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.
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.
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.
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…
Many entrepreneurs will recognize this scenario: You finally get a meeting with a big-name VC partner. In preparation, you spend a week polishing your deck, financial model and pitch. Then, you get to your meeting and the partner is 20 minutes late. Plus, he or she has to run on the hour, so you have 40 minutes to squeeze everything in.
So, you start running through your pitch while the VC looks on, at best, half interested. Then as you wrap up, the VC says something like, “your business is not a current fit for their fund” or “it’s too early and you should come back with some traction” (see my previous post on Micro-Traction).
But, then something that may seem weird to a first-time founder happens.
Just as the VC is passing on your deal, they start dropping names.Though they aren’t going to invest, they know the VP of Cloud Services at Google, an editor at Vogue, or some other relevant contacts that could be partners or clients to your business.
I’ll admit, I often partake in this very behavior at Wonder Ventures. It comes from the genuine desire to help founders, whether I will invest or not. I can see they’re putting everything into their company and I want to use my network to help (and I assume most VCs that name-drop are doing the same thing).
But trust me. For all the times that I offer relevant introductions to entrepreneurs, the percentage of them who take me up on this is way too small. So, I put it to all entrepreneurs to not overlook this opportunity. Here’s why:
Even if they “passed,” it shows your follow-through
Hustle is one of the most crucial qualities of an entrepreneur and something I always look for before investing. Even if I say I am not going to invest right now, if I offer to make an intro for you and you don’t follow up (much less write it down), then what kind of hustle do you have? How are you going to overcome the many hurdles that stand in the way of a startup, when you can’t even capitalize on an intro handed to you on a silver platter? Some investors use this as an implicit test. So follow through, and you’ll pass.
It’s the best way to build your relationship with the investor
If you take the time and effort to follow through on the investor’s connections, you could turn these introductions into relationships, or even pilot customers and business partners. As a result, the next time that investor catches up with the friend they connected you with, that friend just might mention how excited they are by you and your company.
This, in turn, could bring a great investor back to the table and possibly push them over the edge to invest in your business.
It might show that you don’t want them to invest
The relationship with your investors is key. So, any investor who offers introductions offhand and then can’t follow through is probably an investor you want to avoid. Either they’re overstating their connections, or they just aren’t very helpful. Either way, it’s a sign that they won’t be a very supportive (or trustworthy) investor.
#StartUpHack: Use VCs for Business Development
This is also a hack that I give to many founders. It’s hard to get introductions to potential partners and customers. After all, you’re running a startup and can’t afford a sales team. But, VC introductions and due diligence can lead to tons of great connections, usually directly to company founders.
For example: If your company sells dev-ops tools to SaaS companies, what better way to get in front of them than as part of due diligence from a VC with a deep SaaS portfolio? Work to get these introductions and you’ll significantly accelerate your business development pipeline.
In sum, these introductions from investors serve as one of the best ways to build relationships with them, as well as a subtle form of due diligence of you and your company. Don’t overlook them and don’t forget to follow up. Because if you over-deliver on these intros, you’ll see that many investors will get excited to be a part of your startup.
This was originally published on Medium.
When it comes to investment structures, I hope that my 30+ years as an entrepreneur and VC has led to some wisdom about what works and what doesn’t, because it certainly has led me to have strong opinions on the topic. People like to say that VCs are in the pattern recognition business. If that’s true, then today I’m seeing a troubling pattern developing around company valuations aided and abetted by the overuse of debt.
Convertible debt, SAFEs and venture debt all have their place, but increasingly, these structures are being used specifically to avoid setting a price for equity. And if there is no price, there is no all-important “meeting of the minds” between seller and buyer when the money changes hands. Yes, these vehicles make “today” easier, cheaper or more expedient – at the expense of “tomorrow.”
