As I mentioned in my last post, a few of our companies either recently closed a round of financing, or are currently in the process of raising 0ne now. So I’m jotting down some notes of things I’ve been repeating a lot lately.
Fundraising can probably be broken down into three parts:
(1) Networking your way to investors
(2) Convincing those investors that you’re tackling an unbelievable opportunity
(3) Then convincing those investors that the opportunity is believable and that you’re the person to tackle it
Part 1 & 2 are much easier than part 3 is and most diligence a VC will do is in validating part 3.
VC’s care about traction, founder pedigree, product launches etc. all because they help validate part three.
Be ready for VC’s to ask to speak to your potential customers as references (be good to your first customers, your fundraising may rely on their recommendation). They’ll want to see your financials, your Google Analytics, speak to past employers or references and get a demo of your product.
Diligence is essentially an audit — it’s ensuring that what you’ve been pitching is true. The best way to get a deal done is by not over promising. There’s nothing more attractive to an investor than knowing exactly what he or she is putting money into. A moderately interesting white box is way more attractive than a sparkling black box.
Another thing I’ve seen founders struggle with is reading investor interest. Founders are often too optimistic — they assume a good meeting means a likely round of financing. But that’s not true. It just means that most VC’s are good at being likable when they want to be. It’s their job to make you think they’re interested, it ensures they’ll get a look at the deal in case a deal actually happens.
And founders also underestimate the gap between “interested” and “in.”
A lot needs to happen between initial interest and the wiring of money. A VC needs to put together his or her investment memo, pitch it to the rest of the partnership, defend your company against the scrutiny of the partnership, do primary research and form an independent opinion. Institutional VC’s will take much more time than individual investors will in coming to a decision, especially institutional investors who wish to lead.
The best way to combat the paralysis between “interested” and “in” is to make progress during the diligence process. If throughout diligence you keep growing, you strike a deal, or you get other investor interest it will create a forcing mechanism and increasing excitement over time.
The best way to kill a deal is to give it time — time for the infatuation with a deal to ware off and for the promises of immediate growth to wane.
The best ways to close a deal is to get it done in a timely manner. Have diligence materials ready, make progress during the process, and make sure there are no cobwebs.