Clients frequently ask how to approach the first round of venture capital. As a recent outside general counsel to well over a hundred emerging growth private companies in the technology, life sciences, medical device, and clean energy industries, I am sharing this quick guide to going about it thoughtfully and concisely.
Are You Ready for Venture Capital?
The bar to raising the first round of venture capital has risen. Are you ready? Do you have a reliable founder team, do you have intellectual property, have you developed a minimum viable product, = have recurring revenue? What I am getting at is, do you have what it takes? These are all questions that might have been answered post-Series A. Now, these questions are responded to after a friend and family round, a round of business angel financing, and a pre-seed or seed round. While venture investors abound that like seed deals, you need to be ready. You might only get one shot at a meeting with an investor. Make it count. Don’t even go there until you have a story, a team, and some indicia of progress.
Build an Advisory Team to Support Your Startup Founder Team
Your founder team and advisor team will significantly impact your rate of success. Secure a cabinet of formal or informal advisors that have raised venture capital money in a relevant space. You will greatly benefit from reliable counsel, an experienced attorney, a detail-oriented accountant who can help you model out revenues and expenses for 5- and 10- years out, advisory board members from industry, board members with a strong stomach, maybe even a banker at a later stage. Your advisors should be skilled in emerging companies and venture capital markets. Ask other founders in your co-working space, ask colleagues, and acquaintances for recommendations and references. Interview them. Do they fit?
To Get Venture Capital, Prepare Great Marketing Documents
Most businesses approaching venture capital for investment will need three documents:
- An executive summary (1-page only)
- Investor PowerPoint presentation (10 slides)
- Financial model
And before you send these materials to your investors, your advisors who regularly review these documents in the course of their work for other emerging growth companies or venture capital firms should review. The documents should be visually appealing, backed by verifiable-data, well-written, and tell a consistent story. Numerous online resources can help you with models, templates, and examples. There is a cottage industry of services to help you prepare the documents and sail through the meetings.
Great Marketing Documents Tell a Story of Problem & Solution
Great marketing documents will tell a story that a venture capital firm can build conviction around, and will need to address the following key points:
- The problem. What is the problem in the market, or pain point, that you are addressing? This is both a conceptual point to communicate in words, but also to be quantified in dollars whenever possible. You may include data on market size, vertical, and sub-vertical markets that the product can address over time. The conclusion is that the opportunity is significant.
- The solution. You should have a clear message of what your product will deliver, and how it provides the solution to the problem. You need not describe the secret sauce, and indeed, you should not disclose patentable information here, as no NDA will be available, and a patent won’t be possible if not kept secret, but you have to give a lay-person, non-technical investor enough information to want to invest. You should describe what is innovative, what your competitors can’t do. Here is where you should demonstrate that you already have a minimum viable product or MVP.
- Who are the customers, and how will you find them? Investors will need to know who has previously agreed to become a customer and whom you are targeting. At the seed stage, you might show letters of intent, but at the venture capital stage, they will want to see real customers and a practical strategy to acquire more. Sometimes, this will involve identifying channels, channel partners, distributors, and how your product will go to market.
- Management team background. For many venture capital investors, this is a crucial part of your pitch. The founder team is what a venture capital firm is investing in. What is their background, what does each founder bring to the table in terms of expertise and credentials? Have they raised VC money before? Did they return capital and make money? If none of your founder team has raised money previously, your advisor team and board members become much more critical.
- Investors expect to see a detailed competitive analysis of existing competitors, both in terms of companies and solutions. Many founders see their product as so innovative that there are no competitors. Don’t succumb to this hubris. If you don’t fully understand the barriers to success, whether in terms of other solutions, no solutions, different technologies, then you won’t be able to convince an investor of your ability to guide the ship.
- Financial model. The business plan and economic model should demonstrate on a month-by-month basis over three- to five- years when you will incur costs, recognize revenue, or need to raise cash. Investors will need to understand how far their money will go, and when you will need more. They will want to know when you are cash out and ensure that you have enough runway to hit the benchmarks required to raise the next round. In 2020, there is a renewed focus on the underlying profitability of the enterprise at scale. Your model should address this. It should also explain the underlying assumptions. Finally, an investor should see a path to a liquidity event. When do you sell or go public? In some verticals, the path to liquidity should be shorter. In others, particularly life sciences and medical devices, they come at inflection points when regulatory milestones are achieved, which can be lengthy. Remember, venture capital investors are generally looking for a 10x return.
- Make an ask. Founders often forget to make an ask. Investors need to know how much you are raising. You don’t need to tell them a valuation, just how much you need and what you will use it for. This page is often called “Use of Proceeds.”
