You're an entrepreneur with a fabulous new business opportunity that will make you, your colleagues and your investors very wealthy. How do you go about raising venture capital?
First let's set some expectations.
On the capital side, the venture capital industry has been down since the dot.com bust 10 years ago. Returns have been dismal, venture funds have gone out of business, many investors have abandoned the venture space and surviving fund managers struggle to raise new capital and try to get liquidity for successful investments in markets that don't seem to care much.
On the venture side, entrepreneurs really have to work to raise serious money today. Gone are the days when a cocktail napkin presentation got you $20 million on a $50 million pre-money valuation. Valuations are very low. Deal sizes are near record lows.
Here is a quick list to stick up on the refrigerator to guide you in your quest.
1. Get your introductory pitch tuned. One chance for a first impression? Pretty much. Table stakes for your venture are a game-changing technology or product laser-pointed at a large, willing market, but that is not enough. Spit it out into a great one page quick-read that is your elevator pitch. Make it impressive, memorable, believable and easy to understand. You have to hook your target fast.
2. Nail your business plan. You piqued your investor's curiosity with a killer summary … now deliver the full story with punch. Write it yourself. Make it passionate, back it up with solid facts, research, competitive analysis and financial potential.
Make sure to complete the reading experience with a strong investment case that includes a realistic value on what you have done so far, investment terms and realistic exit timeframe and valuation. Investors want to know how they can get out before they decide to get in.
3. Play the odds. One out of 100 ventures like yours raise venture capital. Why should you succeed over the others? Increase your odds by playing the odds. Do exhaustive research on who should be investing in your deal at the stage you are at.
Find 10 to 20 of them in Canada, the U.S. or overseas, depending on your deal. Pitch them all as if they were your only date. Get half of them to commit to doing some due diligence. Try to get term sheets from two or three. Seek healthy competition between them or work them to co-invest.
4. Listen to what they say. We may sound like arrogant jerks poking fun at your baby, but we see 500 deals a year just like yours, and we give you the straight goods. Why would we lie?
If you don't make the impact you're expecting, figure out why. If a pattern emerges from the feedback, such as, "you're a bit early with your product, your team is too weak, your market plan is fuzzy, we don't believe your market is ready," address these comments head on or you won't get funded.
You may need to back off for 90 days and fix the holes in your plan or your deal is dead.
5. Find out what deals are getting done. The venture industry publishes some deal data, but the blogosphere is filled with it. Different local markets have different values for deals that get done.
Silicon Valley deals have their terms, as do deals in Ontario, New York, Israel, Boston. And, pulleeze, don't compare yourself to the tiny number of uber-successful ones like LinkedIn, Zynga or Facebook. Trust me, these are anomalies.
6. If you do get a term sheet from an investor, go find another one. There is nothing like an auction to keep everyone honest. If you only have interest from one party – and they know it – your initial offer will get ground down during due diligence to a fraction of what you're hoping for.
It's like selling your car. If your only prospective buyer takes it to a mechanic and comes back with a long defect list, good luck trying to get a good price.
However, if your buyer knows that another buyer is coming in 10 minutes, the chequebook comes out.
7. Build the business while you shop for money. The worst mistake most entrepreneurs make is having a revenue projection labelled "month 1, month 2, etc." that starts with receiving investment.
It is pathetic having these entrepreneurs back for a repeat visit six months later, and they're still waiting to kick off month 1. Investors like to see a business that's alive. If you come back and you have successfully executed your six-month milestones, your probability of funding goes up. Probability goes up a lot more if you achieve your milestones early.
8. Collect awards. Fill your trophy case. Go after business accolades. Go after third-party endorsements. Get glowing customer testimonials.
In 25 years in the venture business, I have never seen a time when the trophy case has been more important to investors – at least to get you through to the due diligence round. This must be a cultural offshoot of the reality TV, American idol culture generation. "If you can't see the shine, it don't shine."
9. Keep selling your angels and other early investors. It just might be that you don't attract investment capital yet at terms that you and your investors find reasonable.
This may require your existing investors to pony up another $100,000 or a million. Keep them believing by continually giving them your best pitch, too.
Ideally, you want them to think that the outside venture funds are too stupid to see how good your deal is.
10. Have a back-up plan. The venture industry is so timid these days that your best shot may be a strategic partner, such as your best customer or a key supplier. Pitch them constantly to see if they can become your investors. •
