Ask virtually any group of entrepreneurs, and you’ll hear that raising venture capital feels like an endless, fulltime job.
Savvy entrepreneurs understand investment from the VC’s perspective. They map capital requirements to the milestones of the business and prioritize trust and two-way working relationships.
Here are some ideas entrepreneurs can use to better prepare themselves and their companies to compete for venture capital.
Know your audience.
Before the first conversation with any VC, study the venture capitalists in your region. A VC’s website tells the basics—the VC’s target industries and stage of companies.
The venture fund’s previous investments tells more. Search out press releases. Does the VC syndicate? If so, with whom? Find a way to meet and network with founders and teams from the VC’s portfolio companies. Be curious. Ask those entrepreneurs what they’ve learned about the VC and what their post-funding experience has been like. Will the fund invest in pre-revenue businesses or take a chance on a first-time entrepreneur? What’s their track record on exits? Is the VC adding value beyond capital?
To paraphrase the opening number of the Meredith Wilson classic, The Music Man, “Talk, talk, talk…Ya can talk all you want…But ya gotta know the territory.”
Look in the mirror.
Perform a rigorous self-assessment—think of it as third-party due diligence on yourself. Have you prepared for the VCs you want to attract? Is your market validation based on direct engagement with companies? Can you demonstrate a minimally viable product and introduce potential investors to alpha customers? Do your financials show solid cash management? Do you exude confidence that you own the fundamentals of the business you are launching?
What’s the talent situation; which key hires have you chosen to add? Offer references—people who can attest to the credibility to your deal and to your capability and character. Have you built an advisory board with relevant connections and functional expertise to help fill in the gaps?
Describe your IP strategy. Is the company’s intellectual property protected by patents, licensing agreements, or copyrights? Share any recognition that your business received in the press, at trade shows, or in industry publications. In addition to sweat equity, have you put your own money into the company?
In general, a VC will want to know why she should in invest in you when you. So, your self-assessment can help prepare for the right audience.
It’s a marriage, not a date.
From the first meeting, into due diligence, and through the negotiations of valuation and deal terms, every conversation or meeting with an investor is an opportunity to assess whether your personalities and values mesh. Investors will be evaluating the entrepreneur’s integrity and character in addition to the business opportunity; wise entrepreneurs will assess potential investors, too.
Whether on the board or in advisory capacity, VCs who invest become a de facto part of the company team. It takes years to exit. Think of your relationship with investors as dancing lessons for life.
The business considerations between investor and entrepreneur are never trivial and almost always tough. Personalities matter. Passive, active, etc. Decide what’s best for your style and personality. There will be issues. Every company, no matter how successful, will face bumps in the road. What are the best personalities to help augment your style? Investors influence who gets hired, how and how much founders and key employees get paid, and the valuation and dilution of follow-on rounds. Ultimately, they may even choose the CEO.
These are challenging topics in the best case scenario; most of the time, the entrepreneur will be the one giving something up. The more shared values and trust between the company founder and the investors, the better the process will go.
The point is not that entrepreneur and investor will agree on everything, or that the decisions will be comfortable. But the two of you, and as the company grows the group, need to be able to brainstorm, to talk candidly, to debate, and especially to agree to disagree. Most importantly, as the founder and CEO of the company, the entrepreneur must feel that investors are listening and considering the company’s point of view.
The better the relationship between entrepreneur and investors, the easier the work of scaling the company goes. Deal negotiations are the time to set the foundation for the relationship. If the investor and entrepreneur haven’t developed at least a beginning level of trust during due diligence, it’s best to rethink the investment and the relationship. Remember, it’s a long-term relationship.
Even though we have seen a significant increase in seed funding from VCs over the last handful of years, here in the Midwest and in other regions in the land between the Coasts, competition for venture capital is keen.
If you have set your sights on a fund that isn’t a fit, keep networking until you identify a fund that matches you and your goals. Just because there’s a fund in your zip code, doesn’t mean that fund is a fit for you.