOs can use this knowledge to their advantage.  In this post, we’ll start with the people and their job titles, asking the question:

Partners, Principals, Associates & Analysts: What do all these people actually do?

 

a) Partners

Venture Capital firms are rarely ‘companies.’  They are more commonly a form of limited partnership that is owned by the Partners of the firm. Therefore the ‘Partners’ of a VC firm are in fact the owners of the firm, and so have control over the capital that gets invested. Different partnerships are structured differently – some, like mine, are formed of equal partners, others have some form of hierarchy and while that can have an impact on entrepreneurs, that’s a topic worthy a separate post.  When there is a hierarchy, you’ll come across a number of self-explanatory secondary titles such as Managing Partner (the boss) and Junior Partner (not quite so boss).

The key thing to remember is that the partners are the people who can sponsor a deal. In other words, they can suggest that the firm makes an investment in a company, and recommend that the firm take a vote (usually at a ‘partner meeting’) to decide whether the investment is made.

If you have a connection to a partner in a venture capital firm, then this is the best starting point, as you’d be dealing directly with the person who would end up suggesting that the firm invests into your company. However if you don’t know anyone at partner level, this doesn’t mean that the door is closed…

b) Principals

Principals are senior members of the investment team. In addition to helping the firm discover and meet the industry’s most promising entrepreneurs, they also work very closely with companies after investment.

The principals do not usually lead deals (with very rare exceptions), however, they are trusted, long-term members of the team. As an entrepreneur, time spent building a relationship here is not time wasted. They have the ability and influence behind closed doors to hook you up with critically useful meetings and introductions. And, beyond investment itself, Principals are often highly networked, thoughtful players in the technology startup ecosystem that can usually help in a multitude of other ways.

c) Associates

Associates are slightly more junior members of the investment team who are usually in their role for 2-3 years. After this period, they are occasionally promoted to Principal, but they more regularly leave.

Associates do not lead investments, but they are typically visible at events and workshops. Their job is usually externally facing and involves meeting with a large volume of companies, providing a first filter and bringing the more relevant cases to the attention of the principals and partners.

Given this role, Associates are crucial gatekeepers. If you can meet and resonate with an associate, they will open the door to the senior members of the investment team.

I’ve come across entrepreneurs who can be dismissive about Associates.  It’s true that there are others who are more senior to them in any given firm and, given their background, few will have a track record as impressive as the entrepreneur him or herself, but they are trusted, valued members of the team – if they are your only connection to a firm you think would be relevant to your company, then they are an excellent starting point.

d) Analysts

Analysts are the most junior members of the investment team. They usually have two or three years of previous experience, most typically in banking, consulting or at a startup. As an entrepreneur, it’s unlikely that you’ll meet an analyst in the wild, as they are usually desk based, and they have less decision-making power than fellow members of the team.

More likely, if the firm is digging deep into a sector, you might get a call from one. Beware that in these cases the aim is often due diligence of a market when the firm is thinking of investing in a related company, but this is, at very least, a way to get your company onto the firm’s tracking system.

And how do I get an introduction?

 

a) Directly to a Partner

If you are in the fortunate position of knowing a partner or a principal, then great, you can start there directly.  One mistake I’ve seen is that people will hold off meeting with a partner until their pitch is utterly perfect.  Most investors invest in lines, not dots and so you don’t necessarily have to do this. Of course you need to be good at communicating what you do, but over-preparing is probably not as valuable as building a relationship.

If you don’t know a senior investor directly, here are a few more thoughts on what to do next.

b) Angel Investors

If you aren’t connected to a partner but have an angel investor who is well connected, go through the angel.  Most Partners and Principals spend a lot of time with angels (and others who typically invest earlier than them) and so often trust a recommendation from this source extremely highly.

c) Blind in-person meetings

If you are struggling to connect via your network, your next best bet is to meet someone at the team (likely an Associate up) in person.  A great deal of early stage investing begins with a genuine connection with the investment team, and so if you meet someone in person you will both be able to test that connection automatically.  As mentioned above, Associates, Principals and Partners all spend a great deal of their time externally. So follow them on twitter, find out which events and conferences they’re attending, and get yourself a ticket. Also, If you’re currently part of an accelerator programme or coworking space, keep an eye on the mentoring programme. Various members of venture teams often host workshops and mentoring sessions.

d) Blind Emails Suck

The corollary of blind in-person meetings being good is that blind not-in-person emails suck. At Balderton, we receive around 20k such emails each year, and while we are careful to spend time on each and every one, the lack of a human connection means that it can be super tough to evaluate whether a company is one we believe we can help.

Useful?

Let me know if you found this post useful – and if you have any questions, please comment below or  get in touch on twitter at @SurangaC.