If you’ve read any of my ongoing series on fund raising from venture capitalist (episode 1 — controlling your psychology) you no doubt have heard me say that raising capital is a sales & marketing process. You company is the product and you’re selling an equity ownership in your company but much more broadly you’re selling trust & confidence that you’re going to build something enormously valuable and that you’re going to be enjoyable to work hand-in-hand with over the coming decade of each other’s lives.
In order to understand how to “get to yes” with a VC you first need to understand how VC partnerships make decisions and then you can understand how to increase your odds of closing a deal.
Start by understanding how many partners are at the firm you are approaching. It’s pretty easy since nearly every VC lists its partners on the website. Some firms are trickier since they artificially call everybody “partner” but they’re not all “investment partners.” It’s super easy to suss all this out. Find a portfolio company or two that they’ve invested in. Find one that’s on the earlier-stage size or one that raised a long time ago and never scaled and get to know the founder & CEO. They can likely give you the entire playbook of the partnership if you build a meaningful relationship with them and they trust you. The key to your “consigliere” is that they can’t be crazy busy because they’re scaling at meteoric rates. You can’t try to meet the executive team at Bird to understand the Upfront Ventures partnership dynamics because they’re too damn busy dealing with explosive growth.
What do you want to know?
How many partners are there?
Which partners are active and which are less active?
Who in the firm has “pull” to get deals done when they want to?
Which partners work well with which other partners?
Who are the most optimistic partners and who are the most generally skeptical partners?
How does the partnership typically make its final investment decisions?
Each firm makes decisions in different ways so understanding the firm’s decision framework matters. Some firms are “consensus driven” and look for unanimity in the decision or near unanimity. Some partnerships are “conviction driven” meaning they’re looking for a super committed partner who will slam his or her proverbial fist on the table to push through a deal. Those partnerships want to know that the “sponsor” of the deal is willing to have his or her head on the chopping block advocating for this deal. In larger partnership you often have “shadow partners” who serve as the role of an advocate (or detractor) to the main sponsoring partner.
In any event the process is you meet a partner (whether you went direct or first built support from an associate) and that partner decides whether to bring you to meet more people and eventually to a “full partner meeting” which in most firms is on Monday. Usually after a Monday partner meeting you get a pretty strong:
Yes, term sheet coming
No, sorry we’re passing
Maybe, we need to do more due diligence / analysis / work
I always counsel founders that “good news comes early” so if you haven’t heard by Tuesday at noon chances are it wasn’t likely a clean “yes.”
The Role of “Other” Partners
You also need to be aware that every partnership has partners who are not full-time investment partners. These can be called: Operating Partners, Venture Partners, Board Partners or similar. These are often seasoned executives who have influence at the firm but aren’t carrying a full-load of annual new investments. They might sponsor an occasional deal, they might be looking to jump in and run a company or they might take the board seat if the firm invests. Every partnership is different so it’s worth knowing whether you’re talking with an investment partner or an other partner and what their actual role in the firm and in investment decisions is.
The Role of Non-Partner Investment Staff
Most VCs have investment staff who are not yet partners. These can be called Analysts, Associates, Principals or similar. The “A’s” typically don’t have investment authority and Principals it depends firm to firm.
The role of these investment staff varies firm-to-firm but they often entail:
Sourcing deals for partners
Helping with initial deal screening with a partner
Helping with due diligence (competitive assessments, customer calls, reference checking, market sizing, technology reviews, etc.)
Building models to evaluate the deal and/or reviewing customer files, company financials, business plans, etc.
Adding color to partner discussions during a Monday partner meeting
Completing due diligence post partner meeting for thorny questions that were raised
How a Monday Partner Meeting Works
You come in and usually have between 45 minutes to an hour to present. The best companies build a deck and a cadence to use up 50–60% of the time and save buffer for discussions. If the questions aren’t organically flowing you have “pocket slides” after the main deck you can pull out to share more information or analysis.
You leave. The sponsoring partner often outlines his or her thesis and then feedback on the company is offered. Sometimes these are love fests but usually they are pretty brutal take downs of why a company would or would not work.
A vote happens at what’s called “investment committee” and the sponsoring partner is tasked with what comes next.
Some firms have formal voting systems and if the vote passes the deal gets done. Some firms have broad discussions and then resolve the final investment decision until the sponsoring partner answers more questions. Some firms — whether they have voting or not — have a “super user” partner that has all the juice in the vote whether that’s formal or not. Some partnerships allow “vetos” and others don’t.
What Happens When There’s Dissent on the Investment Decision?
If the firm is consensus driven a deal will be killed. If a firm has a voting policy and a set number of “no’s” come in the deal is killed. If a firm has a “super user” partner or a “veto right” and somebody kills a deal then the deal is dead. In some firms dissent is tolerated but then the sponsoring partner really has to show ownership for the concerns raised by the dissenters.
I have sat in some meetings where we reached a decision in 20 minutes and I’ve seen some meetings where an argument lasted 2 hours. Honestly, it can be draining.
I can tell you that at Upfront:
We’re conviction driven
If somebody has deep conviction “against” a decision would be postponed and a small group might caucus later with more information answered
We have 6 full-time investment partners and every partner has an equal say. We also take input from our board partners and from our non-partner investment staff.
We operate a policy of “no retribution” and “no reciprocity.” This is critical to build a cohesive venture capital firm. If you have retribution (you argued against my last deal so I’ll argue against yours) you have animosity. Anybody who knows VC knows that this retribution-type behavior exits and is corrosive. Reciprocity is equally destructive. It says that “you approved my last deal so I feel bad and will approve yours even though I don’t love it.” This produces shit deals getting done.
How to Land and Expand
This was a long walk where I clearly buried the lede. But one advice I have for you is that you not leave your entire outcome simply to your sponsoring partner and/or associate.
Think about it … if you have 6 investment partners and a whole supporting cast of influencers and you have only met with one partner and then you appear in front of a committee of deciders who have never met you before — that’s a lot riding on your pitch and the willingness of the sponsoring partner to advocate.
This is Sales 101. You find a champion but then you find reasons to meet other staff prior to the meeting where your fate would be decided. VCs are busy people and just because one partner is showing you time doesn’t mean others easily will prior to a partner meeting.
Find productive reasons why your sponsoring partner or associate can introduce you to other partners. Maybe you have some knowledge they would find valuable? Maybe they’ve worked with a similar company to yours before. Maybe you go from meeting a partner to meeting 3 associates to broaden your relationships and learn more about the firm. Maybe they even help you meet other partners?
There are a million methods for building broader relationships in any buying organization but there is one key lesson that can’t be ignored. The more people you have in that partner meeting who come in with a stronger sense for what you do and the more you have answered their biases and concerns in advance the higher the probability of getting to yes.
Every VC firm is different and the decision-processes vary; however, they all form the basis sponsor / supporting staff structure and the more people you know when the investment committee happens the higher the probability of success.
Good luck with your raise! Remember, it’s not easy for anybody. Even the ones who tell you they’re “crushing it.”
Next up in the series is “cash in, cash out” — understanding how to talk about how much capital you’re raising, why this number is right, how long the cash will last and what you’ll have to show for yourself once your money is spent.
I was recently with an entrepreneur and talking with him about his fund raising process. He was in a later-stage financing round and was talking with many investors. Some started asking him for very specific analyses to be completed on his data and wanted his company to crunch the numbers. I told him he shouldn’t bother and that it was likely a junior person at the firm whose job is was to find holes in the data / narrative.
I told him,
“I know we don’t yet have a term sheet so you feel you need to listen to everybody’s request. But imagine you were expecting two term sheets imminently. How would you act then? If you don’t act like that now then everybody will smell it — even if they don’t acknowledge it to themselves.”
And my specific response that I recommended was to say, “I can send you our standard data pack but honestly I have too many other firms asking for customized data and we simply can’t send each person custom reports. If you’re further along in the process and you have one piece of information you need for a final decision then I’d be very happy to talk with you about it then.”
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Another entrepreneur was recently in my office. She had emailed with a partner at a big VC fund and he had passed the request to a junior associate. That in itself can be fine in some cases but that associate then asked for a phone call instead of an in-person meeting? I recommended that the founder politely cancel the call because we had other great firms actually taking meetings.
“If you’re willing to take a call then you’re signaling that you have no confidence in your process given you already have other in-person meetings. Tell her that you’ll gladly bring the deal back to that firm in the next fund raising round but that you need to prioritize your time for firms where partners have already had in-person meetings.”
This isn’t rude — it’s just respecting your personal time and your fund-raising process as much as you’d respect the VCs time. So she called the associate, cancelled the meeting and the young associate came to visit her office that very day.
Why? How was I sure that would happen?
I told the founder, “No associate in his or her right mind would want to tell a partner that Sequoia funded this deal and the reason we didn’t see it is because I set up a call instead of an in-person meeting.” I knew she’s come see you.
Of course you have to be careful with this. You have to be sure that you’re actually qualified to raise VC, that you CAN get other meetings and you have to be very polite when you state your reasons why their request doesn’t work.