In other words, they kick the can down the road…
To be fair, over the years I’ve kicked more than a six-pack worth of convertibles down Lake Shore Drive, if you catch my drift. Do I feel good about it? No, but, part of the reason its good to have an experienced operator as a VC is to avoid foreseeable mistakes. At this stage of my life, experience has taught me to align interests early. I know that when investors and entrepreneurs are aligned, both maximize returns.
Valuations are high relative to business fundamentals. What does this mean? Lots of things, but mostly it means that performance expectations are high too.
The big mistake I see many entrepreneurs make is to try to optimize the current transaction at the expense of the future. Look, everyone wants to maximize deal terms, but, fundraising is not a one-time event. You will be back at it for your next round sooner than you think.
The best entrepreneurs are the ones that treat fundraising like a game of chess, where each move sets up the subsequent moves for success. You should always be thinking one or two moves (funding events) ahead!
There are two things that will make your next move easier. First, do NOT over promise now…When you go back to your existing investors and ask them to participate in the next round, the biggest indicator of their response is how the company has performed compared to the expectations that you set in the last round. Imagine two scenarios:
1) You raised your last round on projections to get to $20 million in ARR but are coming in at $16 million.
2) You raised your last round on projections to get to $10 million in ARR but are coming in at $14 million.
Even though the first scenario has more revenue, I promise you it would be easier to raise money on the second scenario as you are exceeding investor expectations.
The lesson here is sales 101 – promise just enough to get the deal done and no more. Or, said another way “under promise and over deliver.”
The second thing that will make your next round easier is if you have a reasonable “hurdle” to clear. The “hurdle” being the post-money valuation of your last round. Everyone likes to invest in companies that are growing fast with valuations that are escalating, very few like to participate in down rounds.
So, even if you get what appears to be an attractive valuation for your first round, think about the capital that you have, the progress it will buy you and your confidence that you can raise the next round to have a pre-money valuation that is higher than this round’s post-money valuation.
If you are not dead confident of this, then this valuation may be too high and may hurt you in the long run. And remember, we are all optimists – we have to be, to be entrepreneurs or VC’s. That means that the strong odds are that results will not be quite as good as or it will take longer than you think. Leave yourself some buffer!
Think it through. Play it out in your head. Ask other entrepreneurs who have lived through it. When you are raising, you should be optimizing for finding the right long term partners who can help you grow your business and worry less about maximizing price.
Valuation does matter. But a higher, unjustified valuation can also hurt you down the road.
Convertible Notes vs. Priced Rounds
Certainly for early rounds, convertible notes and SAFEs are becoming more popular than traditional priced rounds. I get it. Entrepreneurs talk about how notes are easier and cheaper to execute. But what I don’t hear them admit is the real reason many of them prefer notes – they want to avoid the valuation discussion. They would rather deal with that later. But as with most difficult discussions, the sooner you deal with it, the better the outcome.
Here is what really happens with a note. Let’s say that the entrepreneur and the investor agree to a valuation cap of $5 million, with a discount. Here is what is going on in their heads:
Entrepreneur: “I just got a valuation of $5 million for my business this is awesome!”
Investor: “I will live with the $5 million cap, because I think the next round may be below that and I will get my 20% discount so I will be protected.”
You are NOT ALIGNED!
An analogy would be if you sold your product with a price range instead of a price. You tell the buyer it costs “$80 – $100.” The seller only thinks about the $100 side of the deal while the buyer only thinks about the $80 price.
You are not aligned and will have more trouble closing that deal than if you agreed to a single price in the first place.
Sounds crazy to quote a price for your product as a range instead of a single discrete price, why would you ever consider having a range of price for your company!
To be fair, there is a time and a place for convertible or bridge notes. Let’s say you have a big sales contract or distribution agreement that will be signed in the next quarter – or a brand new product release that will change the company and you need a little capital to get you there, then a bridge note makes sense because you have a bridge to somewhere.
