During the creation stage of your entrepreneurial journey, money shouldn’t really enter the transom of your mind in a significant way. But once you realize you’re onto something groundbreaking, a truly disruptive innovation, you’ll have to figure out the funding sources that will fuel your progress from starting block to finish line.
We asked some of the key players on the CI Venture Team—those responsible for evaluating investment opportunities, structuring investments and monitoring portfolio companies—for a look into their playbooks derived from steering hundreds of companies from entry to exit. The following article is a synopsis of their collective wisdom.
Know What You Want
One of the first questions to ask yourself before you even begin to think about raising money is what you hope to accomplish with your company. Do you want a business that you can grow organically and control over the long term? Or do you want to grow fast, strike gold and move on to the next big thing? If your answer is the latter, then venture capital funding is probably your best bet.
Be Worth the Risk
Fundraising strategy is more art than science. Every situation is unique, and the variables are often unpredictable. However, at the risk of oversimplifying the challenge at hand—just build a great company with an ace management team and a compelling business plan in a large and growing market. Accomplish this, and you’ll have a solid inroad to potential investors.
Think Like an Investor
If you clear all the initial hurdles and get an opportunity to make your case to an investor—to explain why your emerging business will be one of the relatively few to succeed—remember that the goals and priorities of VCs may not be exactly aligned with yours. Pitching friends and family, and even angels, who may be rooting for you to succeed is considerably less daunting. With a VC pitch, you have to be prepared to up your game.
VC investors may be drawn in by your moxie and fascinated by your ingenuity, but they’re going to want to hear your realistic expectations for what you can accomplish in the near term and detailed projections of your path to an eventual big payout. Venture investing is a high-stakes business with a singular mission to maximize returns. For the VC, whether your company will change the world is just a means to an end. So, your pitch should be patterned to this messaging.
HONE YOUR PITCH PERCEPTION
You with Me?
Even if you’ve rehearsed your pitch to every friend, neighbor and unfortunate soul sitting next to you on the train, and you’re sure you’ve nailed it, you should develop a keen awareness of the receptivity of each audience you pitch. If you begin to see attention waning, shift gears. If you’re mired in financials, change things up—talk about your competitive edge or increase in repeat customers. Or pause to take a few questions to break up the monotony.
For an optimal fundraising strategy, you should always have multiple pitch styles ready to go to take advantage of unexpected opportunities to discuss your company. You should have a tight elevator pitch, a high-level 10- to 15-minute pitch, and a more detailed presentation for when you have 30 minutes or more.
The adage that you learn more from listening than from talking is one you should take to heart. Plan to spend half your pitch time presenting the problem you’ve identified and your unique solution, and use the other half to answer questions. A big mistake many founders make is getting caught up in the momentum of their pitch without leaving time to address investor concerns.
You should be prepared to respond to all manner of questions about your technology, the market and your business plan. And be ready to discuss the upside for your investors—how they’ll make their money back, the projected revenue growth rate, and the time horizon to a potential exit.
KNOW WHOM TO ASK AND WHY
Narrow the Field
There is a great deal of specialization among institutional investors, and funding from the wrong source can sometimes be just as perilous as not raising enough. VCs tend to focus on specific industries, geographies, fundraising stages and other factors. So, a scattershot approach just won’t do. When you’re creating a capital-raising strategy, it’s important to understand the investors and other players in your marketplace.
As tempting as it might be, don’t jump at the first offer. Take the time to evaluate prospective investors—you should be vetting them as much as they’re vetting you. Think through where you’re getting your money and make sure there’s good alignment with the source of your capital and what you want to do, how you want to do it, and in what time frame.
You should also find out what other companies are in the VC’s portfolio, keeping in mind that if the VC is holding companies similar to yours, that’s not necessarily a negative. It may be looking to create synergies. You may be able to gain an edge by discussing ways that your business will complement the other companies in the VC’s portfolio.
Find a Lead Investor
As you set out on each specific fundraising round, focus first and foremost on finding an experienced lead investor, ideally one at the helm of a strong syndicate with deep pockets and a sector focus that includes broad industry expertise and a network of contacts. This will make the process immeasurably more efficient. With a lead investor, you’ll have (a) the validation of an investor that has provided a term sheet and is willing to take charge of the round, and (b) a professional fundraising organization working for you to fill out the round. Once you turn over the reins, you can turn your full attention back to running your business—at least until it’s time to start finding a lead for your next fundraising round.
Consider Strategic Investors
Another fertile ground to consider for fundraising is strategic investors. These are large players, often the largest ones, in the very industry you seek to disrupt.
A strategic investor can share industry insight and even become your customer. Such an investor can provide a distribution platform to the extent that your product or service is value-added for their customer base. And you can gain access to their global sales force.
On the down side, if you’re working too closely with a strategic investor, you could find others reluctant to invest. Perhaps your strategic investor is a competitor of the investor you’re pitching. You may find that having a strategic investor on your capitalization table could tank your ability to work across the entire industry. Finally, working with a strategic investor might limit your options of viable candidates if your ultimate goal is a strategic sale. Once again, you have to carefully evaluate the sources of capital and all the potential ramifications.
Know What You Don’t Know
When you’re planning a raise, an important part will be building an experienced advisory board with industry experts that can lend valuable knowledge and a fresh perspective you might not have considered. Often your lead investor will be one of your best advisers because it’s someone who’s willing to put skin in the game.
The advisory team should include a few key constituencies: industry insiders who, through their contacts and influence, can open doors for sales. Others whose industry knowledge can help shape your product, service or company offering. Others may be able to open doors to investors or other sources of financing. As you’re planning out your raise, these contacts and connections will be vital.
