Venture Capital – Financing

It is important to think of fund-raising as a process of buying capital rather than selling equity. This difference in mindset is subtle in the packaging, but very important with your placing efforts because venture capital is a commodity.

Prequalify a shortlist of venture capitalists (VCs), and pitch only to senior partners. Do not waste your time with “tire-kickers,” and be sure to protect your venture team from looters. Most importantly, do not download your hard-earned business intelligence on a VC firm if they are not truly qualified to take your meeting—you do not want them learning at your expense.

First-time entrepreneurs out raising money normally make one of two mistakes in approaching venture capitalists. They contact either too few, or too many.

The typical first-time entrepreneur will carefully orchestrate an access point with a single investor. The VC will ask for the business plan package and then the entrepreneur will wait patiently for a response. Then most often, in eagerness to please the one investor, the entrepreneur will eagerly hop into the teacup ride and whirl around, reworking not only the business plan, but also reconsidering the entire business model, strategy, and venture team in attempts to please this one investor. This teacup ride consumes a huge amount of time and critical resources, especially if the entrepreneur needs money pretty soon.

On the other hand, some entrepreneurs will go to the library and photocopy five-hundred names from a comprehensive reference like Pratt’s Guide to Venture Capital Sources. Then they methodically prepare a nationwide “carpet-bombing” strategy in attempts to get the feeling that they are shopping it around.

It Is About Warm Body Referrals

According to Tom Clancy, a partner at Enterprise Capital, raising money for start-ups is probably more dependent on personal relationships than it is on the underlying potential and economics of the deal. Jesse Reyes, a researcher from Venture Economics, says that the best VCs only want qualified leads, adding that an introduction increases your odds of getting your foot in the door at least ten times. This “warm-body” referral is so important in the venture drill.

Gary Rieschel, executive managing director at Mobius, agrees: “The reality is that there is no way any firm can respond to the flow of business plans it sees. You start to screen based on who is saying that this is a good deal.” As a result, VCs tell us that you need to work on a strategy for getting some kind of introduction.

Placing with angel investors is even more difficult. In their book, Angel Investing: Matching Start-up Funds with Start-up Companies, Mark Van Osnabrugge and Robert Robinson discuss why.

– First, there are no directories of angels; angels prefer anonymity to avoid being carpet bombed with business plans.

– The subject matter of angel investments is often private and personal; angels come from a population of wealthy individuals and want to avoid attention to their financial position.

– Finally, there are no public records of their investment transactions.

As Gerald Benjamin and Joel Margulis point out in their book, Angel Financing: How to Find and Invest in Private Equity, 57 percent of angels receive their deals from a friend, family member, or co-worker, and 31 percent receive referrals from professionals. They found that only 12 percent of angel deals come from cold calls.

Placing a plan with an angel is a process of finding out who is who, and of networking around; we call it “triangulating.” This triangulation process involves meeting with at least three individuals who can facilitate a warm-body referral to a particular angel or angel group.

John Morris, a past-president of the Tech Coast Angels, one of the largest angel investment groups in the United States, told us that “what’s gotten our interest in the past is that the entrepreneurs have done their homework on the process, in their space and on us—their investors.”

So how do you get your first warm body referral? As Guy Kawasaki of Garage Technology Ventures says, “You have to be a part of the inner circle to get funding. You have to know someone on Sand Hill Road or at least play golf at the right place. Unless you’re well-connected, it’s difficult to get noticed.”

We suggest that you begin when you first structure your organization. Review our discussions about building a great venture team. Work on getting the best professional service providers, advisors, and board members. You need to have a strong external team ready to go to bat for you.

Here is an insider secret that one experienced venture capitalist shared with us: Do not forget that investors are humans too, which means that they do have to eat breakfast, lunch, and take coffee breaks—all of which present a great opportunity for an informal discussion. It can give you the chance to talk (they will be eating), and it is structured, meaning that it is not going to last much longer than forty-five minutes.

Besides, you never know whom else you could meet while treating a well-known VC to a meal. Do not bring along your team, and do not expect to do a presentation on a laptop. Consider this an extended Fast Pitch opportunity and a one-on-one sales call.

If there is just one rule, one thing to remember about working with private equity investors, it is this: Their world is very connected—more connected than you could ever imagine. As Pierre Omidyar from eBay discovered, “The more VCs you talk to, the more chance you have to screw up your presentation, and then someone says, `They really screwed up, they don’t know what they’re doing.’” Investors know when a deal has made the rounds and they basically will shy away from the deal that has made the rounds.

Remember that investors want to be on the creative edge of ideas and innovations, not the lagging edge. Plan on everyone in the VC community talking to each other, and even on their ganging together and completing one tough term sheet instead of two or three competing term sheets. They could basically tell you to take it or leave it. Finally, be careful about incorporating in your business plan and package any feedback, reviews, or key quotes from other investors you meet along the way. First, it can start the teacup ride; second, understand that for those who may get excited about seeing other names mentioned there may be an equal number who get turned off.

The Follow-Up With Investors

Since you are following the venture drill process, expect that just about every professional investor you contact will claim to be “interested,” by responding with either an e-mail or a phone call. It is your job to follow up and get the investors on the phone, making sure they really have a strong interest in your deal.

A good gauge is how quickly they arrange a meeting, whether a first-time informal meeting over coffee, or even better, an invitation for you to present before partners. In these early contacts, consider this: How is the chemistry between you and the investors? We have found that the importance of personal chemistry between the entrepreneur and the venture capital firm cannot be overemphasized. It lays the roots for success. It fertilizes the value-adding process. What is your attitude toward them as potential investors? What about having them in your board meetings? As Arthur Rock states, “I prefer someone who wants me to play a role in the enterprise’s decision making.” You will need to manage this relationship building with confidence, not desperation.

Investors can, and will, smell desperation. Like with all champion golfers, you need to have the confidence to “play it where it lies.” Confidence in golf comes from being well prepared and knowing what to do after each shot you make no matter where the ball lands. Be sure to ask questions. Find out issues that move investments along and what you can do to facilitate the process.

Finally, the bandwidth of time is the most precious commodity of investors. Watch the fine line between persistence and annoyance. It is a fine line that entrepreneurs must learn to walk.