But confidence is CRITICAL in fund raising. Investors are human and humans want what they can’t have and what they perceive other people want. It’s human nature — just read Cialdini and others on this topic. We don’t think we work that way, we do. If you don’t act in demand, people will subconsciously know you’re not in demand.
The same thing happens to VCs. We have consultants who do research for super big funds who invest in VCs and they have checklists they want you to fill out in order for them to do their work. I find it infuriating because it asks such basic questions that they could find out themselves but they want you to do the work. I think it’s a smokescreen. I know bigger firms sometimes hire people just to fill out the data but I mostly refused. I told them, “We’re already over-subscribed in our round. If you want to invest we might make room but we don’t have time to fill out forms for every consultant. If you want to come visit us you’re welcome to.” Of course if they did some initial work and were leaning in to make an investment then we’d spend time helping them. But they had to show they were committed. I was self-confident enough to turn them away if they didn’t do work.
There is a delicate balance between confident and arrogant and of course the former is what you want. You have to realize that every VC has had hot deals come through their offices that they had to chase hard to try and get into because they “knew” everybody else was chasing. VCs will literally drop everything else they’re doing when they’re in that situation. It’s the gold standard you’d love to strive for, but very few deals ever get that “hot.” But if you can bottle up just a little bit of that feeling, if you can channel just an ounce of your best FOMO juice and if you’re willing to accept taking just a few more self-confident risks in your process — it will go a long way.
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This is part of a series I’ve been writing on fund raising. If you’ve enjoyed or learned please email to a friend or share through social. And you can follow me on Twitter or on Snap and receive my newsletter direct to you email box here:
Every entrepreneur wants to hear “yes” during the fund-raising process but I would argue that being too risk averse and not pushing hard enough and be willing to hear a “no” is what holds back many people from “yes.”
I believe people generally hate making decisions and especially so when they involve commitments and risks. This is true of any buying process where a customer has to make a large investment decision on your software or when an investor must decide whether to give you $5 million. In the case of the investment they are often also not only committing personal risk of looking bad at their partnership if things don’t go well but also countless hours of board meetings, financial reviews, legal documents across what is often 7–10 years or more.
So it should be no surprise that “yes” doesn’t come easily. But “no” also doesn’t come as easily as most people would like so entrepreneurs get stuck and frustrated by this endless string of “maybes” or non-responses. When somebody has to tell you no, the potential investor must:
Feel discomfort of letting you down. Investors are human, after all
Come up with a valid reason because they know in communicating with founders if there’s no reason to say “no” you can generate bad will
Risk missing out on an inflection point: Investors of course are also concerned about saying “no” too early in the process when they can “hang around the rim” and see what happens?
Possibly offend and entrepreneur leading to reputation risk amongst other entrepreneurs. Investors fear that saying “no” to you now will offend you and have them tell other entrepreneurs and/or make it harder that they’ll come back to you in the next round
For these reasons and more fund-raising often leads to a frustrating sense of never really knowing where you stand with most of your prospects and founders often have no plan for how to push prospects along — often out of fear that being too pushy could lead to an earlier “no.” Maybe this is reverse “hanging around the rim” where if you keep you VC process going long enough you’ll eventually get to “yes?”
Of course stringing out the process doesn’t lead to good outcomes. I spend a lot of time coaching entrepreneurs through their fund-raising processes by doing “pipeline reviews” of all of the firms with whom they are speaking. These are similar to the pipeline reviews I used to do with sales reps when I was a CEO. What I’m looking for in the conversation is:
When was your last contact? How many meetings have you had? What information did they request? When did you last hear from them? What feedback did they give you about the process?
What is your next step in the process? It surprises me how few entrepreneurs even know what the next step is. Because entrepreneurs often don’t feel comfortable in a sales process (as a fund-raising process is) they often don’t enquire about the approval process at the firm. It is perfectly acceptable (and should be required!) to politely ask about the process.
The net result is that often I find founders who don’t really know where they stand, what they would need to do in order to get an investment, who has to decide, what is the process to get that decision and what are the next steps in the process.
My belief is that founders often don’t push hard enough in asking for more meetings, asking where they stand, asking what the next steps are in part because they know that if they push too hard they might hear “no.” I often counsel people that they might need to hear 20 “no’s” in order to get 3–4 firms that move closer to a “yes” but those 3–4 firms might not make progress without the founders taking a bit of a risk on the process to get to yes.
I actually have to admit that I learned this from Carly Fiorina. When I was young in my career I did some consulting for the European arm of Lucent. We were working on their go-to-market strategy for Europe and Carly was Group President of the division where I was advising (a $19 billion line of business) at Lucent and she flew out for the final presentations. She stood in front of the sales executives and shouted at them like she was a high school football coach. She was imploring them to push harder in their sales process. To go “top down” in all of their campaigns. To use advisors or contacts to help them build executive-level relationships. And to be willing to hear “no” as long as it came quickly. That they shouldn’t accept a “muddy maybe” where buyers avoid making a decision. She told them they should embrace “no” because if they say “no” they were likely to say “no” eventually anyways so it’s better that you know early and can focus your resources on places where you had a better chance of getting to “yes.”
It was deeply uncomfortable for me because it was a sort of in-you-face, aggressive, go conquer the world kind of speech. But honestly it changed me in positive ways because the message — however hard to hear — resonated. It conveyed urgency, it implored people to respect their own time as much as they respected customers’ time and it asked that people have the courage to face rejection. I have now developed this into my own standard (softer) speech I give to entrepreneurs.
“People are afraid to hear ‘no’ so they don’t push hard enough. You need to be polite, but if you respect yourself you’ve earned the right to ask the awkward questions about where you stand and what comes next. If people tell you ‘no’ as a result of a polite push they were going to say ‘no’ anyways. But often if they don’t say ‘no’ you’ve just got yourself a commitment to re-engage.”
I push for commitments in my own job, sometimes beyond my comfort level. I once had a potential LP back in 2010 (when fund-raising as a VC was harder for me) tell me that he thought he was a better fit to look at our next fund rather than this one. I had learned that this is a standard line every LP uses to have an “easy no” for VCs. He hadn’t actually told me ‘no’ so I figured, “what the hell?” I’d give it a bigger shot.
I told him, “why don’t you come visit me in LA. I’ll set up a dinner with 6–7 VC firms and a bunch of prominent local entrepreneurs. At the end of it if we’re not a good fit — you’ve at least gotten informed about the LA market for when you do ever want to invest? What have you got to lose? Besides — the weather in LA is great this time of year!” I then stayed silent. It’s hard and awkward to do this because silence demands a response.
He said it sounded like a good idea and he committed to coming right then and there on the phone. Phew. I was relieved. I had no downside. At the very least I would build a better relationship and help other VCs in LA get to know an important potential LP. He did come, he enjoyed himself, learned a lot and we became much closer. What I liked about this approach is that he could “see me in the wild” how I normally am with my peer group rather than pitching Powerpoint at conference room table to his colleagues and him.
Then he went a little bit dark on me. It wasn’t surprising — if he engaged he’s have to make up his mind and I knew he was leaning against saying “yes” but I forced myself to actually hear “no” from him. I asked him for a quick call to give him an update on my progress. I used this opportunity to turn this into asking him how the trip went and what he was thinking about LA. He told me, “I had a great trip. But honestly we normally invest $15 million in funds and I don’t think I have the time to get the work done in order to make a commitment to your fund. I’ll try to get the work done but I doubt we’ll have a positive answer in this process. In any event give me time to do the work.”
I knew that I was going to get sucked into another 6–8 weeks of avoidance, some basic analysis and likely no progress. So I pushed harder, being willing to embrace a “no.” I told him, “Listen, why don’t you just give me $5 million. I don’t need the $5 million, it will be amongst our smallest commitments. But I know that if you invest you’ll take more time to get to know us. If you like us over the next three years I promise you a $15 million allocation in our next fund and if you’re not happy I promise not to hassle you for another dollar. You literally have nothing to lose. What do you say?”
Yes, this was out of my comfort zone. I was pushing for a “no” but hoping for a “yes.” This wasn’t the first time I had pushed this hard and I had certainly heard “no” many times back then. But this time he told me he’d think about it and we scheduled a call 48-hours later. And as you imagined, he said, “yes.” I couldn’t believe it. For us $5 million was a small check but it was a victory.
The firm he invested from has now invested more than $30 million with us but as importantly he changed jobs and moved to another firm and he went on to commit $70 million over a 6-year period of time at this other investment firm. He also has gone on to become one of my closer LP advisors. He pushes me hard on issues that have helped me grow.
But I swear to you if I hadn’t been willing to hear “no” I never would have gotten a “yes.”
Embrace “no” and don’t take it personally. Embracing “no” will unlock your much bigger potential.
No SUCKS, but it is also liberating.
Wait, there’s more!
This is part of a series on fund-raising advice for entrepreneurs and VCs. You can see the first post “Lemons Ripen Early,” which also has an outline and a link to all of the other topics.
