A Guide to Managing Your Venture Capital Fundraising Cycle
At the early-stages, entrepreneurs are concerned with a host of problems and uncertainties surrounding the development of their company from how to hire talent to what it takes to get that product built and sold to customers. But overwhelmingly, we see entrepreneurs struggle to understand how the early-stage investment process works, and what they need to do to secure investment.
As luck would have it, Hyde Park Angels Principal Michael Sachaj recently shared the five core steps entrepreneurs should follow to gain an investment with an audience of early-stage healthcare entrepreneurs. Relying on his experience doing and closing 30+ venture deals, Michael shared his five steps for achieving funding success.
1) Build a Great Business First
If you think raising venture capital is your biggest obstacle in building a successful business, you’re wrong. Of all the things you have to do, from “hiring multiple critical team members, firing underperforming founding team members, inspiring customers to love and use your product… [growing] sales in a consistent way,” and more hundreds of other operational challenges, fundraising should not be the most challenging.
Why? “Because having a strong team, having a product that’s being accepted in the market, and growing your sales is going to be able to drive your ability to raise venture capital money.” In other words, raising venture capital is much easier if you’ve taken all of other painstaking steps to build a truly scalable, growing company.
2) Understand You’re Risky
Early-stage companies are risky for investors. There are so many unknowns associated with a company that has just started; unknowns about product viability, market adoption, scalability, operational efficiency, and even about whether it’ll be around a year later.
In fact, the reason “why valuations grow as you continue to grow your business is that you remove a risk in your business and your company is worth more.” Or at least, this is what should be happening in an ideal scenario. If you’re not growing and your valuation is stagnating, venture capital is probably not the right option anyway.
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However, so much of dealing with investors is being able to clearly understand the risk they take on by backing you, and assuaging some of the fears they may have. Specifically, communicating the value of your business, laying out how you will grow and achieve market share, acknowledging some of the risks that come packaged with your individual company and addressing them, and valuing your company reasonably relative to its stage.
3) Develop a Rapport with Investors Early
One of the best ways to alleviate fear in your investors around the risks associated with your company is to build relationships with them early. A preexisting relationship “will get investors to be willing to invest outside of an algorithmic look at your business, but really looking at it holistically, looking at you as a founder and the broader market.”
Leverage portfolio companies, as well as warm introductions to the firms’ investors to learn how to build connections. From there, make sure to be respectful and prepared, always avoiding the hard sell in favor of developing a rapport. You’re more likely to succeed in gaining an investment if you develop this type of rapport before you raise money because you simply have more time to build trust and credibility.
When you get the chance to meet with these investors and open up the communications channels between you, there are two key components to gaining their interest. First, “being able to demonstrate that you have a really good handle on the business as you’re building,” and second, “outlining the milestones you’re achieving so that investors are not seeing a single point on a chart but the trajectory of the company –your growth as a leader and the growth of the company from a metrics perspective, of your team, and just the growth of your strategy.”
4) Always Qualify Potential Investors
As an entrepreneur focusing on the truly monumental task of building a scalable, growth-driven business, you have to learn to cut through a lot of noise to focus your time on what really matters. That same philosophy applies to investors, who are not all created equal, at least not for you.
“You can look at some of the aspects that qualify if an investor is a good fit for you. Three of them are the stage, industry, and location… of the [investment firm.” Does your stage, industry, and location line up with their basic criteria? From there, look at a firm’s previous investments. This will help you refine further what the types of deals the investors typically do.
From there, start ranking investors on whether a meeting would be valuable. You should consider whether there’s a likelihood of investment, and even if there is, would you even want that investment from that firm. What benefit – other than capital – would they bring to the table?
5) You Need Deal Champions to Close a Round
“Venture capital firms are not one big entity – they are three partners, five partners ten partners, and behind every investment there is actually one partner that stood up in front of the rest of the partners and said, ‘We should make this investment.’” The same applies to any investment group, which means you need to focus on cultivating a relationship with the person who will have both the reputational clout and interest to champion your deal internally. This is the person who will largely managing conversations and questions that typically would not go to you.
It’s in your best interest to find this person, usually in those rapport-building and moneyball-scoring stages. From there, validate that this investor really will go to bat for you, and if that’s the case, prepare to give him/her all the tools in your arsenal to help you both close that investment.
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About Hyde Park Angels
Hyde Park Angels is transforming early-stage investing by taking a people first approach. The organization is the largest and most active angel group in the Midwest. With a membership of over 100 successful entrepreneurs, executives, and venture capitalists, the group provides critical strategic expertise to entrepreneurs and the entrepreneurial community. Nearly 40% of our members have founded a company, 88% are CEO’s, top executives or corporate board members, and 100% invest in startups. By leveraging the members’ deep and broad knowledge of multiple industries and financial capital, Hyde Park Angels has driven multiple exits and invested millions of dollars in over 40 portfolio companies that have created over hundreds of jobs in the Midwest since 2006.
About the Author
Alida Miranda-Wolff
Alida Miranda-Wolff heads up communications and strategy at Hyde Park Angels, crafting and disseminating the organization’s brand in all forms across all channels. In addition to single-handedly building HPA’s integrated communications plan and executing its core elements, Alida manages membership, partnerships, portfolio company support, and all community engagement.
Prior to joining Hyde Park Angels, Alida served in a variety of journalism, marketing, communications, and management roles, specializing in creating spreadable multimedia content for tech-enabled businesses at all stages. Alida has run several Kickstarter campaigns, including one of the most successful in Chicago history, and still mentors companies running their own campaigns.
Alida graduated Phi Beta Kappa from the University of Chicago in 2014 with multiple honors and awards. She remains active in the university of alumni network, serving on five advisory boards and committees. Alida is also a published author and poet, with two poetry chapbooks currently in print.
