You need to raise funding for your startup, so your friends start introducing you to investors – angels, venture capitalists, rich folks, and so on. After a few weeks and a number of conversations later, you get a term sheet. You think it’s a low-ball offer. So you turn it down. A month goes by, another term sheet shows up, and it’s even worse than the first. So, of course, you turn it down. A few more months of meetings go by, and one day, an investor says to you: “I heard you guys are having a tough time raising money.”
What a situation to be in! So how do you avoid it?
The answer: treat your fundraising as an event.
Why eventize your fundraising?
Two main reasons: (1) You want the term sheets to come in about the same time, so you can compare them, and choose the best offer with the best terms (not just the valuation, mind you). (2) VCs talk to each other. If there’s an interesting deal, it is a very natural thing for a VC to ask one of his counterparts: “what do you think of this deal?” Word gets around. You don’t want the fundraising process to drag on and have a “stale” feeling within the VC circle.
How do I make fundraising an event?
Line-up your meetings. When your friends introduce you to investors, the first conversation (or email exchange) is to qualify them: ask if they invest in companies in your space. Please don’t be lazy: do your work on the Internet first, before you ask them questions whose answers can be easily found on their website — investors don’t like lazy founders.
Then say something like: “We’re not raising money right now, but we will in a few weeks. Is it okay that I reach out to you then?”
When you have a sufficient number of qualified angels or VCs who are interested (say six to more than ten), select a date far out enough so that you can get most of the first presentation meetings scheduled in the span of one week (or so). Starting the process of talking to VCs simultaneously increases your chance of having those term sheets come in around the same time.
Use sales process management techniques. Ensure you know where you are in the sales process with your investor. Try to get the interested VCs to give you the term sheet within a predictable time frame. Saying something like “I don’t want to pressure you, but I do have a couple of term sheets, and I’d really like to work with you if at all possible” is a good way to turn the pressure up on the investor.
Of course, the best way to avoid problems with fundraising is to have such a great company that investors are clamoring to get a piece of the action. But even if you have such a company, treating the fund raising as an event will help you optimize your fund raising results.
It’s a marriage, not a contest
Here are more tips. What you’re doing is more than a contest with the VCs for the best deal (one of my partners suggested I should be clearer about this). Here’re a few things to think about when raising funds:
Don’t oversell. It’s not an adversarial process where you try to ‘win’ the deal.
It’s not a transaction, but the start of a long term relationship. It’s not just about crossing a line or reaching a certain stage in the process.
Mutual match. You choose the investor as much as the investor chooses you. View it as a process of getting to a mutual fit - a marriage of sorts.
When I was a practicing entrepreneur, I used to run this strategy, but I have not seen it written up anywhere, so I thought it would be useful especially for folks new to fundraising to put this article out.
If you’re a hot deal that I’m interested in, I just made life harder for myself as a VC by telling you how to maximize the terms of your funding by having us compete for you. But that’s okay, according to our philosophy. When we engage a company, it is almost certainly going to be a lifetime of collaboration with the entrepreneur — we only want to go forward if both sides believe that it is a win-win situation.
• Here’s a classic on sales process management: The New Strategic Selling (by Miller, Heiman, et al)
This was initially published in Tech in Asia.