Why you should never have a data room — the most counter-intuitive fund-raising advice you’ll ever get
I’m about to offer you some fund-raising advice that flies directly in the face of what most conventional wisdom will tell you. If you stick through to the end I’m guessing I can persuade most of you. Let me start out with my premise:
“Data rooms are where fund-raising processes go to die.”
I have to back up and give you more context.
When you raise money from investors you produce information that you are told they want and care about:
A fund-raising deck that articulates your company strategy, plans, team, market, competitors and so forth.
A detailed financial model that shows your anticipated revenue, costs and profits (Income Statement) as well as your balance sheet and cashflow statements.
Your historical trading information including financials and a “customer file” which shows the history of your transactions so that investors can run “cohort” analyses
Customer reference, personal references, key team members, compensation, cap table, stock option plan, etc.
Or if you’re a VC raising from LPs you have to list all of your deals, your investment value, your carrying value, your multiples, your IRRs, TVPIs, DPIs, etc along with net cashflows plus your previous LPAs.
These collective sets of documents form the basis of what somebody looking at investing would call “financial due diligence.”
Getting the first meeting with a VC isn’t easy because each partner at a VC firm gets so many requests for meetings that he/she couldn’t possibly take them all so they tend to prioritize people that were introduced from high-quality sources. Some people find this elitist — I don’t. If you’ve got the skills to be a strong entrepreneur then it shouldn’t be too difficult to find people who know a partner at a VC firm and if you can build relationship with them you can get introduced. I also like to say that while getting a first meeting isn’t easy, it also isn’t that hard.
Getting follow-on meetings is very hard because if the VC wasn’t totally persuaded in the first pitch meeting they aren’t likely to want to commit more time. So what does a VC do when he or she isn’t ready to say “no” or perhaps might like to talk with you in a year but not now? Often they ask for access to your “data room” so they can do analysis on whether this would be a good investment for them or not.
Most entrepreneurs (and VCs raising from LPs) think this means progress. It doesn’t. The data room is where your process goes to die. What happens is 18–20 firms access the data room and download all of your documents. You feel proud because data rooms have tracking on them so you know exactly who did and who did not access your data. So you sit around and wait for the next call. You convince yourself that it should take 1–2 weeks until they have gone through the data and you’ll get a call but it never comes.
There are a set of reasons VCs and LPs ask for data and I’m not sure they even always internalize these reasons themselves. I’m going to start with the reasons and then explain how to use your best data to your advantage.
VCs (and LPs) sometimes ask for data because they don’t know what else to do in the process. They don’t have a compelling reason to tell you “no” based on a meeting but they aren’t prepared to meet you again. Asking for the data room is the easiest way to get off the hook for a few weeks while seemingly making progress. They aren’t doing this viciously — they might not even realize that this is why they ask for the data room. But I assure you it plays a big role.
VCs (and LPs) have a vested interest in having more data, whether they want to invest in your company / firm or not. If a VC meets with 40 eCommerce companies and has the data room on all of them (downloaded on to his or her system) then when they DO finally dig in on an investment opportunity they can compare information such as CACs, LTVs, churn rates, margins, etc. against a broad range of similar companies. LPs also do this to VCs so that they get a broad representation of returns data.
Investors often want to see your performance this year in case you come back and look for money next year. Investors love to be able to see what you told them in forecasts in prior years and then compare with how you actually performed. In this way investors can make some assessments of how well they should believe your future forecasts that you are showing them a year later.
Investors often DO want to do the first pass of analysis on your company and might genuinely have an interest. But for the most part this analysis is done by more junior people who can always find a reason in the data to show that you suck. It’s not that they’re particularly negative but the fact is that supporting roles at investment firms are designed to show the partners the risks in deals and the “upside case” always requires huge assumptions to be believed. So junior analysis of your company is also often where initial due diligence goes to die unless you can be sure that the investment partner is also willing to engage.
So is there any good reason to create a data room and allow access to select individuals?
No. None. Zero. Zippo. Nada.
So WTF am I supposed to do when an investor asks for access to my data room if I don’t have one?
For starters you have to realize that fund-raising is a sales process. The buyer is shopping for equity in startups and the seller is looking for cash in exchange for equity and shared governing control of his or her company. Asking too early for a the data room access is the equivalent of going into a store to look at clothes, watches, cars, electronics, etc. and then asking to take a brochure home with you. You are going to “study” the details before making a decision. Yeah, sure. A brochure is an easy out for you in the sales process without being rude. You know that you theoretically MIGHT want to look at the specs of that $5,000 coffee machine one day but in reality it’s likely to sit in a pile on your desk.
I never thought of this until I became the Founder & CEO of my first startup company. We did some outbound sales & marketing, we responded to some inbound enquiries that came “over the transom” from marketing activities and we responded to RFPs (requests for proposal). I hired a sales coach named Kai Krickle who helped me figure out how to close more deals. He told me to stop responded to RFPs where I wasn’t the person who helped write the specs for the RFPs. He told me, “if you didn’t help shape the RFP somebody else did and you’ve already lost.”
That was a hard pill to swallow since there were so many deals done via an RFP. He didn’t think RFPs were a total waste but he said that you need to test every potential buyer for true interest. Normally you are sent an RFP and asked to fill out forms and send it back. If they like your response they call you in for meetings. Kai said, “Responding to RFPs is where sales processes go to die.” It felt like heresy. They asked me to send them info, how could I do anything else? It would be rude!?!
He instructed me to call the potential customer instead and ask for a meeting. “Just tell them that you’re working on your response but to better understand your ROI calculation and to give them a more precise offer you need to test a few of your assumptions. You’d love a super short meeting to do this.” He said, “If they are not willing to meet then you’re already dead so you’re better off to spend your time with another lead. Any truly interested buyer would give you some time to help you and improve your offer and probably to get to know you better.”
Kai taught me that the key metric to whether a sales process is going well is “engagement.” If they’re giving you time then you owe them more data and if they don’t give you time then you shouldn’t share you data. I tried it, it worked incredibly well and meeting with people (in person, in a web conference or on the phone) is ALWAYS better for you to understand their buyer needs and them to better understand you.
In short, meeting in person gives you a chance to remind the prospective buyer “why they loved you” in the first place and gives you a chance to better share your story. It’s the equivalent of falling in love with a Tesla in the showroom and if they get you back in the showroom you can remember why you loved them and wanted them and would be happy owning one. Sending the specs can’t do this.
So how does this work in practice? I mean, in a real fund-raising process?Initial Call
VC: “We enjoyed our meeting. Can you please send us your certificate of incorporation, your Cap Table, your 3-year P&L and last year’s historical trading information?
Entrepreneur: “Sure. No problem. We have all of that. Can we please schedule a 15-minute call next week to quickly walk through your information request so we can best be prepared? I promise not to run over that time allotment.”
If “no” then you know it’s a waste to send the information. What interested party wouldn’t even grant you 15 minutes? “Just send the information and when we analyze it we’ll set up a call” is not good enough. If you have self-respect you’ll say “no” to that request. And frankly, the more you say “no” the more likely they’ll take the call and the more they say “no” the less likely you should want to work with them.
Entrepreneur (when on the initial call): “In trying to figure out how to prioritize the information you need, I wanted to best understand your process, what analysis would be most helpful and make sure I get it to you in the right format.” and later, “What do you expect the next step in the process would likely be? How should I best prepare for that?”
Your goal is to learn more about what they are trying to solve with the information and frankly you’re politely forcing them both to think about what they’d actually do with it (other than ask for it) and they are starting to make subtle commitments to reengaging with you. In the above situation I would hope that you were able to persuade them just to look at historical data and future forecasts because your cap table, certificate of incorporate, reference list, etc, isn’t valid until later in due diligence.
When You’re Ready to Share the Data
Entrepreneur (post call, now ready to share data): “We’ve prepared the cohort analysis you requested and we’ll send you the raw data file, too. I have now done our 3-year plan as monthly rather than quarterly as requested. The model is a bit complex — I’d love the chance to come and and quickly walk you through our assumptions. It shouldn’t take more than 30 minutes but it’s important to me that you and the partner meet me so you can understand the key drivers before I send it.”
Again, your goal is to trade data for engagement. If they prefer not to meet (they’re rationally trying to be judicious with time) you can politely request that perhaps you could just do it on a web conference call (Xoom, Google Hangouts, Skype, whatever.) Each interaction is an opportunity to test whether or not they’re really doing the work and since you have to rigorously protect your time each piece of data should be traded for engagement.
In-Person > Web Conference > Phone Call > Email > Data Room
If you run a good process and if the investor is truly interested (even if busy and doesn’t respond as fast as you’d like) then each major step of analysis on their side can be a series of documents you trade them in exchange for more proof of engagement.
I do the exact same for reference calls. Many times I’ve been asked for the names of references only to find that they were never called or only 1–2 were called. I love when investors ask me for references because I know it’s a great chance to actually DRIVE engagement. How?
