6 Steps To Raising Venture Capital.
I have either been a CEO, C0-Founder, or First Employee at companies that have raised a total of $27M dollars in venture capital. I have closed a venture capital round in between Christmas and New Years, with some money even being wired to me on Christmas day. I have also turned down a private offer for capital from Barbara Cocoran from Shark Tank.
Step 1: Why and when to raise Venture Capital.
Let’s start off with why you want to raise venture capital in the first place. Not every business requires venture capital, it is a useful tool only for some businesses.
Venture Capital is different than other investment vehicles in that it is typically made to help a business acquire more customers now in exchange for pushing profits out into the future.
For example if you don’t expect “hockey stick” graph growth of your user base (the angle of a hockey stick is flat at first, then hits a point [venture raise], then takes off exponentially), then you are not a good candidate for VC money.
In addition, if you are a linearly growing business that is profitable, this might actually hinder your ability to raise VC money. If you are growing profitably now, they will most likely tell you to continue what you are doing and pat you on the back for a great job :-/
When you are thinking about raising money, you need to ask yourself three questions:
1. Is my idea a Billion Dollar idea?
2. What’s the lifetime value of my customer, and what does the entire customer bases’ lifetime value equate to at thousands, or millions of users.
3. What’s my acquisition cost to acquire these customers?
If VC’s you are speaking with are not asking these types of questions, then you are probably dealing with an unqualified investor who may cause you more of a headache down the line.
There are two sides to influence in raising money, the emotional and the logical.
The emotional part is the sexy, cool part of the business. Maybe you are automating automation somehow, or allowing people to book flying cars.
The logical side is a pure math problem. And if your math is correct, it can help a VC make their decision. The math involves both Lifetime Value of a Customer, and Acquisition Cost.
Uber’s pitch a few years ago might look like this:
Emotional: We help people book private cars on demand.
Logical: We know that it costs $500 to acquire a new driver today, but the lifetime value of those drivers is about $2,000 each. We want to acquire one million drivers over the next three years, but we don’t have $500 million right now. If you give us $500 Million in VC money, one million drivers will be worth $2 Billion over the course of their lifetimes.
(1 million drivers x $2,000 LTV each= $2 Billion)
See what we did there? We are using VC money now in order to acquire users now, because the users will be worth a ton more in the future.
The above is a perfect scenario to raise venture capital.
Step 2: Know The Playing Field.
One of the first things to know is that investors need you often more than you need them.
For their business -their fund that they manage- to survive, they need to deploy capital. If there is no investments made by them, then there is zero chance of a return. Remember, VC’s have investors in their funds, usually called LP’s or Limited Partners. These are usually pension funds or bigger billionares who are essentially investing in a mutual fund of high-growth startups.
So, because VC’s also have bosses they are under pressure to deploy capital. So VC’s give themselves a quota, like two investments per month of at least 150,000.
So because we know that this quota exists, we can use this as leverage to setup a “market” for our business and create fake urgency. At this point you are really competing not with the VC but against the other deals that are currently out there in the market.
You are creating a market out of thin air that never existed before. Since VC’s are required to invest, they are going to have certain emotions running through them, and we are going to push them to make a decision. This is where the strategy comes into play.
Remember this: raising money is like dating in high school. Nobody wants you until they see someone else with you, and that gets people attention. Others start to take notice and you have more of a market.
And the same goes for raising Venture Capital. Nobody is going to give a shit about you until somebody else does. Some lazier investors won’t even talk to you until somebody else has committed to you. From their perspective it makes sense. As much as they want to invest for the hockey-stick growth, they want to protect their investment from risk. And nothing de-risks things better than one of their VC buddies at another firm already doing their due diligence on an investment and saying yes. Often investors will go in on investments together. The VC crowd is pretty small, even in a big city like NYC where I have raised. So once you are in with one it will make it so much easier for you. You just need one and you can use that to create urgency and play off of it.
Step 3: How To Get Meetings:
So, getting the first yes is going to be the hardest one. I know for me raising money for ShineOn, I had over 30 calls and in-person meetings before I got my first yes. This is a sales funnel like any other and so you need to be balls out getting as many meetings as possible. You should use a CRM or a spreadsheet and keep track of who you spoke to, when you last spoke to them, and what you spoke about. Create categories for hot, warm, and not-interested.
Find advisors first if you can. The best ones are other founders that have gotten a return for their previous investors in a prior project. Their intros are like gold.
In combination with finding advisors for intros, you should also do your own scouting. Go to Crunchbase.com and find similar companies to yours and lookup who invested in them. For each VC firm that made an investment, try to find the individual parter who made the investment in said company. Reach out to this person directly.
At the VC Firm:
Partner: These are the decision makers. These are the people you ultimately will want to pitch and get in front of.
Associates: These are “scouts” just like baseball scouts. They will ask a lot of questions but cannot make any decisions. They will talk a big game and try to intimidate you to break your idea but with proper preparation you can befriend them and get to the Partners.
