Venture Capitalists’ advice to startups: how to successfully raise funds

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(Last Updated On: June 25, 2015)

Venture capital fundraising in 2014  has jumped 62% compared to the previous year, reaching the highest amount raised since 2007, before the recession. Venture capitalist funds now have $32.97 billion available to be deployed for investments, according to WJS, and National Venture Capital Association, with early stage investing showing an increase of 33.1%. Historically, about one third of VC funds have been deployed into early stage companies, and about 3% went to a seed stage.

 

Venture capital fund commitments in 2014, National Venture Capital Association
Venture capital fund commitments in 2014, National Venture Capital Association

In essence, investors are ready to deploy the capital and take advantage of the thriving startup ecosystem. Because of that, 2015 is an excellent year for startups to close on Series A. To help entrepreneurs navigate venture capitalist world, I am outlining advice from venture capitalists themselves on how to successfully work with them.

How to communicate with a venture capitalist?

Mark Suster, General Partner at Upfront Venture has a comprehensive blog, Both Side of the Table, where he regularly advises entrepreneurs how to approach fundraising process from finding the best investor for their startup, getting an introduction, all the way to closing on a fund. Mark had two successful exits before he turned a venture capitalist, so he understands challenges that startup founders face as well as investors.
Because investors cannot afford time to travel long distances to manage their portfolio companies, entrepreneurs should make a list of investors they would like to work with that are located in their state or metro area. Since cold calling is frown upon, entrepreneurs should then seek introductions from local service providers (advisors, business consultants, accountants, attorneys) and fellow startup founders. Once an introduction is made, Mark prefers that entrepreneurs send him Power Point pitch deck so he can quickly scan trough it and get a sense for the company’s business model and industry. Most likely you will not get a response back simply because all VCs are very busy people; but that doesn’t imply a rejection. In fact, VCs depend on a steady deal flow to stay in business, so entrepreneurs have to be politely persistent in asking for periodic meetings and quick feedback along the way. Constant, but not overbearing communication about company’s successes and milestones builds a relationship with an investor during the fundraising process that can easily take up to six months, so the first meeting is just the first step. As long as you do not hear explicit “no, we are not interested in your company” message, you have to assume otherwise so continue with periodic email updates, and quick meetings. Finally, VCs will rarely say “No” to startups, so if you hear such feedback, be grateful that they are not wasting your time and respectfully move on. Finally, as you are getting closer to getting Series A check, make sure that you truly like your investment team as you will have very close working relationships over the next 5-7 years.

Co-Founders should have deep industry expertise

Charlie O’Donnell at Brooklyn Bridge Ventures emphasizes the fact that most venture capitalists invest in their own backyard, they invest in companies that are close to their office so they don’t have to spend time commuting to meetings because time is their most precious commodity. This geographic discrimination puts startups outside Silicon Valley and New England at significant disadvantage when it comes to fundraising. Charlie welcomes email introduction from startup founders, he receives anywhere from 1,500 to 2,000 per year and he has time for 150 meetings. Entrepreneurs that will catch his attention are people that have deep expertise in their industry, they understand in details the supply chain, competition and business models that are relevant for this segment. Both Kevin Kinsella and Heidi Roizen echo the sentiment that deep technical expertise by the founding team is absolutely necessary as they expect to be educated about this particular industry by the startup management team.

Entrepreneur’s Passion for the Business Model is a Key

Almost all venture capitalists want to see entrepreneurs truly passionate about their business model and potential because launching a company is incredibly hard work that frequently leads to a failure.  Heidi Roizen, operating partner at DFJ, advises entrepreneurs to build relationships with their VCs and always ask for specific feedback, metrics for improvement.

Is this a new business or high growth startup?

Brian Hirsch,  managing partner at Tribeca Venture Partners, differentiates between new (small) businesses and new high growth startups. Most new businesses are so called main street businesses that will not have exponential growth trajectory of having double or triple digit annual growth in revenue or number of customers or employees. Because of that, these businesses cannot provide an adequate ROI required by venture capitalists to stay in business. Instead, these businesses can get loans from variety of lenders that execute decision making process relying exclusively on financial analysis. In contrast, very few new businesses have high growth potential (think about Facebook or Google) that would qualify to be a good venture capitalist investment. If your startup has such high growth potential, Brian prefers that entrepreneurs keep him updated every 30-60-90 days about company’s milestones and successes so he can start getting confidence in startup founders and their ability to execute a business plan.

Venture Capitalists Blogging and Twitting

A good starting point to get to know venture capitalists and their work style (thank you CB Insights for starting the list):

  • Fred Wilson was one of the first VCs to actively engage on social media and has kept up with daily blogging for nearly a decade
  • Brad Feld started started blogging shortly after Wilson in May 2004 and proceeded to write 10,000 words per month for the next year while simultaneously putting Boulder, Colorado on the tech map.
  • Paul Graham compiled his blog posts into a book Hackers and Painters.

Summary

Because venture capitalists have raised unprecedented amount of money in 2014, they will compete with each other for deal flow, so entrepreneurs should not be shy about reaching out and pitching their business. Startup founders should persistently and regularly communicate the major business milestones they have achieved to the investors they would like to work with, unless they are explicitly rejected. The fundraising process takes months, so entrepreneurs have plenty of time to effectively demonstrate their deep industry expertise and explain their business model that has significant upside potential for the investor.

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Because effective communication with potential investor is a key, we offer affordable pitch evaluation and feedback services to startups.

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About Dragana Mendel 85 Articles
Dragana Mendel is a President and Principal Consultant at ANAGARD, LLC. In her role, she provides management consulting services to small and medium size businesses on the best strategy to achieve their short and long term goals.