Don’t you wish there was a formula that could guarantee VC funding success? There isn’t of course, but there are ways to make the process feel less like a heroic quest and more like a demanding but achievable goal. But how do you actually go about it? And what are the steps involved? If you missed Monday’s webinar with Ryan Azlein of Stubbs Alderton & Markiles and EGFS’ Chief Revenue Officer Gadiel Morantes, here’s the download.
The key is getting investors to believe in your story, to buy into your vision, and to back your management team. Below, here’s a plan to make that happen.
1. Create a game plan. I say this over and over, but, drumroll please: practice milestone funding. What do I mean by this? You’ll greatly increase your chances of success if you identify your milestones and then calculate how much capital you need to raise in order to reach them before you start preparing your pitch and setting up investor meetings.
Here are some examples of reasonable ones. Ultimately though, milestones are highly dependent on the type of business you’re in as well as on its stage of maturity.
- Minimum number of customers
- Minimum number of users
- User engagement
- Financial metrics e.g., revenues or cash flow
- Product launch dates
2. Think through what kind of capital you want and how much it will cost you. Consider your options and do a cost benefit analysis for each.
Of course you can’t understand the pros and cons of different capital types without an understanding of their differences. The main choice is between debt, usually in the form of convertible notes, and equity, whether from angel investors or VCs.
With equity, you’re looking at a priced round: i.e., selling shares in your company for a fixed price based on a set valuation.
With convertible notes, you agree to take on debt in the form of a note that will convert into equity based on the price set in the note’s terms. Converts have two perceived advantages:
They can be quicker and less costly than raising equity because there are fewer terms to negotiate, a correspondingly shorter documentation process, and less legal work.
Because the notes automatically convert into equity at a discount to the business’ valuation at the next equity funding round, in theory they allow founders and investors to defer the valuation discussion. But it’s not always that simple. Investors increasingly demand “capped” notes. Because these instruments place a ceiling on valuation, founders find them less attractive.
3. Take a business development perspective. That is, understand that it will take time: potentially as long as 6 months. Create a project plan and set your goals and objectives. Be clear on your company’s value proposition, as well as that of any VCs you plan to talk to. Work your ecosystem – including asking your service providers – for investor introductions.
4. Thoughtfully target VCs. What do I mean? Do your homework. You only have a small window to get VCs’ time. Focus your efforts on the ones that will have the most interest in and be of greatest value to you. Don’t waste time chasing ones whose expertise and industry focus are not a match for your startup. They won’t be interested or able to offer a lot of value to you. In a similar vein, most VCs focus their investments on companies at a specific stage of development so spend your time trying to meet and pitch those that match yours.
A quality VC name will give you validation in the market as well as raise your company’s profile. Consider brand and reputation and evaluate what kind of support network they’ll provide. This can be a huge value-add in terms of scaling your business. For more on this, take a look at my recent post on partnering with VCs.
5. Network. You never know where your next warm introduction will come from. Join an accelerator program if you can. Demo days provide good exposure and can lead to some good introductions. Of course, getting into one is difficult, so also look at co-location spaces. The best ones offer high quality programming and networking events with founders, funders, and advisers you might not get to meet otherwise.
6. Prepare. Success! You’ve got meetings lined up. That’s great, but don’t get too excited yet. There’s a lot you still need to do:
- Understand your goal. You’re unlikely to walk away from a first meeting with a check, so set a realistic goal of lining up a second meeting.
- Know who you’re sitting across from (see my point on doing your homework)
- Prepare for questions. Be clear on the assumptions around your go-to market strategy, your business’ competitive advantages, and the competitive environment.
- Practice, then practice again. Seriously, do 10-20 trial runs before the meeting.
- Remember, your goal in the first meeting is to get to the second one. Don’t be shy about your ask: “when can we schedule the next meeting?”
7-8. Perfect your Pitch Deck. Tailor your executive summary to the specific investors you’re meeting. Your deck should be 1-12 pages, with any supporting documents (financials, management bios, etc) included in an appendix. Here’s what you need to hit:
- Problem and solution — What problem does your business address? What’s your solution? Why is it better than the alternatives?
- Market opportunity — Outline and quantify
- Management team — The quality of your team is often VCs’ #1 investment criteria. Describe past successes and relevant domain expertise. Be proactive about addressing skill gaps. No one expects you to have everything in place yet, but you do need to be able to articulate a plan for filling in the gaps.
- Technology — Walk them through your offering and explain its unique value proposition.
- Convey your understanding of the competitive landscape
- Funding requirements — Connect the dots and demonstrate how it will enable you to hit your milestones.
- Financials are a major component. Figure out your key metrics. And outline achievable milestones.
9. Tell your story. Be honest and open minded, conveying your vision and your passion. This is about an exchange of ideas, so engage your audience and listen! In our experience, in the best pitches you won’t even get through your deck, because investors are engaged and asking lots of questions.
10. Follow Up! Persistence pays off. Of course, the key is to do it without being annoying or appearing desperate by checking in too often. But even if you get a no at the end of the first meeting, find out why. If they’re hedging because they want to see how you executive on your milestones or they want to gain comfort with your management team, follow up by keeping them in the loop as far as your successes.
Are you looking for VC funding? Tell us about it in the comments section below or contact Early Growth Financial Services for a free 30 minute financial consultation.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, an outsourced financial services firm that provides small to mid-sized companies with day-to-day accounting, strategic finance, CFO, tax, and valuation services and support. He’s a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.