Venture Capital Fundraising: The Why, The When and The How
The CDTM is committed to its goal of nurturing and empowering the innovators of tomorrow. The success of many German startups that trace their roots back to the Center is a testament to this fact. Two such startups that have been stealing the limelight for the past several months are Personio and Forto (previously FreightHub). Their founders Hanno Renner (CDTM Spring’14) and Michael Wax (CDTM Spring’13) decided to distill their experiences from founding their ventures and raising capital into a 3-part CDTM elective — The Basics of Venture Funding. In this blog post, we walk you through what this elective was about and what we, as students, took away from it.
We were a class of 25 students with varying amounts of exposure to venture funding, so we started the course with some very foundational questions. The first among these was ‘what qualifies as a good reason for raising capital?’. A discussion about this question gave us an insight into when it is a good time in the journey of a startup for its founders to start looking for funding. This was followed by a discussion about the various sources of capital. The lecturers covered all the popular themes such as incubators and accelerator programs, loans, government grants, and of course, equity financing from angel investors and venture capital firms. It was quite ironic that at this stage we got a disclaimer from the lecturers that VC funding is the most expensive form of financing and should therefore be considered only after a startup has explored all other funding options. This was, of course, prefaced by the fact that these other funding options have several limitations such as personal liability for the founders. So, in a lot of cases, it certainly makes sense to raise capital from VC firms, and therefore, it makes sense to offer this elective. ;)
Things took an interesting turn at this point as we were joined by Dr. Patrick Auerbach from BMH Brautigam. Patrick is a lawyer who specializes in venture capital law and was, therefore, the perfect candidate to speak about the difficulties that young venture founders can find themselves in, during the fund-raising process. Patrick spoke extensively about founder vesting and VSOPs. He also enlightened us with his thoughts on ‘starting it right’ with convertibles and then proceeding to equity financing. The session with Patrick gave us a unique legal perspective on the venture capital industry and was riddled with questions from a very intrigued audience.
In the second lecture, we moved away from the ‘why’ question for fundraising and dove into the topic of ‘how’: how does the fundraising process look, how do we structure a pitch deck, and what the investors are looking for. We covered the basics for the whole process starting from pitch deck preparation to finding a partner and performing final due diligence to signing a term sheet🎉. The lecturers walked us through the process by referring back to their personal experiences with raising funds for Personio and Forto that resulted in successful fundraising rounds. We focused on preparing and delivering the pitch deck most extensively and received insights on what the investors actually want to hear from the pitch — that the companies have, among other things, a great team, a good idea, paying customers, and proof of rapid growth. For a richer discussion, Hanno and Michael presented their pitch decks from when they were raising funds a few years ago. The audience got to ask follow-up questions about the content, how they approached presenting it and even offered critique for their pitch decks. The discussion led to a summary of lessons learned and some additional advice from their personal and first-hand experiences.
VCs do not bite!
In the last session of the course, the highlight was having an open discussion between the class and veterans VC investors covering all stages of investment, from pre-seed to growth series. We would be remiss if we forget to thank Judith Dada (La Famiglia, CDTM alumna Spring 2014 ), Max Rimpel (Index Ventures), and Christian Meermann (Cherry Ventures) for joining us at CDTM again and sharing their experiences from the VC Industry with the community. The panel did not have it easy with the questions, though. An inquisitive cohort of students had questions ranging from common topics like how to value an early-stage company, to more challenging ones related to understanding the role of VC firms in the future of society, and their responsibilities towards their limited partners and towards sustainable business. From the students’ perspective, it was a fun and eye-opening experience to peek into what working on the investing side looks like. In fact, a significant amount of time was dedicated to the topic of finding and developing talent in the VC world, so this session may lead to some future investors emerging from the audience.
Finally, in the true spirit of being hands-on, after all the input received during the sessions it was time for the Centerlings to put what they had learned into practice. A mock exercise for creating pitch decks, term sheets, and negotiating the terms as any founder going through their first financing round would do, was the final deliverable to an awesome course that will surely be of great importance for the success of future founders and investors in the class.
A big thank you to Hanno Renner, Michael Wax, and Philipp Hofsommer for organizing this elective and making the journey both enriching and fun, even in the virtual setting!