Develop a Targeted List of Potential Startup Investors
In today’s hyper-data driven world, you can readily find verifiable information on what venture capital firms invest in your verticals and sub-verticals, in your stage of growth, in your geography and according to many other indicia. Crunchbase, Pitchbook, CB Insights, and many other firms provide this data for free or for a nominal fee. These firms, among others, can tell you who else has invested in your space, the name of the individual partner, the check size, other syndicate investors, key terms, all of which should help you form ideas on how to meet them. Data is also available on how much the fund has left to invest, other portfolio companies and potential partners and competitors. All this data will help drive you to the venture capital firm that is the best fit for your business.
As you develop your list of potential investors from commercial databases and your advisors, it should become a spreadsheet that tracks everyone you have met or want to meet,various touchpoints and pick your best entry point. The optimal entry point for most VCs is another entrepreneur they are invested in. Start there.
Be disciplined. Only attempt one entry point per person and firm. Don’t ask multiple people to make intros to the same VC. And you’ll lose credibility if you get introduced to one VC in one firm, don’t take a pass and then seek an intro to another VC at the same firm.
Once you identify whom you should meet, and your best entry point, ask someone to make an introduction on your behalf. This introduction usually takes place by e-mail and follows the rule of “double-blind” or “double opt-in.” The person making an introduction for you must first ask if you are open to a new introduction to a specific person. Once confirmed, that person checks with the other person to find out whether that person is open to an introduction to you. Both parties have to opt-in freely to make it work.
The request for an introduction must be explicit, and the recipient must be able to understand the ask quickly to determine whether it makes sense to move forward. Your request should be personal and should be designed to be answered with a “yes, I’d like to meet” so and so.
When reaching out, start with an informative, forwardable, self contained email that sets forth your elevator pitch. Your email should be concise. Say it in five lines of one-line bullets or try start again. Your content should be accurate and targeted. Make a strong first impression, you may only get one shot.
Finally, don’t forget to update the spreadsheet and follow-up!
Process the Feedback and Re-Center
As you reach out to potential investors, you will get feedback on why they passed without taking a meeting, or why they met you and decided not to take another meeting. Make sure you are recording the feedback. Themes will develop. Learn from them. Revise your pitch with the benefit of the feedback.
The Art of the Investor Pitch
Raising money is part data science and part art. Your research is the scientific part. The art is making every touchpoint count. Each interaction is an opportunity to get more interactions. Make the best of it. If someone tells you they won’t invest, ask them for a referral to someone they think might be interested. Maybe they have a potential data scientist to refer you to or a CMO. Perhaps they can introduce you to a potential customer or partner. There is value in each meeting. Be respectful of the time allotted. Don’t go over.
Your elevator pitch should be crisp. Practice it in front of a friendly audiences who will identify weaknesses and test you with lots of questions. Continually refine your pitch until it is persuasive.
Legal Details to Get Venture Funding
Most VCs require companies to be a Delaware corporation. LLCs and partnerships likely don’t work for venture capital structures. Your attorneys should set up documents suitable for a VC-funded company, including a charter, bylaws, equity incentive plan documents, proprietary information and invention assignment agreements, and stock restriction agreements?
An experienced IP attorney should review IP-intensive businesses. An IP attorney will help distinguish what is proprietary, what can be protected as a patent, trademark, copyright, or a trade secret. It is important to confirm your IP belongs to the company, including IP developed by founders, former employees, and consultants.
Facilitate the fund-raising process and give the impression of being highly organized by preparing a due diligence binder containing the following:
- Necessary financial and corporate documents
- Debt and equity financing documents
- Important contracts
- Capitalization table
- List of IP
- Equity incentive or stock option plan
- All employee agreements
- Management team resumes
Some Common Mishaps to Avoid When Seeking Venture Capital
- Smile. Everyone is watching. Enchant, evangelize, be positive. No one wants to invest in someone that is impolite, unpleasant, anxious, or nervous.
- Make sure your website is working.
- Anticipate what a simple google search about you will show. Anticipate background checks on all your founders.
- Be responsive to communication, answer emails, and return calls promptly. Provide references that say what you expect.
- Finally, don’t forget to follow-up!***
About L2 Counsel, P.C.
L2 Counsel, P.C. is an elite boutique law firm designed to serve entrepreneurs, innovative companies and strategic investors with sound legal strategies and solutions. We serve businesses in all stages of growth, from garage to global, utilizing best-in-class technology-enabled services and vendors that allow us to remain nimble and effective. We have significant expertise and experience working with technology, healthcare and clean energy companies at all stages of growth.
Louis Lehot is an emerging growth company, venture capital, and M&A lawyer at Foley & Lardner in Silicon Valley. Louis spends his time providing entrepreneurs, innovative companies, and investors with practical and commercial legal strategies and solutions at all stages of growth, from garage to global.