I always ask the potential investor, “would you mind if I contacted Josephine Wright and organize for her to speak with you for 20 minutes?” Most people will say “yes” and now I know you’ve committed to further engagement with my process which is also 20-minutes you’re not committing to somebody else’s process. Presumably your “on sheet” references are big advocates (otherwise you’re in real trouble) so this engagement should go well.
I often send the introduction email and then a second email to the reference to say, “This reference is really important to me. I’d be grateful if you could prioritize it. Thank you!” That way you have an advocate making sure the meeting happens.
But just putting a customer reference list in a data room? NFW.
I hope I’ve been able to persuade you that data rooms are waste. There is nothing you can provide in a data room that you couldn’t send via email. Sending the docs via email is less friction than making people come to a data room. And if you break up your diligence documents into related sets of information that map to different stages in the processes then you realize you never send it all at once anyways.
I know the first time you don’t follow the customer’s “rules” for how they want to engage it feels awkward. But remember the brochure you take at a car dealership. And remember that unless you can break out of the traditional process designed to put up walls you will forever be the company sitting in a pile on the buyers desk in a stack of brochures.
Wait, there’s more!
This is part of a series on fund-raising advice for entrepreneurs and VCs. You can see the first post “Lemons Ripen Early,” which also has an outline and a link to all of the other topics.
I Know Everybody Told You to Send Your Fund-Raising Decks as a Link. Here’s Why You Should Just Send the Deck
I know you have your document sending tool to send your fund-raising deck to VCs and track who read your deck, which pages they read and how much time they spend on each page. I know that you can use an email system with this to track my open rate, whether I forwarded the email, the IP address where I read it, whether I was on a mobile device or a wired computer and you can tell who else read the document. I know all of this because every VC knows this because we’ve all either funded companies that have marketing technology or we’ve seen a pitch with a company that does this.
So while it might seem obvious that you should send it via a link, I’d like to make the counter-argument that it is not an obvious choice. I’ll explain why in this post. First, it’s not the end of the world if you do send links and I feel confident many people will disagree with me but let me at least make the case.
Your pitch deck should really be your best marketing tool
Your pitch deck shouldn’t contain your deepest, darkest secrets and plans. That would be something you’d only reveal when you’re well into the VC process and have established mutual trust and they’ve proven engagement with you. Whenever you write your deck and send it out I think you should actually think to yourself, “my competitors are probably going to read this one day and this will be forwarded widely” and if your response isn’t “so what!” or “that would be awesome” then I think you’re doing something wrong anyways.
In a perfect world your deck shows you in such a positive light that the person in the VC firm who receives it forwards it to the rest of his or her team. Your deck should be so good that a VC asks you for permission to show it to his or her portfolio companies. Your deck should be so compelling that the partner at the VC firm you’re talking to reads it multiple times because they keep going back to the thought, “I should really spend more time with this company” and they can’t get it out of their head.
VCs are acutely aware that with a link they’re being tracked so those benefits to you may actually limit consumption.
You’re adding unnecessary “purchase friction”
If your deck is something I should open 3–4 times as I’m contemplating an investment, why add any consumption friction to the reader?. No amount of tracking when she read your deck is going to truly help you get inside her head so those benefits are oversold.
I’m sure that some VCs and others do love online viewers when they read a deck. They probably think it’s efficient because they don’t have to download a big file with tons of graphics. Frankly, it should be your goal to build your deck in a way that it isn’t more than 10mb or you’re doing something wrong. There are a million ways to make graphics lighter or resize your file without a huge impact on the quality of the slides — after all you aren’t presenting this at TED.
Financial Projections, preferably 18 months income statement by month and a 3–5 year projection by quarter (showing the “out years” is a helpful exercise even though nobody expects good fidelity)
Customer metrics or if enterprise sales some key customers and pipeline
Amount you’re raising
Use of proceeds
And all of this should come across as a narrative story rather than a stilted business plan.
What should not be in your deck?
Detailed roadmap of features you plan to build
Detailed customer information
Any other information you wouldn’t want seen or know by your competitors or a larger audience
In short, there is nothing in your deck that should give you pause or make you feel like you can’t just send the damn file to somebody.
Your detailed financial model? Sure, I wouldn’t want that in my competitors hands, but in a million years I’d never send that before my first meeting so it shouldn’t affect you anyways.
VCs like to measure your strategy & progress over time
I like to download the decks I receive. I like to refer back to them when you come by 9–12 months later for your next meeting and I like to see how your strategy, your narrative and your numbers have changed. Many of my colleagues do, too. Because I invest in “lines, not dots” it’s actually the delta that I’m investing in. I don’t mind if your numbers last year were wildly optimistic — frankly I’d be surprised if they weren’t.
And it’s not infrequent where somebody mentions a market I’m thinking about and I think, “didn’t I just see company x, y, z nine months ago who was playing in this space?” I would likely open up your deck, read it again and begin contemplating your company again. If it’s in a link in an email with an expired link you can certainly stop a VC from thinking about you again but I’m not sure how that furthers your agenda.
Summary: Send the Deck
Pitch decks are sales & marketing decks and like in any sales activity, any great sales person assumes his or her competition will eventually get their deck. So what? Competition isn’t won or lost by your marketing decks — it’s won by how you innovate and by how you execute. A deck is a deck. Just send it. It’s all upside and limited downside.
This is part of a series of advice for founders who need to raise money from venture capitalists. The first in the series is “Lemons Ripen Early,” which also has a link to other posts.
The most important advice I could give you before you set out in fund raising mode is to understand that fund-raising a sales & marketing process and needs to be managed. Somehow many first-time founders equate “sales” with something that is beneath them. I always tell founders …
“An investors job is to deploy capital and make a return. If you truly believe that you, your company and your products are exceptional and your company will be valuable then you’re actually doing them a FAVOR by helping them invest in your startup. If you don’t believe in your bones that you’re amazing then it’s no wonder you don’t want to sell them on making the investment.”
Like any sale you first need to plan your “prospects” and qualify whether or not they’d be a good fit for your product — an investment in your company. You need to figure out how much time to spend with each prospect and you need to rigorously manage your time and the calendar. This is where most founders err. Most founders prepare a deck, ask a few friends and investors whom to meet, get a few introductions and just wing it. As a result founders often meet the wrong investors, waste time on those who ask for more information.
The typical VC process is as follows:
They say there are three rules in property: Location, location, location. In sales there are also three rules: Qualify, qualify, qualify. Your entire process should be about “testing” whether your prospect has
Authority to make a decision
Is willing to continue spending actual time with you and analyzing you. You can short-hand this as “engagement.”
If an investor isn’t engaging then they’re not suddenly going to get a term sheet. The surest sign a fund-raising process has stalled is when you aren’t getting follow-up meetings or hearing from the VC or hearing from friends that they got a phone call or email asking about you.
If engagement wanes you either need to move that VC to a lower priority or you need to find ways to improve on any of these dimensions (obviously points 2 & 3 might mean you’re meeting the wrong person in the firm). Moving a VC from an A to a B doesn’t mean they aren’t still your top pick, it just means your chances are less likely and your extremely limited resources should be allocated elsewhere.
In my post “Measure twice, cut once” I’ve outlined how to plan before you start raising. Today I want to talk about the process and how to allocate your time.
How Many Investors Should You Speak With?
Of course there’s no exact number of VCs you should meet — these are simply guidelines. For simplicity I’ll assume you’ve raised some money from angels or seed investors and you’re either raising an A round or a B round of venture capital.
I like to start with a list of approximately 40 qualified investors. If you don’t know what is “qualified” please read my fund-raising planning post but assume they’re all the right: Size, geography, industry focus, capacity available and they themselves have raised a new fund in the last 3–4 years so you know they have dry powder. If you’re raising a round where a new lead investor would invest $5 million the VC fund must have no less than $100 million and if you’re looking for them to write $15–20 million as the lead their fund realistically should be at least $400 million. If you think you’ll have shared leads obviously fund-sizes can be slightly smaller but as a rough guideline assume most Seed/A/B VC funds wouldn’t allocate more than 5% of their fund to a first-time investment.
In terms of stack ranking I recommend you force yourself to have no more than 8–10 “A’s,” 8–10 “B’s” and the balance 20–24 should be “C’s.” An “A” is somebody who would be likely to invest in a company like yours and if chosen is somebody you’d be interested in working with. If you’re not likely to get Sequoia then just because they’re an amazing firm doesn’t mean they go on your A list. If in high school you got a 3.6 GPA you might WANT to go Stanford but it isn’t likely so you spend more energy on schools you’re more likely to get into. Same with VC.
The A’s are the firms you’re going to work hardest to research, hardest to find high-quality introductions to and make the most effort to engage with. To be clear — your list never stays static. If you have a mediocre meeting with a high-quality prospect and you don’t think they’re likely to lean in they drop to a B or C. Likewise if a firm that you don’t think is your top pick suddenly starts engaging and doing work and showing you the love you might put them as an A because having an offer is important.
Should You Start with Your “Safety Schools?”
