Making the decision to work with a venture fund is one that changes the trajectory of a start-up. It's not easy to pick the right long-term partner while forging a relationship that can survive the inevitable disappointments, resolve the unforeseen conflicts, and monetize the mutually earned successes to come. In the past two years, my business partner, Michael Krasman, and I have had the opportunity to raise nearly 10 million dollars between two companies that we co-founded. As a result, I have direct experience in the process and I'd like to share with you some things I've learned. In April of 2013, my business partner and I debated if we should continue down the path of raising private money, or if we should partner with venture capitalists to help us scale faster. We rolled out a 90-day plan to find the right VC’s by targeting those that had proven track records, consistent up rounds of financing, and successful exits in our space. After finalizing our list we went on a mission to raise 5 million dollars. Here are the top 20 things the experience has taught me.
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The 10/20/30 Rule - It's simple. The pitch deck should be no more than 10 slides, 20 minutes in length, and the font size should be no smaller than 30. The fewer words the better. Have your marketing team (or outsourced agency) build the deck with you. It has to tell a story that connects with both sides of the brain.
Social Proof Goes a Long Way - Including the logos of well-known customers that have used your company is very powerful. I often found myself answering questions through short client issues that we solved.
Q & A - Prepare a list of every possible question that you anticipate being thrown at you. Write down the questions you were asked at each pitch and add them immediately to your list. By your 5th or 6th pitch you’ll find that you can predict 95% of the questions.
Solve a Problem - When selling the vision do not share ideas, share problems and your solution to them. It's easier for the VC to grasp the concept if you present them with a problem, and then solve it. I believe ideas are meaningless if they don’t address a core problem that someone is willing to pay you to solve.
Rhythm is Gonna Get You - If a VC likes your business they will immediately pepper you with questions throughout your pitch, making it impossible to establish a rhythm. Stop what you are doing and answer their questions. Don’t wait until you get to the slide with the answer. They control the meeting, not you.
Passion is Critical - Your passion and enthusiasm has to shine through. VCs are investing in you, not in your company. They have to be 100% confident that you will do whatever it takes for your business to succeed.
Fund Status - Know the status of the VC's most recent fund. When was the last time they raised money? When do they expect to be raising a new fund? Is their last fund higher than the fund before? If yes, this is a very good sign that they have experienced success with their limited partners. Research and learn if they are still in their commitment period where they are actively looking to invest in new companies, or if they are past that phase altogether. I would recommend asking every VC when they made their last investment, and how many new investments they will make out of their current fund. The closer the fund is to the end of its life, the less likely you are to get a deal done.
Pitch with Two people with Caution - With two founders pitching, the VCs look like they're watching a tennis match while the founders take turns speaking. That's why I recommend letting one founder do the majority of the pitching while the other fills in the gaps with short stories or important selling points.
Relationship First - Remember that once you agree to terms with a VC, you are in bed with them for the remainder of your business. We had several term sheets, but at the end of the day it came down to the VCs that matched our goals and values. Raising from a top-tier VC is great, but what’s more important is that you really like the VC partner investing in you. The partner on your board is more important than the fund that finances your business.
Know What “Market” is - It is certain that you will meet with many VCs who will throw several not-so-favorable terms at you. They will push you to see what they can get away with, and they'll speak through the “market” to drive down price. You will need to know which terms are common, and which terms are rare and could be harmful to your company’s future. To figure out what the common deal terms are, it is recommended that you hire a great attorney or track down reports from larger law firms that do a lot of startup transactions.
