When you run a startup you’re always on borrowed time. You have cash in the bank, a monthly burn rate and a “cash out” date that few in the company truly comprehend. I’ve never met a founder who wasn’t acutely aware of his or her ticking time bomb and the sense that failure and humiliation is a real possibility. It’s why so few can really start a business from scratch. It’s the ultimate in accountability and public judgment.
It’s why raising a round of capital often feels like a hollow victory because it almost feels like a temporary reprieve from the Grim Reaper and in a way every new round just sets the bar higher to clear for the next round of financing or the hope of reaching profitability.
If you have existing investors of course you feel a degree of comfort knowing that they would likely have your back in tough times — but of course you never really know. I remember my VCs telling me they would be supportive yet I knew the ultimate decision would only come if I were truly out of cash and needed more money.
As the end date nears and the cash-out date becomes more predictable the pressure mounts and every decisions becomes more consequential. There is no way to run a startup business without accepting at least a little bit of cognitive dissonance as you persuade yourself that one way or the other you’ll find a way to make it work while suppressing the very real possibility that you may not.
Fund raising is hard for everybody. Very, very few founders have an easy time despite what you read in the press. Knowing that now will help you greatly in your dark moments to know that you’re not the only one struggling.
The perverse nature of raising capital is that “no’s” almost always precede “yeses” because it’s very easy for a VC to tell you that you’re not a good fit without doing any real work to evaluate your company so you hear “no” far before others start doing more work.
I’ve seen many founders lose confidence in the earliest parts of the process rather than accept that it’s a numbers game where you’re just not a fit for everybody. Fund raising is like a funnel where you need a bunch of potential leads in the top end and only a few will reach the bottom.
Because I’ve observed this process dozens and dozens of times both as somebody who has had to raise capital for nearly 20 years himself and as an investor on the board of companies where we’re raising money — I thought I’d jot down some thoughts for those who will raise in the years ahead.
1. Start Early
The single biggest mistake founders make is waiting until they have too little cash in the bank before fund raising. If your back is against the wall you end up taking short-cuts in funding, you don’t meet enough potential investors, you don’t have time to change your approach based on feedback and you don’t have the time to properly work with your existing investors to come up with “plan b” if fund raising proves difficult.
This problem of a ticking time bomb is exacerbated by a high burn rate because the higher the burn, the more the cash you need to raise to fund 18 months and the harder it is for insiders to bridge you when you hit tough times.
MAKE SURE to talk with your existing investors about how they feel about your burn rate, discuss with them early what the back-up plan may be and whether they think they’d be able to get support in the unlikely event that fund raising proves difficult. Strangely, most founders I know don’t have this conversation with the inside investors early. Also, make sure you know several partners at the VC firms who have invested in you because in tough times it helps to have very broad support.
2. Put Serious Effort Into Your Pre-Game
I find most entrepreneurs put all of their effort into creating a perfect deck and then asking existing investors which VCs to talk with but they put almost no effort into the real “pre-game” work.
Having a list of VCs to approach is of course is a good start. But then you need to research that firm and what other deals they’ve done over the past year. You need to know how many partners they have and which partners do which kinds of deals. Ideally you’d find out which partners are super active and which are less active and who has the power to get deals approved and who struggles.
It sounds like a lot to know — and it is. But if you work your entrepreneur network, talk with lawyers who do a ton of startup deals, ask existing investors, etc. you can usually get a sense of things. You should plan out who you want to meet at each firm and who is the best person to introduce you to that person.
It sounds like a lot of work, I know! But the secret to a successful fund-raising effort is exactly the spade work you put in early and preferable long before you even need to fund raise. Fund raising is a full-time job and the responsibility of the CEO and it’s not something you have the luxury of doing just 3 months every 2–3 years. People who do that are the ones who struggle.
3. Take a Test Drive
When you create the list of potential VCs to approach make sure you have a few “back up schools” in your mix and test some of those as your earliest pitches. You should also pitch your existing investors and ask them to react as though they’re outsiders.
Inevitably your first pitch or two you won’t be on your A-game, which is why you want to take a test drive. Pitch, iterate, update your deck and approach and get better before your most important meetings.
4. Show up. Be in Person. Follow Up. Get Back in Person.
Raising money is a sale and selling requires persistence and follow up. The best sales people never give up and they are politely persistent in finding new ways to get in front of target buyers. I see too many founders that are willing to do all of their meetings as phone calls or video-conference pitches. Sometimes this is a good way to qualify somebody early but it’s certainly less effective so I usually recommend getting your butt on the road.
The biggest surprise to meet in watching people fund raising is how few of them follow up. I know the founders believe once they pitch it’s the responsibility of the VC to follow up with you but the truth is that it is never the responsibility of a buyer to follow up with the seller. The best VCs follow up but then so, too, to the best entrepreneurs. I’m amazed by how few entrepreneurs are persistent post their first meeting.
