After successfully raising nearly 10 million dollars between two companies that I co-founded (UrbanBound and Hireology), I realized that I've learned quite a lot about the process. Here is the second half of the 20 lessons I learned. (Check out Part 1 here)
11. Raise More Than You Need - Regardless of how much capital you raise, you will likely wish you raised a little more within reason. Raising more money will allow you to attack an aggressive hiring and growth plan and hit the ground running. Raising capital is a lengthy process, and it takes entrepreneurs out of the day to day of their business. The transactional cost of having to raise an additional round within 12-24 months will be a drain on time, money, and resources. You should probably go ahead and take more money as long as the terms are reasonable.
[ibimage==27095==Medium==none==self==ibimage_align-right]
12. Read Venture Deals - Brad Feld wrote a game-changing book that every entrepreneur must read. It is a balanced view between the perspectives of venture capitalists and entrepreneurs. Since the process of funding is emotional and complex, the book will serve as your road map during difficult and exciting times.
13. Know Their Portfolio - Understanding the existing portfolio of the VC is critical to your pitch. We incorporated an entire slide of a VCs portfolio client that had a successful exit. This brought back positive emotions for the partners while we explained to them how our business would likely get similar results. This resulted in a term sheet immediately.
14. Don’t be a Solo Founder - You have little chance of raising capital unless you have a team. Going at it alone is a red flag. The VCs want to invest in a team, and it's not a good sign if you can’t get others excited about your business. No single person can do it all. You need sales, operations, finances, marketing, etc. Find your co-founder ASAP and you will be much happier.
15. One Goal...One Mission - You must get several term sheets. The terms you desire become more of a reality when you have several interested parties looking to invest in you. Having several term sheets will create a market for your financing, and increase the odds of you being happy with the term sheet you sign.
16. Be Yourself - Most entrepreneurs get very nervous during a pitch and have trouble communicating their vision and passion. Just remember to be yourself, and practice as much as possible. Your preparation will give you the confidence you need to act accordingly. My partner and I went into each pitch with the attitude that they have to pitch us as much as we are pitching them.
17. Top 3 Terms - Before going into a negotiation, know the three most important terms that you want to negotiate. For us it was valuation, options pool, and board control. Start off your negotiation with the VC by learning what terms are most important to them. This guides conversations down the path of swallowing the largest frog first. If you can’t agree to your top three terms, you likely won’t have a deal.
18. Get References - If a VC provides you with a term sheet, ask them for three references. It's best if they can provide you with two entrepreneurs that had a successful exit, and one entrepreneur that struggled and needed assistance from the VC. Asking for references also buys you some much needed time if you are not ready to sign the term sheet. Stalling can help if you expect to receive more term sheets in the near future.
19. Show Up and Throw Up - The most effective pitches are two-way conversations. Stop talking throughout your pitch and wait for feedback or questions. Raise open-ended questions and allow VCs to challenge you. The key is not to get defensive, and to be honest if you don’t know the answer. Use it as an excuse to follow up after the meeting.
20. Ask for Referrals - Not all VCs are the right fit as many focus within very specific verticals. If your company shows promise but doesn’t fit within the VCs investment strategy, be sure to ask for referrals at the end of the meeting. The VC community is very small and word travels fast with the help of a few good referrals.
Whether you’re an experienced or aspiring entrepreneur I hope my lessons learned from raising capital will have an impact on the future growth of your business. If you found the information valuable and would like to read more of my blogs please visit www.startupnightsweats.com.
*Jeff Ellman is the co-founder of UrbanBound, Hireology & Homescout Realty