A PATHWAY VIA MILESTONES
Everyone in the venture capital world talks about the importance of milestones—those specific, measurable achievements that create value and help ensure that your company can continue on its journey. But for investors, the real holy grail is traction, because the more traction you gain, the less risk your company faces, and the more enticing your next investment round will be. So, when you’re touting your milestones as the linchpin of your fundraising conversations, you should explain how each and every one increases traction and decreases risk for your company.
How you define those milestones will vary widely by industry, geography and fundraising round. Even within the same industry, investors will have different opinions. So, it’s best to get lots of input and leverage your network of contacts to make those determinations. Here’s where having the right advisers in place can be invaluable to help you craft the narrative to promote the next financing round.
For each raise, you should make a clear commitment to what you will accomplish with the money raised. And if you don’t hit those marks, it’s crucial to have a compelling reason why and back it up with the milestones you have achieved in the time frame. You should also be prepared for it to take more money and time than you think to hit your milestones. And be prepared for unexpected changes—the macro market can blow up the playing field and leave you scrambling to reset your priorities.
When to Raise
One of the biggest challenges for entrepreneurs is knowing when to begin seeking outside investors. If you go out to market too early, without the appropriate traction, you’ll sacrifice your future credibility. Also, once you take investment money in exchange for an equity stake in your company, you’ve started the clock on building the business for the purpose of delivering a return for investors. So be ready before you go there.
When the time is right, coordinate your fundraising outreach to align with an active pipeline of ongoing milestone wins. For each raise, you should be able to point to a few key traction-building, risk-mitigating milestones you’ve achieved as well as specific progress toward the next two or three milestones on the horizon.
Naturally, it’s easiest to raise money when you don’t need it. If you haven’t hit your milestones and your bank account is on fumes, it’s ridiculously hard to raise money. The broadly accepted rule of thumb for startups is an 18-month runway. That will give you 12–15 months to hit some strong milestones and three to six months to raise your next round.
How Much to Raise
Generally speaking, you should seek to raise no more, and no less, than you can put to work—although, if you’re offered more than you’ve asked for, you should take it. But then the onus is on you to employ the funds to maximum advantage. By the time you head out to fundraise, you should have a clearly stated rationale for how much money you’ll need to hit the specific milestones you’re striving for. And then, always build in a buffer to handle the unexpected—if you have to slow down because you run out of funding, you can lose crucial momentum that may be difficult to regain and you also open the door for a competitor to gain traction and pass you.
Of course, even with the best-laid plans you may find yourself tapped out. But it doesn’t have to be game over. You could just need more time. This is where a strong syndicate is so vital. If you come up short, existing investors can often provide a lifeline. With the latitude of some bridge funding, you may be able to get back on track and gear up to raise a more formal round at a higher valuation to attract new investors.
SOLVING THE DILUTION DILEMMA
When Less Is More … So Much More
The unanimous consensus of the CI investment team is that founders should not be overly concerned about dilution. Those focused less on losing control and more on raising the right amount of capital from the right sources will be more successful. Most really good founders and virtually all serial entrepreneurs are not distracted by concerns about dilution—they are focused on the big picture and the value they will own at the end. If it’s a blockbuster, everyone wins.
You will always need money and connections. And there is a cost in terms of sharing control. Once you take on investors, they may have voting rights and will most assuredly have opinions on a range of issues. But if you have a critical funding need and can strike a reasonable negotiation of terms, take the money!
BALANCING BUSINESS AND FUNDING NEEDS
The only way to balance running your business and raising capital is to figure out how do both. Unfortunately, the two are inextricably intertwined—without capital you won’t have a business, and if you allow your business to languish, you won’t be able to attract new investors. The most prolific founders and serial entrepreneurs either possess or have learned to cultivate both skill sets.
FINDING THE SPENDING SWEET SPOT
Ideally, as soon as you raise capital you will initiate a plan to put the money to the best possible use. Your goal should be to strike a balance between spending enough to ignite fast growth while not becoming reckless with investor money.
Managing your burn rate is an issue of tempering your grand vision with what’s practical. A good board and advisers can be tremendously helpful in this regard. Be open to stress-testing your assumptions with other points of view. Then factor all that in to figure out the proper expense level.
Remember your financial responsibility to your investors. Don’t hire too quickly. And keep spending to a minimum until you have proven traction with customers willing to buy your solution. Then you can consider accelerating spending on sales, marketing, social media, support staff and the like. And don’t overlook the fact that there is a great deal you can outsource—from HR, to back office, financial management, marketing and more.
You will always have to balance spending and growth and keep close tabs so you’re sure you’re generating results. With a formalized 12-month budget and a three- to five-year operating plan, you can easily and consistently monitor your progress.
We have some parting words of wisdom from the article’s contributors:
- Be careful of the deal structure you put in place in early rounds. It could create obstacles down the road and turn off new investors.
- Make sure you have good legal representation—and not just any Choose one who knows the VC business and has done deals before. That sort of expertise and advice will be expensive, but money very well spent.
- The internet has great information. The National Venture Capital Association (NVCA) website has model documents and term sheet, which can be used as a starting point. Big venture funds also have great information on their sites.
- Remember that funding a startup is largely about relationships. You have to be able to make human contact, no matter how smart you are. You might be the right person to start the company, but not the right person to fundraise or serve as CEO.
- To be the most appealing to investors, you should have a laser focus on your defined target market and stick to it. If you’re targeting several customer types from multiple industries, your focus will look fragmented.
NOTE: Special thanks to the following CI subject matter experts who were interviewed for this article and whose insights are incorporated herein:
Peter Longo, Senior Managing Director, Investments
Alison Malloy, Managing Director, Portfolio Acceleration Services and Director, Investments
Douglas Roth, Managing Director, Investments
Daniel Wagner, Senior Managing Director, Investments