Your Pitch Deck:
VC’s get pitched sometimes hundred of times throughout a normal month, and they probably look at 3-5 slide decks per day. The first thing they are going to ask you if for you to send them a slide deck. You want this to be SIMPLE. I often reference AirBnB’s original slide deck. The start with the perfect “Problem/Solution” scenario:
If you have no sales, or no email signups, or no free trials, then VC’s will ask you to come back when you have more traction. You might have to do 2-3 rounds of this. So keep in touch, be friendly as most importantly keep your growth up and to the right.
Even garnering a large email list can be good traction and help you with your pitch. In Uber’s case:
”We have 100,000 email signups. We know that 1 of out 10 from the email list will become drivers when we are ready. And each driver’s lifetime value is $2,000. So our email list is worth $2,000 x 10,000= $20 million.
Step 4: The Deal Sheet:
Your first yes comes in the form of a deal sheet. Typically I think its good to ask for a deal sheet instead of pushing a deal onto a VC. You are a tiny ant who has done nothing with your business at this point, so just take it easy and don’t think you are worth more than you actually are. Sometimes founders and VC’s agree to a basic Pre-Money valuation of $4 Million with investors putting in $1 Million Dollars, for a Post-Money valuation of $5 Million. In this case, VC’s will own 25% of your company and you will have $1 Million in the company’s bank account.
The deal round is the first round of financing. The deal sheet you choose sets the deal for all the other investors. Most VC’s will not want to make the first move and be your “lead” investor. Most wait for someone else to do this.
You can ask for deal sheets from the VC’s you talk to, but like dating in high school, nobody really wants you until you actually have a deal sheet from somebody else. So don’t fuss around too much on figuring out the valuation of your company and getting the best deal possible. Just get 1 or 2 deal sheets, pick one and move on. What comes next is the fun part.
*Side story. One time raising money, I got a deal sheet from Barbara Cocoran from Shark Tank (I was not on shark tank, but had a connection to her). Basically the deal was a horrible deal for me. She was using her power and influence to take a king’s random from the company. What I did was I took her deal sheet and I shopped it around. Because she is a big celebrity, people were impressed I got a deal sheet from her. I got their attention. Then I said to the other VC’s I was speaking with “Yeah Barbara is cool but I don’t really want to take money from some TV-celebrity who will probably never be around to help. I would rather work with someone like yourself- do you want to make an offer (deal sheet) instead?”. And that is how I got my first yes.
Step 5: Turning On The Jets.
Getting your first yes is like getting into Harvard. It was super hard to get in, but now that you are in, things are a lot clearer and get a little bit easier. Now you just have to grind and do the coursework (finish raising the money).
At this point you will have selected a deal sheet that sets the terms of your venture raise.
Ask your lead investor who made the deal with you when you think you should close by. They will give you a date and then you can ask them who else might be good to talk to.
Your lead investor is now committed, and going to want to help you and hopefully if they are well known, will provide many intros to you. They will become your new best friend.
At this stage you can also start creating deadlines.
”Our lead investor is XXX and we have a closing date of June 1.”
You can be more brash once you have commitment from someone else.
You can go back to all of the VC’s you were talking to in the first stage and start waving your deal sheet at them. Often times anyway they will ask you to come back with not just traction but a lead investor (doing what you say you will do is always the best way to raise money, and treat investors in general).
You will need to do a lot more meetings to finish closing the round. Usually there is a minimum amount of investment dollars that need to be committed in order for the round to close. Lead investors don’t want to be the only ones in the deal, they de-risk it by joining with others. So you need to get above a certain threshold of dollars closed (for example, on a $1Million raise it might actually be a minimum of $750k investment needed to close).
When you are in meetings on the phone, or in person, just remember that you have the leverage now that you have a lead investor and a deal sheet and a closing date. After explaining your business a few times, and answering lots of questions with a VC, you can literally at a certain point say “John, are you in or are you out? We’ve been speaking for a while, I hope I have answered all of your questions. At this point I have 10 other people to talk to before the round closes, so I need a decision from you.”
This type of urgency is how you get the deal closed. Remember at this point you are not competing with VC’s but against the other deals in the market. If those Founders are bad at closing, or bad at asking for the money, then that is a huge advantage for you. Watch Boiler Room a couple times, get in the mentality that you are hot shit and go close your round.
Step 6: Getting The Money
Congratulations on creating a market for your business that never existed before. It’s a pretty cool concept. At this point you will have to decide who’s attorney to use to draft all the deal paperwork. It does not matter and you will most likely split the costs anyway. You will need to set a closing date, which is the date that all of the docs from all the investors need to be signed. This is usually a few days before the wire date, the date the VC’s actually wire you money and the deal is officially closed. Often times you will feel like you are herding cats, and at this point raising money is a full time administrative job. Sometimes you have to move your dates back by a week or two. Enjoy it because you may only get the chance once in your lifetime :-)