A big part of my practice over the last fifteen years has been working with companies that are seeking financing. Regardless of anticipated structure or amount, there are specific strategies and tactics that can be used to significantly enhance the prospects of a successful financing.
These tips are particularly relevant when seeking venture capital (or other institutional level) funding. Meetings with venture capitalists (VC) are rife with pitfalls and can present significant challenges to entrepreneurs. Having participated in well over one hundred financing meetings, I can attest that there is no substitute for the advice of a seasoned professional ( this is why companies hire firms like Apheleon Group as advisors ). However, there are some core elements that every entrepreneur should know prior to seeking financing.
This turned out to be an extensive subject, so I’ve broken it up into a series of three posts. This post will focus on questions to ask and answer before you start searching for funding and some thoughts on researching and segmenting prospective financing sources. Part II will offer thoughts on the initial approach, scheduling process and etiquette of VC meetings. Part III will examine core elements and strategies of presenting to a VC and offer suggestions on meeting management and follow up.
Why are you raising money?
There are a host of questions that revolve around the “why” of growth financing. If you’re serious about obtaining VC financing, you need to start by addressing these. In order to do so, you’ll need a very robust financial projection model. This will need to include a projected balance sheet and cash flow statement and key off of specific growth assumptions. If you don’t yet have this, STOP. You must produce it before you even consider seeking financing. If you need assistance, hire a consultant (an accountant or advisory firm – like my company). Once you’ve worked through your financial projection model, you can go on to answer the following:
- What specifically do you need the money for? An institutional investor wants to know that you’ve spent the time to build a plan for spending any financing. Do you need to fund manufacturing? Build a sales team? Commercialize a prototype? Detailing the primary purpose for your capital creates legitimacy and an atmosphere of comfort for prospective institutional investors.
- How long will it last? If you secure the financing that you seek, when will you next run out of working capital? Many entrepreneurs address this point by seeking an amount that will carry them through profitability. It’s fine to proceed in that fashion, but be certain you know how much “cushion” exists in your analysis. Also, analyze whether you need all your funds up front. Although it’s always preferable to have money in your coffers, sometimes a funding source may be more comfortable providing the money in tranches, based off of key milestone completion.
- Why venture capital financing? I once had an entrepreneur answer this question as “Because it’s there and available.” Not precisely the point I was trying to elicit from him. The fact is, venture capital financing comes with its own brand of complications and challenges that other forms of financing may not have. For the most part, venture capital financing is far more “active” than other types of funding. You need to be prepared to explain why the components of venture capital financing fit with your particular business in a manner that sounds convincing and reasonable.
When seeking growth financing (at least in the initial phases of your approach) take the time to research prospective funders and make choices. Although it is tempting to simply secure as many meetings as possible, that’s not usually the most effective strategy. You should narrow your focus in the following manner:
- Expertise. Start by approaching funds that have demonstrated that they invest in and understand your “space” and phase of business life-cycle. Spending your time pitching to a group that is unlikely to be interested in the first place is a time-wasting and debilitating process. Performing this research is now relatively easy. Most institutional funding sources have detailed websites, including a list (with descriptions/links) of their existing (and often previous) portfolio companies. You can scan through these companies to determine if they are in your “space” (direct or related). Additionally, many VC’s set forth their investment philosophy, including the areas in which they have interest. This allows you to build a list of prospective financers by classification: (a) have invested in the “space,” (b) likely have interest in the “space,” (c) have related investments and (d) have no investments or expressed interests.
- Who? Once you’ve segmented the funds, you can perform further research on each fund that you plan to target. Although VC’s appear to operate by consensus (there is an investment committee, after all), that can be a bit misleading. For the most part, each and every deal at each and every VC is managed and “championed” by a particular partner. If you don’t secure a champion who is prepared to push for financing you, you won’t get funds. This means you need to target individuals at each funds. Once again, this is now relatively easy to do. Review the biographies of key players at the funds you are targeting to understand their areas of expertise. Many times, the biographies (or the portfolio list) match up partners with portfolio companies. One tip for determining this – check which Boards each partner serves on. When you identify the key individuals for your space, do your utmost to make any and all approaches through them. Be sure to suggest that those partners with appropriate expertise are part of your pitch meetings.
By the way, when first contacting a VC, do your best to avoid cold calling. Check out Getting a Return Call for some tips before making your first approach .
At this point you’ve done some significant preparation in regards to your own business and substantive research about prospective financers. You’re now ready to move on to the next step: outlining your contact plan and approaching the VC’s. We’ll address this, as well as certain rules of etiquette, in Part II of How to Get Venture Capital Funding For Your Business.
Interested in more on this subject? Check out How to Get Venture Capital Funding for Your Business – Part II.