I love debt. What a fantastic tool and great leverage to help you operate your business – once your business is stable and you have predictable and consistent cash flows. Just like with higher valuations or Convertible Notes, at MATH we are starting to see a troubling trend of companies earlier in the life-cycle, taking on Venture Debt.
The truth is debt can be a fantastic tool. It can also be the death of many companies.
All debt comes with covenants. What happens when you breach your covenants? There are both micro as well as macro trends that can affect your business – some within your control, many outside of your ability to affect change. What happens if you miss your quarter? If there is a sales slow down? A delay in shipping your next product? Or, what happens if 2008 happens all over again, and outside of your control the markets take a dive? We’ve seen perfectly rational lenders, make totally irrational decisions in turbulent markets.
We get it; sometimes Venture Debt might seem like a great, or the only, alternative. But, you are truly putting your business in the hands of lenders who might not always make, or have the ability to make, the most appropriate decisions about your business given stressful times. I’ve lived through 2000 and then again 2008/2009 and saw many good businesses shut down or forced to liquidate/sell by banks.
So let me be clear – I love venture debt – when the company already has proven the product-market fit and there is consistency and predictability to revenues. Otherwise – tread thoughtfully and carefully my friends.
Optimizing for the Long-term – Beware the Easier Solution!
Most of us think and optimize for the short-term. Makes sense, when you are a start-up entrepreneur. A higher valuation on the surface seems to make sense (who wouldn’t want a higher valuation); or a Convertible Note is easier and cheaper today; or Venture Debt seems less dilutive (or maybe is perceived to be the only alternative). All true – but beware!
Each one of these can have much more troubling longer-term consequences. Many times the easier or more obvious path is not the right one. Unless your company is one of the very rare rocket ships, then more often than not, it is actually the harder path that is the right one to take.
Don’t kick the can down the road. As hard as it may seem in the moment, it’s always better to optimize for the longer-term and not just in the moment.
This post was originally published on MATH Venture Partners’ blog.
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While every Harvard MBA is trying to find a way into venture capital, how did an unknown Brit cut ahead in line and become a go-to-source and door-opener? To paraphrase the cartoonist Peter Steiner, it helps that on the internet, nobody knows you’re a 19 year old.
I was introduced to Harry Stebbings’ work at my lowest moment. I was undergoing chemo and radiation and had little energy. During those long hours with my feet propped up, I checked out every podcast I could find about startups and came across Harry’s “The Twenty Minute VC”. The earliest podcasts weren’t that great, but they just kept getting better.
What became apparent over time was that in interviewing VCs, doing his homework and studying the field, Harry kept applying their teachings to his own business, with spectacular results.
While Harry started as a student/groupie, listening to his idols, he now has become the role model: his business can easily be turned into a case study of how to incorporate Lean Startup methodology, inbound marketing, virality, and much of today’s startup gospels and convert it into uncommon reach and influence.
But first, back to how I met Harry.
After recovering from the cancer treatments, I published highly subjective rankings of 75 startup podcasts. I gave Harry a B, summing up the show as “VCs fawned over by an overenthusiastic Brit”. (He’s a solid A now.) I loved the concept, the structure, the brevity, but a number of characteristics bothered me. Harry actually was doing two podcasts at the time, the other one focusing on European angels; it was justifiably forgettable.
Startup Lesson #1 Experiment, Iterate, Repeat
Looking back, these early podcasts were classic examples of creating MVPs–essentially Harry executed 2 beta projects, and then focused on improving the more successful VC podcast. The angel podcast just wasn’t attracting as many downloads for predictable reasons. Interviews of low profile angels investing small amounts of money couldn’t compete with shows with higher profile VCs investing big buckets of money. Harry analysed the data, and ditched what wasn’t working.
Startup Lesson #2 Market Research and Customer Discovery
After my blogpost, Harry contacted me, saying “Hi–I’m that ‘overenthusiastic, fawning Brit’ you reviewed. What can I do to make my show better?” and we had a nice discussion.
I admired that he took the time and risk to his ego to get feedback from critics.
