Navigating Venture Capital’s Murky Waters
No secret that we at SWARM have worked with, and work with startups. As a part of our business these are some of the most fun and challenging projects because they require us to really dive into the product and make those assumptions that will place the MVP at launch as close to product market as you can. But unlike enterprise that has an annual budget for digital or product, startups need to cut their teeth by raising money; first from family and friends, then from Angels and finally from VC. This article is about raising from VC’s, only where you already have something that’s getting a bit of traction, still needs polish, and cash to scale.
So say you’re there, have a three months of runway left, four maybe if you stretch it. What do you do?”
A few questions to ask yourself before seeking financing:
- Can we bootstrap/squeeze cash a little longer?
- What do we need this money for?
- Do we have a product with clients and users?
- Do we have healthy growth?
- What kind of a capital structure are we looking to have in the future?
- Will we need subsequent rounds of funding?
Fundraising has a strategic purpose. Raising money doesn’t mean you’ve made it — far from it — and it’s not about getting written about on the top blogs. It’s a vehicle to help your business grow, expand and capture more market share. In entrepreneurship there is no end, there only is.
FROM A FIRST GLANCE, TO GETTING INTO THE SACK
Build Relationships: Business is about relationships and raising capital is no different. Start building those relationships early by asking for advice (not money), and asking for introductions. These folks don’t know you, and you don’t know them.
Raising capital is not just about the capital, but finding a partner who will help you grow. Entrepreneurs constantly make the mistake of thinking cash is cash. It’s not. It’s a relationship.
Do your due dilly: Just as VCs will conduct due diligence on you, your cofounders, business and history, you should do the same with each fund you’re speaking with. Talk to the people who’ve worked there, portfolio companies and their employees. Get a sense for who these people are and how they work with their portfolio companies.
You may want a hands-on approach, or perhaps a hands-off one. Getting to know the people behind the paychecks is unavoidable.
East Coast vs West Coast: First thing’s first, if you’re in NYC and looking for funding, you’ll have more luck with funds that are either NYC-based, or have a presence here. Investors want to know where their money’s going, and by going to west coast funds without a lead or personal intros, the first thing people will think is: “why are they reaching out to us? Did everyone in NYC pass on them?”
The mentality between the east and west likewise differs. If you do go out there to pitch, there are a few things to consider. NYC funds are much more market driven. They want numbers and stats on how you’re going to grow in the market. The west coast, however, is more about the vision and whether you can disrupt a market or better yet, create a new one.
Be honest: Never be afraid to ask questions and bring up problems. For example, if you found a lead investor, but couldn’t convince other funds to hop on, don’t be afraid to bring this up. You might worry that telling this to your lead will make them pull out. It may, but more likely than not they’ll just look to their network for help. Remember, this is all about trust.
Shit terms, tranches, and inflated egos: Remember that due diligence we spoke of? Good. If you did your job right, you’ll know whom it is you’re taking money from, and how they work with companies. If they’re ego driven people, stay away. If they offer you wonky terms for capital distribution, say three tranches of 100k for a total of 300k, under various caps — run like hell. Not only does this create artificial down rounds, but a messed up cap table early-on will negatively affect subsequent fundraising effort. And I can’t stress this enough, get to know the jargon.
KAPOOOW: An exploding term sheet is one that has a finite expiration date, typically 72 hours or less. VCs will typically give these to companies under two conditions. One: they believe you’re leveraging them to get better terms from other funds who better fit their culture, and that you the entrepreneur does not want to work with them. Or Two: they want to put you into the corner and force your hand to sign a deal. The second type is much more dangerous than the first as the terms they offer may be outright rubbish.
Use math, and get a good lawyer: It’s imperative to get a solid lawyer on your side, learn the jargon, and understand the math behind how these deals work. Some of the law firms to look at are Lowenstein LLP, Orrick, Gunderson, and Withers.
Follow your gut: At the end of the day, follow your gut. Fundraising is a time intensive, complex process where you’re selling yourself, your team, showing maturity, preparedness and ability to grow a company. During this time, you’re also getting into a relationship with people — one where you should use your own emotional intelligence to decide whether or not the deal is good for you. After all, a good deal is one where both parties are happy, and not a zero sum.
While brief, I hope this guide points you in the right direction and helps you pick investors that bring the most value to your business. If you have any questions, please feel free to ping me.