Speaking the VC language across the Startup/VC lifecycle — PART 2

A few months ago, I published part 1 of a recap of my Web Summit Masterclass with the aim of providing more clarity around the stages of venture capital funding and best practices for successful fundraising. We went over how VC works, how to decide whether VC money is right for you, as well as what to expect from the first meeting, the due diligence process, and the Investment Committee.

So now you’ve made it through the first call, the due diligence, and you’ve gotten investment committee approval… Congrats! You’re now a portfolio company! What does that mean? And what’s expected of you? I’ve broken that down below…

• This is where information rights will come into play. VCs will want to know about your metrics, key hires, expansion plans, product development
• You should also expect that the famous VC value-add had to show up some time. VCs will have tried to sell you the dream of joining their portfolio, this is where they should prove their worth.
• Not all companies need VC money. But if you do, expect to ‘grow-up’ and be asked to put in place processes and systems that most companies don’t have
• One of the main things you might need to put in place is a Board of Directors. A well put together and well run board can make a world of difference
• LPs will look closely at companies. Most LPs not only invest in VC funds for a financial upside (i.e. making money) but also to become customers or co-invest

How to prepare for this

• Ask VCs to send you templates of what they expect to see. You might be overpreparing for something that can be made simple. This can get tricky and, from what we see, it is typically on the bottom of the priority list for founders but, if left unattended, can take up more time than needed. Make sure you have a template that can work well for most VCs and that it is regularly updated with latest information.
• Make sure you understand all the resources that VCs have and in what conditions. They might have valuable Venture Partners, Advisors, Mentors that you can use, additional perks and benefits (through some of their portfolio companies), or even Demo Days you can attend. Also, be weary of VCs that try to manage your company for you
• Prepare for Board Meetings. Best-in-class founders do regular catch-ups with their investors ahead of the board meeting, to make sure that the information presented isn’t news to anyone and that you managed to incorporate feedback into it. There are plenty of resources out there on how to run effective board meetings but each case is slightly different.
• Compliance is key for most VCs. Be sure that you adopt the policies you agreed to, continue to ask for help with things you don’t know. While it might seem overkill, it is much easier to implement when there’s 3 of you in the company rather than try to do it while managing 100 employees
• Ask to speak to LPs! Only 15–20% of portfolio companies ask proactively for this, but there is an incentive for everyone to make it work. Note that LPs will be paying attention to what VCs report back to them, which is where you can think of information rights as beneficial to you, rather than it just being something you need to do to keep the VC happy. Based on your progression, these LPs will start become interesting in speaking to you, to either use your product or even invest in the business.

At some point (all being well), you will want to raise another round and will be looking for follow-on investment…

What to expect

• By now, your investor will not only be looking at new companies but will, most likely, have dozens of portfolio companies asking for additional investment. You will be compared not only to your competitors but to all their opportunities
• While some funds (namely in the US) are quite quick at backing founders multiple times, most funds aren’t. The process will not be entirely from scratch, but you will hear a lot of the same questions from before!
• When VCs first invest in your company, they are backing mostly your team, product and market size. To keep doing the same, they need to back your execution (i.e. traction, product development)

How to prepare

• By default, you should consider this to be almost as if you were talking to a new investor. Have a good data room, proper metrics, and a good equity story — this means that you will be able to explain what has happened with the business since this investor first backed you, how you performed against the plan you had, and what is yet to come. In essence, you have to sell to the VCs that they have made a good investment in you and the best is yet to come
• Prepare case studies, customer testimonials, major product releases — virtually, any proof of traction that you can show how much you progressed from when you were in that small co-working space
• Don’t rely solely on existing investors! When investors first come in, they will want to see other people believing the same thing when wiring funds. But more than that, they will want to see people coming in later that believe now even more than they did.

And finally, at some point, you will look to exit the business…

What to expect

• Exits are messy. Through M&A, IPO, liquidation, trade sale — there isn’t a single exit process that is flawless (our easiest exit took 3 months to complete, even when everyone was incredibly happy with the deal)
• Your team will need to know at some point. You need to keep them engaged while you’re, to an extent, selling their livelihoods
• You will be at the bottom of the pile. After so many rounds, you will not only have to pay back your investors, but maybe some debt facilities, creditors and the likes — the total pie left for you is much less than you ever thought.

How to prepare

• INVEST IN A GOOD LAWYER — again, even though they are expensive (and you will not only need one for you, but also one for your investors), they help keeping a consistent message in front of buyers. If a buyer senses that there is a misalignment between you and your investors, they migth try to use this to bring down the price or negotiate harsher terms
• Make sure that you previously incentivized the team. ESOP works wonders on more senior hires, but having discretionary bonuses can help make sure the company keeps going while you’re working on getting everyone an amazing payout. Additionally, most hires will not have a clear idea of how options work, so invest some time in explaining to your team how the process works and in what terms will they benefit from it
• While you might be left with less than you thought, this can be anticipated when you originally raise rounds. Make sure that, whenever you raise new capital, you understand the implications of giving away liquidations preferences (and to whom).

In summary, when creating a start-up, you have to consider your journey from start to finish. Being a founder is not easy work, and it doesn’t get much easier as you grow — investors become more sophisticated, you get more demands from them and your own team, and you need to start dealing with different regulations, among many other things. However, I hope this is a good guide to (at the very least) help you be better prepared for investor expectations, and (hopefully) ensure a long-lasting relationship. And, to many founders, an exit is where their VC journey begins or, better yet, a new start-up is born.

If you missed Part 1, you can find it here.