He asked me perceptive questions about other startup broadcasts competing for my attention, trying to determine how his show could be sufficiently better or differentiated to keep my attention. He asked about a competitive VC interview show (one that was a little longer and more ponderous) that I’d given higher grades to, and wanted to know why. He changed some things (no longer effusively praising any minor league VC with no meaningful exits as a “legend”), but also stood his own ground when I suggested that he ask more hardball questions. He – quite correctly, given his stage – didn’t want to risk pissing off his guests, for fear of getting a bad rep and losing referral intros. (Harry, I know you’re reading this–you’d become my favorite podcaster of all time if you get another interview with Tim Draper and ask “What is it with this Ayn Randian bullshit about all government is bad, Silicon Valley should secede from the US so you don’t have to support less advantaged parts of the country, and your refusal to admit that Theranos’ management made egregious errors?” Just asking!)
What has happened, though, is that as Harry himself has gotten wiser and more confident, he now draws on his previous interviews to diplomatically bring up the opposing viewpoint and incorporate it with some authority without overtly confronting his subject. “You know, xyz was on the show and makes the different case that…”
Startup Lesson #3: Customer Acquisition and Virality
How did you hear about the 20 minute VC? A tweet or blog from a venture capitalist you follow? Postings on Product Hunt? The Mattermark Daily? Whatever the means, I’m sure that Harry’s listener acquisition cost is zero. He’s ballooned to 100k downloads per show, getting bumps from social media mentions of people with large followings. VCs who have been interviewed naturally publicize the show, looking to capture the attention of the many young startup founders who comprise a good part of the audience. This didn’t come easily, although I admit most VCs chase publicity like a politician chases votes. The Twenty Minute VC’s first big break came from establishing a cross-platform partnership Mattermark, which knows a thing or two about growing a loyal audience of VCs and startup folks. Which goes back to…
Startup Lesson #4: Inbound Marketing
Simply put, this concept requires quality content to be put out regularly to build an audience. From sheer hustle, Harry has created enough of a backlog of shows that not only can he publish on a steady, 3x a week schedule, and now has enough shows in the wings that he can do quality control and simply not publish the dogs. And he posts on all the major social media channels.
Startup Lesson #5: Leveraging Networks
How has a 19 year old outside of Silicon Valley gotten so connected? Well, one interview leads to another…and he’s always quick to thank and give public credit to the introducer. While no stranger to cold-calling prospective subjects, he knows a warm intro is always the best way to gain access. The latest example: Harry now also hosts the SaaStr podcast, bringing in the enormous audience, influence and contacts of Jason Lemkin. And Harry’s impact just keeps snowballing…
Startup Lesson #6: Branding
Just think of that great name: “The Twenty Minute VC Podcast” says it all in 5 words. While not all shows actually stick to twenty minutes, it seems to be just the right amount of time for a listener to digest a show during a commute and for the interview to contain something of substance. Right concept, communicated perfectly.
Startup Lesson #7 Breaking New Ground
Ever see much content on, say, the perspective of a VC fund’s limited partners–i.e., the source of all the money? I thought not. Harry filled the gap, with examples like this show with my favorite LP/blogger, Chris Douvos, of Venture Investment Associates.
Startup Lesson #8 Give First
I have yet to have a conversation with Harry where he did not ask “How can I help you?” Before Chris Sacca and Mike Maples earned their reputations and dealflow, they made themselves valuable to others any way they could. Paying it forward is always rewarded in the end.
This is just Part 1 of the Harry Stebbings Saga
I get asked all the time by young grads “How do I get into VC?” I used to talk about getting operating experience, blogging to create a personal brand, networking…all the usual cliche advice. Now I just tell them to consider how a 19 year old who skipped college has become a household name with VCs. Be like Harry.