There is some debate about whether you should “test drive” with a few firms before a wider process or whether you just begin the process. People who believe the former believe that you should see the market demand before too many people know you’re “in market.” I think there’s some truth in this. It’s such a small industry that if you talk with too many investors people will hear that you’re in market and quickly know who has passed.
My personal advice is that you first take 2 meetings with “safety schools” meaning somebody on your B list and somebody on your C list unless you already have a very strong relationship with somebody on your A list. This gives you good practice for your A meetings and you will have a sense of some likely questions, comments and concerns.
Then begin your process in earnest with up to 8–10 firms. These are the ones that you really want and that you also have a realistic possibility of landing. Keeping it to 8–10 helps you manage the public information flow that will be broader if you see 20 firms and also help you prioritize resources. You can hit a broader group in a few weeks once you know how you did with your initial meetings or perhaps of you did really well you can keep your aperture narrow.
Why 8–10 and not just 3–4?
One of the most important aims of a fund-raising process is to keep similar firms at the same stage of your process. If you’re talking with too small of a set and one leans in early and offers you a term sheet and you’re not sure that it’s the firm you really wanted to work with it is incredibly difficult to slow them down and say, “we really need to finish our process” as you run the risk that they feel played. An investor who doesn’t feel like there is a two-way commitment will eventually walk and look for deals they perceive as a better two-way fit.
As a VC I of course want you to come see only me because that means I have no competition and have time to properly get to know you. But honestly you should do this before you’re actually raising, which was the basis of my “Lines, not Dots” essay. If we feel a mutual connection then my goal is to make your life easier by offering you a term sheet before you’re even raising and I’ll spend the time and effort trying to prove that it isn’t worth running a process. This is the exception, rather than the rule.
How Do You Know if a VC is Engaged?
The first meeting is usually with 1–2 people within the VC firm. You might start with a partner in the meeting or it might be a principal or associate. In any event this is a “screening meeting” or as I’ve called on my graphics an “introduction” to the firm. It’s hard but not that hard to get a first meeting for talented teams who hustle. It’s infinitely harder to get a prompt* second meeting due to rigorous time management on behalf of a VCs. (* VCs will often grant you a second meeting in 9–12 months to hear a progress update).
Many VCs will appear to be super friendly in a first-meeting because they are there to learn and get to know you and there’s no upside to being an asshole (Yes, I know some VCs are assholes anyway. Remember, I was an entrepreneur for 10 years before a VC). The warmest, friendliest and yet most direct VC on why he wasn’t going to invest in my company was Gus Tai at Trinity . Even though I got a “no” he helped me understand why I wasn’t a fit for him and that always set the bar for how I wanted to treat entrepreneurs — friendly, but direct in my thoughts.
I point out that VCs are often friendly in the first meeting because I’ve heard hundreds of founders tell me their first meeting was great only to feel ghosted when there is limited engagement following this meeting. There is a super simple way to know if a VC is engaged. If you get a second meeting, a follow-up phone call or you know they’re doing actual work then they’re engaged. No VC spends more time evaluating your company unless they know that they at least have some interest.
This is a sales process and your job is to look for “buying signals” — remember: Qualify, qualify, qualify.
Other signs of engagement are: they ask you to meet with portfolio companies (they want feedback on your product and you), they ask you to meet a colleague, they set up a call to go through a product demo / financial walk-through, they ask to speak with customers, etc.
It is NOT necessarily engagement if they ask you to send a bunch of financial information under the guise of “doing analysis on your firm.” It drives me nuts but many VCs ask for all of this because they figure more data is better than less and they might as well have insight into how your numbers look. This goes into the heart of my controversial blog post (coming soon! it’s item 7 on this series) “Why You Should Never Have a Data Room.” Come back to this blog over the next 2 weeks and I’ll explain.
But the previous is that I wouldn’t send your data lightly. I’d ask that you have a second meeting in order to walk through your data or maybe ask to walk through it with an associate. If they won’t spend time going through it with you then they’re more likely just shopping you for data. The best test of engagement is time so I like to ask people to let me walk them through the data and then I’ll send it to them afterwards — even if it’s just a web conference call walk through. Your job in the sales process is to test engagement so you can figure out how to allocate your time better. It’s also true that the more time you have engaging with an investor the more you remind them why they loved you in the first place.
If a VC “ghosts you” (i.e. they told you it was a great meeting but then they don’t respond to emails) DO NOT ASSUME it means they’re not engaged. I wrote about it here. Sometimes — best will in the world — people just get busy. Your job is to push politely until you either get a “soft no” or more engagement. If you fold simply because they haven’t responded to your last two emails you won’t have success in business development, sales, press, recruiting … anything. Every important person with whom you want to do business will at times go dark on you as self-preservation for other tasks they’re trying to complete.
How Do You Work the “Bottom End of the Funnel?”
Most entrepreneurs make the mistake of allocating too much time to taking new meetings or to spending time on the wrong investors simply because they’ll keep meeting with you. Don’t. Keep your eye focused first and foremost on any VCs that are A’s and are in your “analysis” or “due diligence” phases. This is the green and yellow portions of my graphic above which I’ve highlighted specifically as a reminder to you. Most entrepreneurs don’t put enough effort into these phases.
Sometimes engagement at the later stages seems to go dry. They haven’t said “no” but they don’t seem to be spending a lot of time thinking about whether to progress. It should be obvious to you. At the end of the process is when the really need to decide not only whether they want to invest $5–10 million in your company and take the personal risk of being wrong, but they’re also voting on how they might spend a considerable amount of their personal time for the next 5–10 years and nobody smart does this lightly.
Your job is to create reasons to spend more time with you and to draw them into engaging because the more time they’re doing work, thinking about you, spending time with you and getting their head around why this could be really exciting then the more likely they will bring you into a partner meeting or make a final commitment to you.
Some easy hacks to get in front of a VC again if your process stalls
Have them meet key team members they haven’t yet met — particularly if these are people whom the VC would want to know regardless of whether or not they fund your company
Show demo’s of product that is yet to be released. This requires you to be disciplined and not sure it early in the process but a quick message to a VC that says, “I’d love to show you some really cool new features we’ve built in that we haven’t shown the market yet — can I get 20 minutes to swing by” is a good way to engage.
Sometimes I encourage teams to create new analysis on cohorts, future revenue projections, competitor reviews, pricing studies, etc. Any information that creates a compelling next meeting is worth doing. With some pre-planning you might even know what information you show in your first or second meeting and what fragments you save for a follow-on meeting.
Another idea I use is to encourage entrepreneurs to ask whether it’s ok to meet another team member of that VC in a 1–1 session to also show them your product. You can’t ask for a generic person — it must be a named individual that has some reason for you to meet. But that’s a chance for you to “land and expand” and build more fans inside the VC firm. It doesn’t have to be a partner — every advocate on the inside if valuable.
Due diligence meetings are the hardest to secure because VCs of course know that these follow-up meetings create obligations for them and if they’re balancing five potential deals and haven’t decided whether or not you’re a fit yet then they don’t meet again easily. As a result many entrepreneurs take the easy route of taking new first meetings because they’re easier to get, easier to prepare for (you already have a deck) and the feel like progress. Frankly, this is like running a sales campaign and when the last big push to persuade four disparate departments to back you and it starts feeling difficult, you instead start working on selling to different customers.
As dumb as it sounds, this is a very common playbook for entrepreneurs. The bottom end of the funnel is hard. Damn hard. But I’d rather see your time and energy go into creating new artifacts to share with your prospective VCs in the bottom of the funnel than just purely taking too many new meetings.
Why Marketing Helps
In the earliest stages of this post I mentioned that fund-raising is a “sales & marketing” process but I’ve only spoken about sales. Marketing support is as critical in a fund-raising process as it is in a sales campaign. If you’re ever been involved with enterprise marketing you know how important it is to have marketing collateral and to have email drip campaigns and to drive re-marketing campaigns to prospects who showed interest but didn’t convert and to run PR so that you stay top of mind.
If you accept that these marketing techniques are critical in enterprise sales then please understand that they are no less critical in fund raising. When you plan out your fund-raising process you should dedicate some tasks on your GANTT chart to marketing. When VCs are thinking about whether to take a second, third or fourth meeting it doesn’t hurt that they saw an article about you in the WSJ, Recode or TechCrunch. If you have a friend of the VC who is a customer of your product or an existing investor in your company and they share news of your company in their social feeds it helps to remind the VC that they need to engage.
Every VC just like every consumer of any product likes to think that we aren’t at all influenced by marketing but of course any behavioral economist can prove to you that we are. As a founder, use this basic knowledge to your advantage.
Why You Need to Keep Feeding the “Top of Funnel”
Having pleaded with you to put more time into the bottom end of the funnel, I do want to encourage you not to completely ignore the top end of the funnel.
In some cases VCs lean into a deal, do tons of work and seemingly get so interested that they seen about to submit a term sheet only to have them say “no” at the last minute. Your lead on the deal was likely sincere in his or her interest in you but possibly got shut down when seeking approval.