And I tell founders all the time that when you’re in the room if you have a great meeting and feel the chemistry it probably was truly a great meeting. But three weeks later when you try to chase them down again they’ve likely worked on 25 other tasks and seen 10 other pitches and the memory of just how much they loved you begins to fade. It’s the exact same phenomenon in sales when you’re in a competitive RFP and 5 firms are pitching. By the end the buyer forgets why they loved your presentation.
So GET BACK IN FRONT OF THEM! Remind them why they loved you so much. It’s the MOST important thing you need to do in fund raising — create a million excuses of why you need a little bit more time and have more stuff to show them.
5. Learn What’s Not Working
VCs are the masters of the “soft no” just like Hollywood producers are. They will tell you every version of “it’s too early for us” or “I need to see a little bit more traction” or “we don’t yet have conviction” or any other nice version of “no” to avoid giving you real feedback.
If you get a “no” from a VC I would politely ask them for constructive feedback. Tell them you understand that they’re passing and you’re not going to try and debate it with them — you just want to learn so you can improve your pitch. Another great way to get feedback is to ask your existing investors to call and get feedback because VC to VC will often give more direct feedback — call it professional courtesy.
I recently took a call from a VC firm to get feedback for my team and she told me that the CFO kept interrupting the CEO and saying, “What he really meant was …” and they found it disconcerting. Knowing this is valuable.
6. Use Your Team
I mentioned earlier that your goal as a startup is to get in front of the investors multiple times to “remind them why they loved you.” One very effective way is to use your broader team. If in your first meeting you bring 3–4 people then there’s less reason for the VC to meet you again. If, on the other hand, you did the first meeting on your own you could ping that VC and tell them, “my CTO is going to be around next week and I’d love to get the chance for her to meet you because we’ve just launched this one big new innovation that I think is well worth your seeing — whether you end up investing in us our not.”
Face time = winning.
Use your bench. Other investors may tell you this is the wrong move. They’re wrong. VCs suck as sales and raising money is a sale. Call your favorite VP of Sales — he’ll tell you what’s what.
7. Back Channel
I mentioned earlier back-channeling as a way to get feedback after a pass on how to improve. Back-channeling is also very effective in helping your process. You can have entrepreneurs put in a good word for you, you can have angels whisper that “you’ve been invited to a few partner meetings,” you can get existing investors to lobby on your behalf. Every effective sales campaigns uses external parties as champions to help the cause. If you’re not doing it you’re not using every resource you have. Your back-channels should be subtle and should be truthful but it helps you to avoid having to send 5 reminder emails to a VC yourself.
8. No’s Come Early / Don’t Lose Confidence
The hardest thing about fund raising is the “no’s” always come early. Simply put, a few VCs will pass early in the process — some even without taking a meeting and some right after the first meeting. Other VCs who are willing to do work will of course take time and many meetings to get to a “yes.” So by default the bad news piles up early and can erode your confidence. Don’t let it!
While you need to listen to feedback during your fund raise you also need to be careful not to let it get to your head. Some negative feedback is just wrong and some might be a VCs house style whereas another VC might be fine with it.
Keep your confidence high. You will only feel super defeated if you start fund raising too late in the process because you’ll have heart palpitations about the limitations of your bank account balance.
9. Funding is Hard for Everyone
An important part of not losing your confidence is to stop believing that everybody else has an easy time fund raising. I’ve been part of some very hard raises over the past 5 years and each time when we eventually get it done and announce it to the outside world it just looks like a win.
10. Funding is Binary — You Only Need One Yes
Don’t give up. If the big names turn you down and the second-tier turn you down and strategics turn you down — keep going. Broaden your list. Ask friends where they raised capital. Read the press and gather every named investor you’ve never heard of before and see if they’re increasingly active. You’re not done until you’re done. I’ve seen some fund raises where everybody thought it might end in a zero and then at the last minute they get a yes. Nobody is ever the wiser — it’s still a victory. A raise is a raise and a dollar is a dollar. Of course you want the best source possible. But if you get a raise done then it’s up to you to perform.
10. Nothing is Done Until It’s Done. Sprint to the Finish Line
Just as I recommend not giving up and showing grit until the end — I also caution people from assuming a round is done until it’s done. Never stop in the ink is dry on the contract and the money is in your bank account. Ask anybody who was raising in the midst of 9/11 or during the Lehman Brothers meltdown. Or ask anybody who has had a VC pull a term sheet for whatever reason. You’re not done until you’re done.
There is so much fund raising press these days that it’s easy to imagine founders strolling into pitch meetings and walking out a week later with a term sheet. That’s fantasy land. Fund raising is hard. And that’s true for everybody. Don’t put it off. Start early. Measure twice, cut once. Put in 2 hours of research for every 1 hour meeting. Take nothing for granted. Pull out all the stops. And keep your head in the game. You’re gonna need it.
(Cross-posted @ Both Sides of the Table)