There are many investors who started as journalists – Michael Moritz, Esther Dyson, Stuart Alsop, Jason Calacanis, Semil Shah, MG Siegler… the list goes on. I have ZERO doubt that Harry soon will not be able to escape the allure of venture. He has an audience, he understands what it is to be a founder, he has influential fans, knows how to ask questions, and works his ass off. If I were a VC, I’d be recruiting him as hard as possible.
Harry, in the words of your countryman Ali G, “Respek”!
[Postscript–after seeing the published post, Harry informs me he is no longer a teenager, having turned 20 two weeks ago. But in my book he is still a wunderkind!]
This post was originally published on Ty’s blog.
Back in Q1, you couldn’t swing a dead cat without hitting someone advising startups that the world, as they knew it, was coming to an end. Venture dollars flowing to startups had decreased from $16B in Q3 ’15 to $12B in Q4 and VCs were telling anyone who would listen that nuclear winter was in sight and funding would be drying up. The media just ate it up. Take a look at just a tiny sample of headlines from early Q1.
Imagine my surprise when I opened PWC’s VC Q2 Money Tree report on Friday (ok, I’ll admit that I wasn’t surprised at all). Take a look at the chart from their report below. Not exactly the apocalypse everyone was predicting, right? To be fair, while dollars have increased again, the number of deals fell by about 5% (suggesting that larger dollars were going into some later stage companies).
I wrote a post about all this in February and my advice to founders remains the same as it always is. Raise more than you think you need. Price your rounds to avoid the pain of stacked notes. Watch your expenses. But whatever you do, don’t pay attention to what anybody’s saying about the macro because they’re all full of shit.
Will the funding environment get worse for startups? Yes, of course it will. Eventually. Bill Gurley’s been telling us we’re in a bubble for years now. He will undoubtedly eventually be right. But there’s also logic supporting the notion that an entire generation of globally important companies will be born and go public by the time he is.
We’ve now had ten quarters in a row of over $10B of venture capital flowing into the system. Venture Capital firms raised more money in 2014 than ever before in history and then they raised even more in 2015!
All of those firms have a mandate to put that capital to work which means VC dollars will continue to flow liberally to startups at least for the next three to four years.
My two cents? I think we’re in the greatest tech innovative cycle in history and capital will continue to be available to fuel it.
Technology is solving more problems for more people in more ways around the globe than ever before.
I see it when I travel to our 22 Techstars accelerator programs and the hundreds of events we put on for entrepreneurs around the world in over 130 countries. Barring a global economic collapse (which certainly does seem like better than a zero percent chance given the events of 2016 and the potential fallout from our Presidential election this November), I think we’ll continue to see a healthy environment for startups for years to come.
This post was originally published on Mark’s blog.
I love the 20 Minute VC podcast. It’s the perfect amount of time and Harry Stebbings does a great job attracting interesting guests and asking them the right questions. I was honored when asked to be on the show, here’s that episode.
Harry asks me questions like:
- How did I make the transition from Founder to VC with Techstars and Fund I?
- Fund I is one of the most successful funds in history; what was the structure with Fund I? Why did you choose a $5m fund size? How did you decide initial to follow on ratio?
- Why were you so valuation sensitive with Fund I? Why were you so rigid on a consistent check size on Fund I?
- Why did you decide to expand from being a solo GP fund? What are the challenges and complexities of fund scaling and how did you approach this?
- What do you think about uncapped notes?
- Why do you like big boring companies?
- How did you meet Ryan Graves @ Uber and how did the Uber investment come about? (even more about that here)
- Where does David still see inefficiencies in the current venture model?
I hope you enjoy it. I had fun doing the interview.
The Twenty Minute VC takes you inside the world of Venture Capital, Startup Funding and The Pitch. It helps you discover how you can attain funding for your business by listening to what the most prominent investors are directly looking for in startups, providing easily actionable tips and tricks that can be put in place to increase your chances of getting funded.
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.
- 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.
- 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!
- 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.
- 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.
- 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.
- 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.
- 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.
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?
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…
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.
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.
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.
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.