The problem with putting all of your eggs into this one basket is that if you do get a “no” then you don’t have a well established pipeline of other prospects who have already gotten through a meeting or two and you end up having to go back to square one and you lose 6–8 weeks, which can be existential for some startups.
It seems obvious that you shouldn’t count on one VC whose process seems to be going well but I’ve seen so many entrepreneurs do this that I want to highlight it and remind you not to let this happen. Even if you are certain that you’re about to get a term sheet you need to keep working a few names in the top end of the funnel all of the way through a signed term sheet. Never just assume that this will come through. I know you’re likely tired at the end of a process but it’s important to sprint through the finish line. Even if you DO get a term sheet there’s no saying you’re going to like the terms and with no pipeline behind you you’ll likely feel pressured to just say “yes.”
Fund-raising is a sales & marketing process in which the buyer is a VC and the product is equity in your company.
Any great sales & marketing campaign begins with methodical planning and any great process is run with rigorous time allocation on the most important prospects.
Because many startup founders view “running the business” as their only job and view fund-raising as something that they’re forced to do every 18 months it often doesn’t get the time, attention and resources it deserves. It’s true that fund-raising in its own right won’t make you successful, but being successful at fund-raising can give you a distinct advantage in the market against your competitors who aren’t as good at getting financed as you or have to spend more time in market.
Plan accordingly. Fund-raising is a year-round activity and never ends. Place a small amount of your monthly time allocation to this task. Outside of fund-raising periods it should still be at least 15% of your time. It’s a large part of the job of a successful CEO.
Whether you’re fund raising from angels, seed investors and VCs — as an industry we succumb to “herd mentality.” There are a few exceptions and originally thinkers but it’s maddening how much group think and need for social proof there are. Nobody commits, nobody wants to set a price, nobody wants to stick their neck out then BOOM! Reid Hoffman is in? I’m in for $500k. Wait, make that $1 million. And please reserve another $1 million for me — I just need to call my LPs to see if they want to do it with us.
I hate it. It’s like the entire industry wants to outsource its brain to the smartest person they know and then follow that person. And for a founder it’s maddening because you feel like until you find that anchor you’re spinning plates.
I mention this because it’s critical that you not let the fund raising process psyche you out.
“You might hear 9–10 “no’s” in the early stretches of your fund-raising process. It is CRITICAL that you not let this get inside your head. Just remind yourself of lemons. Sure, you need to learn what the common theme of the no’s are and be willing to make adjustments to your pitch. But if there is nothing wrong with you then please don’t let early rejections alter your course.”
Many entrepreneurs let the early rejections get to them and it’s normal because when you hear “no” you think “what’s wrong with me!?” I remind founders that the no’s come early because it’s super easy to qualify out a deal that you know is unlikely due to stage, focus, geography, competitive deal you’ve done or even just the fact that you’re too busy right now. These are the “lemons that ripen early.” The “sure, let’s continue the process” by definition are not yeses so the no’s rack up and the yeses stay stuck at zero.
While I tell founders not to let the lemons get to them I also have to remind people that
“It only takes one yes to have a successful fund-raising round!”
Founders read the tech press every day filled with stories about these $20 million fund-raisings by this firm and that firm and it sounds like everybody else is doing it except for you. Fund raising seems so easy for everybody else and you’re doing something wrong. What you don’t know is that MANY of these financings have been a months’ long series of no’s, compromises, hard terms, heartaches, arguments, self doubt, followed by a “yes” that saves the day. When you read about the funding in the press it sounds like it was a walk in the park.
I’d like to repeat, “It only takes one yes to have a successful fund-raising round.”
In the next post I’m going to talk about “funnel management” and how to handle all of your VC pipeline discussions and how to keep your process alive but the first step is to keep your confidence alive.
In the mid 1990’s I was in my 20’s and single I lived in France and groups of us would go out to dance clubs. We’d sit around in groups of guys having a couple of drinks and occasionally somebody would ask a girl they didn’t know to dance. For the most part if you got one or two rejections you’d return to the pack of guys feeling a bit of wounded pride and decide it was safer just to hang.
There was one guy named Ron Lawrence who always met girls and was always out dancing with or talking to girls. I didn’t understand it because while he was a decent guy he wasn’t extraordinarily handsome, funny or charming. He was just a normal guy like the rest of us.
I once asked him — and this is a true story — “How do you always manage to get girls to dance with you or give you their numbers? Every single time, Ron! What gives? I don’t get it? Your record at meeting people is 10x anybody else in our group.”
What he said has always stuck with me and while it never helped me at the club it has always helped me in business.
“Mark, the only difference between me and the rest of you is that I’m willing to hear ‘no’ 15 times before I get a yes. I’m no better looking, funnier or a better dancer than any of you. But I don’t let ‘no’s’ get to me. I don’t take it personally. I just know that I’m not for everybody so when they say “no” I just think I must not be their type. You guys fold after one or two rejections. But I meet a lot more girls.”
Fortunately I met the love of my life through work so I never had to follow his dating advice but I’ve always remembered Ron Lawrence in business. When I’m fund raising I never let rejection stop me from feeling confident in the next pitch, “I’m just not their type.” I have successfully used this in business development, sales, fund raising and even the press. If you’re willing to be persistent, if you have thick skin and don’t take things personally, if you maintain your confidence, charm, sincerity and grace then you can usually power through the difficult days of knocking on doors.
Sometimes you have to find creative ways of getting to the next milestone. Sometimes this means laying off staff, doing consulting on the side, taking prepayments from customers, raising a small amount of debt, doing a convertible note — whatever. But if you can stay in the game you can often find that one yes.
It only takes one.
And if you’ve ever been there, had the stress, had everybody say “no” to you, gained weight, lost sleep, visualized telling your employees you went bankrupt only to find that at the last minute somebody funded you then you know the really fucked up thing that happens next. When you finally get a term sheet you get three.
When investors hear that somebody else wanted to fund you it gets their FOMO going and they pile on. When a VC submits a term sheet all of those angels & seed funds who wanted to fund you “once you got a lead” are your new best friends. When you get your term sheet your existing investors suddenly fight over prorata rights. When you’re funded you’re often over-funded.
Once you have been through this you understand FOMO. And once you can channel this energy from “almost have a term sheet” into a feeling of “act now or you’ll miss out” you can get those sitting on the fence to fall off the fence. And in a later post I’ll write about why you want them to fall of the fence even if it means “no.”
Happy raising. Head up. Even Amazon was told “no” by many before they built the world’s greatest company. It only takes one yes.
You had an amazing meeting with an investor. Your product demo crushed. The dialog was great. They told you how much they loved your space. The meeting was only supposed to last 45 minutes but you ran 90. The assistant tried to end the meeting twice but was shoooshed away.
You race back to the office to tell everybody how well it went and you wait for the follow-up call to have a partners’ meeting or talk about term sheets or at least dip into due diligence. One week. Two weeks. Oh, fork. What do I do now?
This is a very common scenario when entrepreneurs pitch VCs and frankly is a very common scenario when VCs try to raise money from LPs. It’s predictable, there is no reason to get mad about it and with a well-designed play book you can overcome this much of the time.
I call it, “Remind me why I love you again?”
When you pitched me I really did love you. I was amazed at your innovation, approach, cleverness, enthusiasm, leadership traits, background, education, team — everything.
You left the meeting dreaming about money and finally having resources to do all of the things you wanted to do. I left the meeting and had to attend a 3-hour board meeting where two founders have been fighting and each want the other one fired.
After my board meeting I had to do an interview with a CFO candidate that one of my portfolio companies asked me to speak with. I then had to review a nefarious IP lawsuit filed against another company and help the CEO figure out whether we should just pay it or join forces with the other companies named and fight it.
At night I had a group dinner where I met 6 new entrepreneurs and hung out with some old friends from law firms, banks and other VC funds. I raced home to put my kids to bed, say hello to my wife and then spend a grueling administrative hour doing email. I had a nice “thank you” note from you and remembered that I had something exciting to look forward to working on.
But it’s only Tuesday. Sigh. Wednesday I have 4 companies coming in to talk about their companies. Some were interesting, some weren’t. I also had to negotiate a follow-on round at a portfolio company because new investors were trying to force a bit option-pool top-up that would dilute the founders and existing shareholders and existing investors were fighting over prorata rights.
Rinse and repeat for 10 days and I keep reminding myself that I’ve got this to do list of new deals the stack rank and there was that company I had seen and liked a couple of weeks ago. But I have to catch a flight to New York for a two-day computer vision conference and 2 board meetings, 2 board dinners and a catch up with my LPs to tell them how our fund is going. I fly home Friday night, weekend on the soccer field with the kids and head into a Monday partner meeting that will be contentious because there are two controversial investment decisions to make.
A few weeks have slipped by. I know you emailed me and I emailed you back. I asked you to send over some cohort data and I did get 30 minutes to go through it the other night. I developed a list of questions to ask you next time we speak — especially about churn rates and your high CACs last quarter relative to the previous year. Was that a blip?
