The Must-have Habit of Highly Effective Startup Founder. Turn Fundraising Into Your Regular Business Processes
“Hunters at rest”. Author: Vasiliy Perov. Wikimedia commons.
A few months back I published my thoughts regarding the VC-way vs non-VC way for entrepreneurs when it comes to company financing, helping them to choose a path that is right for them personally. Apparently, there are numerous great companies assuming that they want and they are ready to scale fast, win the market rapidly. At the same time, the amount of VC money flooding into the market makes investments inevitable and an essential component of running a high-tech business, especially in the hyped sectors. Experienced VCs today pay rigorous attention to the ability of the target company to raise the next rounds of investments: expecting founders to have a clear understanding of the planned results to be achieved with the existing financing and the power of the founder to do good fundraise in the future. So in this post, I want to elaborate a little bit on that in a few simple ideas.
1. Fundraising process shall become a regular business process and you have to master it
Many times I heard from founders the phrases like “talking to VCs distract us from running a business” or “sorry, but we have a lot of business-related tasks, so we’re not able to go deep with your questions” etc. Without a doubt, it’s way more attractive for founders to build products, business models, talk to clients and the team daily. So fundraising looks like something distractive and heterogenous (finally I found the context to use the word “heterogeneous” :) )
At the same time, the successful round may provide 12–24 months' worth of runway for the Company, and in most cases, the investment amounts are bigger than the Company's annual revenue (at times even a few times higher). So think about VC as a huuuuge customer, who pays for not your product but also partly for the future of your company and your vision itself. Do you still think that a customer who can cover 100% of your sales quota isn’t worth paying some attention to?
There are only a few founders, like Elon Musk, with a great inner genius for fundraising, based on their charisma and leadership. But I believe even in their case it wasn’t purely an innate ability, but rather it was a long way with lots of learnings and practice mastering the skill.
The fundraising process requires lots of energy, attention, and time. But it isn’t the “distraction” from the day-to-day running of the business, it’s just a part of it if you chose to go venture capital way. Fundraising shall become one of the core competencies of the Company, and it’s on founders to master it and turn it into a regular business process.
2. Make the process efficient and repeatable
Let’s assume that you reconcile yourself to the fact that your company is always in a constant fundraising mode. The simplest way to manage it is to build something similar to the Sales + Customer success process. A few tips here:
- Manage your communication with investors in CRM or at least some spreadsheet. Create a system of reminders, when it’s the right time to communicate. Use their contacts to solve some of your business tasks. You know the famous “let me know if I can be helpful” from the VC, so give them a chance to be helpful.
- Decide who is the “process owner” in your company to be in charge of fundraising. I strongly advise that it shall be the only one of founders and in most cases, it shall be the CEO. VC investors give money to people who run the whole business, know its main strengths and weaknesses, and who are actually responsible for the vision and leadership, not to people who give the right answers to questions, even the tricky ones. The rest of the team shall be focused on the growth of the business, which is also critical for the success of the fundraising. So the job of “fundraising responsible founder” is also to bring the right people to the dialogue, when it actually seems reasonable.
- Create a “Fundraising data room” and update it at least quarterly. The good set shall contain a corporate pitch deck, historical statements(P&L, CF, Management reports, etc.), key business metrics statistics, and an updated business plan (Note: as a great entrepreneur you already have it for yourself, not for the sake of investors, right?:). Also, I recommend adding some standard Q&A list you hear often when getting feedback and some additional materials you believe is important to show why your investment opportunity is so great in comparison with any other opportunity in the world. On the one hand, such an updated data room can save you a ton of time, while preparing for the meeting or answering additional questions, with no need to distract your team every time. On the other, it gives you the ability to communicate fast with potential investors and will prevent you from apologizing for outdated materials adding that “everything has changed since we created this deck 9mo ago”.
- Send regular business updates to the potential VCs, make it automatic. Similar to what sales reps are doing, consider this as a “warming up” of an investor. You can never know from outside what is going inside VC fund: are they hungry for new deals, or are they closing few deals right at the very moment, so they are just unable to take a few more even if it’s the right fit. So always being on the radar is the only way to always hit “the right timing” in terms of the internal processes of VCs.
3. Use each and every meeting to its maximum
The VCs’ money in your bank account isn’t the only outcome you can take from the process. Actually, the chances of getting cash from every meeting are less than 1%, so try to get everything you can from potential investors.
First of all, I’m talking about learnings from the feedback. Try to catch patterns, the most common questions to your business, and the main doubts you hear from the investors’ side. Sometimes it can bring you new ideas and insights for your business. Sometimes it can help you to understand what to pitch and how to pitch things that are important for VCs. Create a list of questions to ask during the meetings, be as much curious as you can. You’ll be surprised how people love to share their thoughts and vision. Try to catch at least one idea, one new contact, or some little changes to your pitch from every meeting. Make it your habit.
Eventually, it helps you to crystalize your pitch, prepare better materials for future meetings, and make the whole process faster and more efficient. Remember, don’t change 99% of your meeting for nothing, your main goal here is to improve your fundraising skill.
4. Don’t get trapped into common errors of perception
Most venture capitalists are very polite and won’t give you any negative feedback until you ask them. Inexperienced founders consider this as a good sign and may fall into common misjudgments.
- Required timing to close the round. Among one of the major common mistakes, is an underestimation of how long the process is from the initial interest. Be prepared to spend at least 6 months to get all offers, negotiate them, come to initial terms, finish Due Diligence and Closing terms and then get the money. Of course, there is no standard in the market the shortest deal we closed at Leta Capital took only 2 weeks, the longest one — almost 1 year.
- “Potential investor is very excited, so we’re close to the deal”. Most probably it means that VC finds an opportunity worth considering and go deeper with studying. Sometimes it can be just a polite rejection. Sometimes just a first step in knowing each other. Anyway, you should explore the decision-making process inside the firm you’re talking to. It gives you a more realistic understanding of where you are right now and the probability to close.
- Misinterpretation of terms being offered. Oftentimes founders believe that they are done after reaching an agreement with the investor on “valuation”(whatever it means)and an investment amount. As always the devil is in details, starting with the type of valuation you agreed on. Try to be very careful with that. At least read our articles regarding Term Sheets.
5. Inspire with the long term vision
Last but not least. You have to learn how to inspire people with your long-term vision. Actually, it’s the main thing that differentiates founders with great fundraising skills from the opposite ones. Such founders can sell the future and the feeling of participation in that future. Remember the story about NASA janitor helping put a man on the moon. The same works here.
I won’t get tired by repeating: when you pitch your Company to a VC investor you have to pitch the long-term big future vision as a motivation to invest and today’s results as proof that you’re able to execute your vision. Do not sell only the state of the Company as of today.
Always remember that from the VC perspective the product of your Company isn’t a product for us. YOUR COMPANY IS A PRODUCT. Existing and potential shareholders are clients for that product. Your job is to sell that product to us, so don’t hesitate to use the right pitch and tools to do it. I want every founder to become the best salesperson for that process. Work hard on that, be ready to fail, and get repeated rejections on your way. Еventually it pays back in multiples.