18 days later we hop on a call. I have a 30-minute window between other calls but I really want some time with you. We hop on the call and walk through the spreadsheet and get lost in the weeds.
Weren’t you the one who went to … oh, no. That wasn’t you. You went to Wash U. I remember. But your co-founder had been senior at one of the big enterprise software companies and if I remember correctly American Express had run a big pilot with you. I think??? Right?
I know this sounds exaggerated but this is the life of an investor. Frankly, it’s the life of ANY executives with whom you want to sell product, do a business development deal with, execute M&A, a journalist you want to write about your company — anybody.
Because you have a unitary focus on financing your company or you die you seem not to miss a beat in thinking about the last meeting and the funder has been whipsawed in 20 directions. I call this the “love decay” and with every passing day it depletes just a little bit more.
If they loved you on the first meeting chances are they will pick up right where you left off but you HAVE TO find a way to get back in front of them again. Raising money is about a series of engagements where in each instance the investor gets to know you better, gets comfortable working with you, sees how you think, sees how you follow up, gets answers to his or her questions and starts to imagine what this working relationship could and would really look like. And frankly, you get to see the same in reverse of them.
But how do you get back in front of the investor? They will always tell you, “don’t worry a phone call should be fine.” It is never fine. You can’t remember why you loved somebody over the phone. It doesn’t have the same energy or chemistry. On a phone call it’s too easy to be distracted and thumb through paperwork, stare out the window or glance at your computer screen. On the phone the shoooshing admin will win the battle and whisk you on time to your next meeting.
Your job is to break the convention. Your job is to find a reason why the investor needs to see you again.
“In our last meeting you asked me about our cohorts and why retention went down. I worked on a new model and I’d really love to show it to you in person. It’s hard to completely grok reading it. Can I please just get 30 minutes of your time. I’ll come to you and promise to be fast.”
“Last time we met I didn’t have my CTO with me. She was one of the lead engineers at Uber. I think you’d really enjoy meeting her wether you decide to invest or not. Would it be alright if I brought her by your offices for a super quick coffee?”
(In fact, my personal fund raising strategy is to attend the first meeting by myself. That way when my partners in are in …. New York, Chicago, Boston, etc. there is a reason for us to re-engage because they never met that partner before. If three of us go to the first meeting there’s no reason to have a follow up meeting 6 weeks later!)
Or maybe your strategy isn’t to go pitch them again but rather to invite them to an entrepreneur dinner that you’ve organized in the private room of a local restaurant and you’d like to invite them to meet 12 other startup founders. You’re the host so you lead the table discussion, seat placement and follow ups. You’re in control. And you get to demonstrate your skill sets without even pitching.
When you get the room you have the chance to remind them why there was magic. You get to show them your enthusiasm, you get to ask questions about their process, you get to judge whether they’re “feeling it” by looking them in the eyes.
I always tell people that fund raising is a sales process. The investor has money and the entrepreneur is selling ownership in his or her company. But the real product being bought or sold is “trust.” Trust that you can deliver on what you say you’re going to do, trust that you will follow up when you say you will, trust that you will be a pleasure to work with, trust that in good times and bad you’ll be committed to making the investment valuable.
And there is no short-cut, no collaboration tool, no spreadsheet, no web conference tool that can build trust even remotely as effectively as being in person.
If you didn’t have chemistry on the first meeting it may not be able to be salvaged. Sometimes there just isn’t a fit. But if you had a cracking meeting and know that they loved you … don’t take the love for granted. Get back in front of them and remind them why they loved you in the first place. Again and again and again until the cash is in the bank.
This is part of a series on “fund raising” and if you want to start at the beginning you can find the first post, “Lemons Ripen Early” on that link along with the full outline of all posts.
There is an old management saying, “measure twice, cut once” which refers to the benefit of doing some planning. It’s the antithesis of “ready, fire, aim” which seems to be so prevalent in today’s society. The benefits you will receive from doing even some basic planning before you hit the fund raising trail are enormous.
This post has some basic advice on how to plan your raise before you hit the road. Many points will seem obvious but since I observe many fund-raising processes as a VC I can tell you that most people get even the basics wrong.
1. Create a list
It sounds obvious but the starting point for any fund-raising planning is to create a list of prospects. I know this is CRM 101 but I assure you most startups (and VCs) don’t do this or don’t do it well. Given the limited nature of how many people you’ll approach (ie not that many) I actually just do these in Google Sheets. You can use this just internally for you and the people on your team helping you in the raise or if you have existing investors or advisors you can open it up to share with them. I literally have a Google Sheet for nearly every portfolio company who is in the process of raising a round.
You will find what information you want to track but a starting recommendation that the columns would be a version of:
Who knows them?
Typical check size
2. Stack rank opportunities
Once you have your spreadsheet you really want to split the rows into a stack-ranked priority list. You can keep this simple as: A, B, C and Passed. As you work deals they might move up or down in the priority list but when you start you should have no more than 8–10 priority A’s (more is unrealistic) and no more than 8–10 priority B’s. This might get slightly longer the more you’re in market but really you should never really have more than 15–20 potential investors you’re actively working on none will get the time / attention / focus they need. C’s can be your “catch all” for others with whom your speaking and if you have a really long list I sometimes do “D’s” which are long shots.
A’s should be the people who would not only make a perfect investor for you but also those that have the highest probability of your closing them. It is not your “wish list” so if you REALLY want Sequoia (for example) as an investor but you know that you’re not really likely a good fit for them then they shouldn’t be on your A list. Essentially A is a combination of “most likely to close” and “most desired to close.”
Let’s say the C list is probably your “safety schools” — not bad options but just not your first or second choice.
I’d probably also add a list for “follow on checks” for the smaller funds that might be good with adding a small amount to your funding but only once you’ve found a lead. You may be able to include them, you may not, but best to have a few on your list.
3. Qualify, qualify, qualify
The first thing you need to do when you sort your potential firms into “segments” (A, B, C, D, Follow On) is to know who would be a good fit for you.
One first-pass qualification is “stage.” If you’re raising a seed round (say $1.5m) and the firm you’re talking to manages $1.2 billion — it’s probably not going to be a good fit. Conversely if you’re raising $20 million in a C round then you probably shouldn’t be targeting an $80 million fund because they aren’t likely a good fit.
The second-pass qualification is “industry focus.” If you’re a SaaS company and the firm is a “consumer” firm (or vice versa) then don’t waste your time. If you’re building an education startup and you don’t see any logos of education companies on the firm’s website you are likely targeting the wrong firm.
The third-pass is geography. If you’re talking with a firm that mostly only invests in the San Francisco Bay Area and you’re in Minnesota, you’re probably wasting your time for a seed or A round unless you find somebody at that firm who is from Minneapolis and comes home 2–3x / year already.
The next pass is the “competitive pass” — have they invested in somebody that is very similar to my business? If they have, it’s unlikely they’ll make a second bet. If they’ve backed Lyft and you have a company that you believe can compete with Lyft, it’s exceedingly unlikely they’ll back you. If you sell glasses and they’ve investing in Warby Parker, you’re wasting your time.
The final pass is “have they invested in any companies in my space before?” I wouldn’t rule somebody out because I’m a computer vision startup and I don’t see that on their website, but if they’ve done 5 computer vision companies I should prioritize them.
As an investor I can tell you that when I meet an entrepreneur who knows very little about our fund or me as an individual it’s a huge turn off. It’s not about my ego but it’s more that if an entrepreneur can’t bother to spend a few minutes even reading our website then I know they aren’t pursuing us as a firm with intent and I know that when they do business more broadly they’ll likely “wing it” on important things when 5 minutes’ prep would at least have covered the basics.
4. Know the firm but also know the partnership
So by now you have 50 names on a spreadsheet with 8–10 A’s, 8–10 B’s, 10–20 C’s and 10 D’s. That is the firm qualification. Next up you need to now find which partners in which firms have led deals that look like yours. There is no sense in meeting Jonny as Firm X who is the consumer guy just because you know him when Elizabeth is the one who funds AI deals. People make this mistake all the time.
You also need to know “who can get deals done?” Investment professionals tend to fall into the following categories:
Not an investment partner. Can be worth meeting but then you still need to get access to a decision maker. So you are meeting a gate keeper. At some firms this is necessary at others it isn’t.
Partner on the way out. This is a partner who is either so rich and successful that he/she doesn’t do many deals anymore (let’s say a “golfing partner”) or it can be a partner who hasn’t been successful and is being transitioned out.
Super busy partner. This can be somebody on 15 boards or maybe the managing partner. They still can get deals done but they’re probably more selective given time constraints. The good news is that they can clearly get deals done! The bad news is that they probably aren’t dying to do too many more.
New partner. The good news is that new partners are dying to do deals since they don’t have board seats and are keen to get experience. The down side is you don’t yet know if they have the political clout to get deals approved.
Active partner. Every fund has partners who are on a few boards but not yet crazy busy and are more available than others. They likely joined the firm in the past 2–6 years, have learned the political ropes of how to get deals done but their “dance card isn’t filled up yet.” Or it could be a person who’s been around 15 years but chose to have a slower pace more recently so they aren’t as busy as somebody on 15 boards.
So I know I’m asking you to know a hell of a lot about your potential investors and you’re thinking “how the hell do I get all of this information?”
Well, the first pass you just need to research. There are enough data sources that if you can’t figure out the basics then don’t run a startup. But once you have a list I’d walk a reduced version of it around to your startup entrepreneur friends, lawyers, friendly investors who aren’t a fit for you, college buddies, etc and ask for input. If you take 10–15 coffee meetings with friends who can comment you’ll learn a hell of a lot about whom to approach. And throughout the process you should constantly be asking people, “Is that partner doing deals?”, “Do you know if she invests in eCommerce businesses?”, “Is he willing to fund companies in Boston?” etc.
All of this, of course, is Sales 101. In 2010 I didn’t know a single thing about LPs (the people who invest in VC funds). So I built a list, I walked it around, I asked other VCs for help commenting on my names, I asked who did deals like mine and each time my friends gave me new names that weren’t on my list. Over the years I’ve invested heavily in building real relationships with the people on my list and even though most have never invested in my firm each is a valuable relationship and can help me better understand the industry.
5. Research whom the partner knows both for an introduction as well as for back-channeling
So now you know the firms and the partners. You could easily guess their email addresses or ping them on Twitter — don’t. No matter how tempting it is.
If you read the “Lemons Ripen Early” post I did you’ll know that a large part of what a VC or investor is evaluating in the earliest stages is you. Borrowing from that post:
“Remember that fund raising is a sales process. The investor is a customer and they have money to spend but only for a limited number of companies. They are buying trust in you that you will build a large business that will be valuable. The first “Blink” evaluation they’ll make is about YOU and only when they’ve subconsciously decided whether they find your smart, likable, credible, a good leader, inspirational, competitive and all of the other subconscious attributes they’ll look for do they begin to truly think about whether your business idea has legs.”
Whether you like it or not we all interpret the world through “filters” that help us determine value and quality. If you don’t have an intuitive sense for this please read Cialdini’s Influence or Kahneman’s Thinking, Fast and Slow or watch Brian Games.
It’s why when you hear that somebody went to Stanford, worked at Google, graduated summa cum laude, played professional tennis or whatever else determines a degree of achievement, competitiveness or success in your mind you start by “leaning in” when you meet that person. I am NOT saying you need to have gone to an Ivy League school to succeed — I’m just pointing out that filters play a large role in people’s perception of quality. Or how about — you were a “YC company” — that implies a level of “potential” that speaks for itself.
I say all this because the person who introduces you to a potential investor matters a lot. You need to spend a hell of a lot of time and effort figuring out your best intro. The highest quality is usually another entrepreneur but there are other sources of intros that can pay off.
When I started meeting LPs in 2010 I would walk my list around to my friends who were VCs and say, “I don’t want you to introduce me to 10 names on this list. But are there 2 that you know well enough to make a high-quality introduction? If you don’t feel comfortable — don’t worry! I can can get other intro’s. But if you’d feel comfortable advocating for me and there are 1–2 names in this list that you could help with I’d greatly appreciate it.”
And so I got > 100 intro’s but it took huge time and effort. And it was worth its weight in gold. The people who intro’d me I’m guessing knew that I would be hugely respectful and prepared when I turned up so that they wouldn’t look bad. The “social proof” of a high-quality introduction is worth the time and effort. Back then I literally wouldn’t travel for any meeting unless I got an introduction first.
I measured twice and cut once. I figured I was wasting my time unless the LP was leaning in on my first meeting.
The hardest thing is that after you’ve had a great first meeting with a VC (or LP) you expect it’s all going to start happening! The meeting was great! I’m going to now get a whole bunch of data requests and activities!
Then people are disappointed that they don’t hear back. Some people even get mad and say, “it’s their damn job to follow up — I can’t believe how unprofessional they are!”
Well, that may be true. But it’s a sad reality of the modern world that we’re all crazy busy and despite the best will in the world often people don’t get back, they get busy. If you’re not able to find ways to keep a prospect engaged during your sales process then you have no hope as an entrepreneur when you eventually need to run sales campaigns, sign business development deals or one day sell your company in a large transaction. The key to all success in life is follow through and what separates out the truly successful people from the less successful people in funding is often follow through and follow up.
So while it might seem like it’s unfair, the golden rule in sales is that when you’re the seller you own follow up. Always. So best to be humble. Not get mad. Understand the other person’s shoes a bit. And find ways to drive the engagement yourself.
The good news is that in the next post I’m going to spend most of the post on how to do this!
What’s the next post in my series?
In the next post titled “Remind Me Why I Love You?” I talk about the need for in-person connectivity with potential investors, why one meeting isn’t good enough and how to get in front of your investors a 2nd, 3rd & 4th time.
This is part of an ongoing series on fund raising for entrepreneurs looking to raise capital and for VCs looking to raise money from LPs. The first in the series is titled “Lemons Ripen Early” and you can read both that post and the whole outline for the series if you click on this link.
It definitely has a “d” in it, as in it’s really not fun, raising. But it’s critical for your business, for you as a leader and people who excel at fund raising have an extreme advantage over those who do not. The best entrepreneurs in our industry focus on it year-round as opposed to just once every 18 months.
As a VC with scores of startups in our portfolio we have ringside seats to many, many fund raising processes plus I had to raise money across about 5 different rounds of capital as an entrepreneur so I’ve developed some thought on the process that I hope can be helpful to some of you before you start.
As a VC I also have to fund raise every three years and these posts 100% apply to VCs raising money, too.
Rather than overwhelm you with a super long Suster post I thought I’d break it up into a series of 12 posts but provide the outline Upfront.
1. Lemons ripen early
The hardest thing about fund raising is how dispiriting it can be. The reality is that very early in your process you’ll hear “no” and it can set you back and make you think that nobody sees your vision or values your progress to date.
The trust is that “lemons ripen early” meaning that the easiest thing for an investor to do is say “no” quickly to a deal if he or she doesn’t feel like your business is in her wheelhouse, fit her investment thesis, isn’t the right stage or frankly maybe she’s just too busy with other deal related stuff that she doesn’t have time to evaluate your deal.
So you might hear 9–10 “no’s” in the early stretches of your fund raising process. It is CRITICAL that you not let this get inside your head. Just remind yourself of lemons. Sure, you need to learn what the common theme of the no’s are and be willing to make adjustments to your pitch. But if there is nothing wrong with you then please don’t let early rejections alter your course.
A huge mistake I see is that VC tells an entrepreneur no based on a set of reason that this VC felt weren’t right with the business (market size, traction to date, too many competitors, no big exits in the category or whatever easy excuses VCs have developed to politely say no) and the entrepreneur lets this get inside his or her head.
Let me give you an example. Let’s say you have built a SaaS company where a large part of the early revenue comes from a few big customers or a large part of the revenue is services based vs. software based. It’s important to know that these biases may affect a VCs evaluation of your business but it’s equally important that you not start saying early in the meeting, “I know we only have a few clients today, but …” or “I know that today we have 40% services revenue, but …”
It seems absurd reading this that entrepreneurs would do this but I promise you this is one of the most repeated mistakes I see and it often comes out in subtle comments that you drop in the meeting. You’ve lost your swagger because after 10 “no’s” you assume that everybody is going to see the same potential flaws in your business.
“I know that our repeat purchase rate is lower than the industry average now, but …”
“I know that our margins are lower than VCs like to see, but …”
“I know our revenue decelerated in the last 2 quarters of 2017, but …”
Remember that fund raising is a sales process. The investor is a customer and they have money to spend but only for a limited number of companies. They are buying trust in you that you will build a large business that will be valuable. The first “Blink” evaluation they’ll make is about YOU and only when they’ve subconsciously decided whether they find your smart, likable, credible, a good leader, inspirational, competitive and all of the other subconscious attributed they’ll look for do they begin to truly think about whether your business idea has legs.
That’s why it’s critical not to let yourself get into the weeds early in a fund-raising meeting and allow time for your concept to sink in while they’re subconsciously evaluating you. Of course you need to have answers to all of the hard questions that you know you can anticipate about your business — just don’t lead with them!
Once you accept that lemons ripen early I hope you’ll realize the following about fund raising
Fund raising can be a numbers game so you really need to do research and have a long list of potential VCs in case the earliest ones don’t bite.
Fund raising is a confidence game so you can’t let yourself get psyched out by the early “no’s”
For most companies fund raising takes a long time so start early!
The rest of the outline I’ll write as a series to come back to this blog if you want to read more.
2. Remind me why I love you?
3. You only need one “yes” & when it rains, it pours
4. Never stop working the top end of the funnel
5. The bottom end of the funnel is where deals get done
6. Why you should never have a data room — the most counter-intuitive fund-raising advice you’ll get