Many founders aren’t familiar with the inner workings of VC firms. I won’t attempt a detailed explanation here, see Brad Feld’s book Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist to really educate yourself. But here are some tips that may be helpful.
Here’s how I frame the process of raising capital:
Venture firms are financial management firms whose goal is to manage a portfolio of investments in order to generate the maximum return to their investors, known as LPs or Limited Partners. VC firms may have multiple funds, with the same or different set of LPs.
Roughly speaking a typical VC firm gets about 1,000 pitch decks a year, which result in roughly 250 meetings. So you have about 25% chance of getting a meeting with a VC. But the reality is without a warm introduction, meaning an introduction from someone the VC partner knows and trusts, preferably and entrepreneur who has made money for their firm, your chances of getting a meeting are nil and zero.
Those 250 meeting results in about 5 investments per year. So you have about a 2% chance of getting an investment, assuming you get a first meeting. And an important caveat – that’s a first meeting with a partner, not an associate. VC firms are partnerships, but they also employ young MBA-equipped associates, analysts, as well as various admin staff. If an associate or analyst expresses interest in your venture your goal is getting a meeting with a partner.
Let’s back up. If you are raising venture capital you are a sales person. The product you are selling is equity in your firm – partial ownership. Your customer is the VC firm. VC firms are partnerships and making an investment requires a unanimous vote of the partners, usually made at their regular Monday morning meetings.
So associates are not decision makers, but they are influencers as are EIRs – Entrepreneurs in Residence, analysts – and others whom the partners may consult with, such as other entrepreneurs and investors.
So here’s your job as a founder: find the partner in the firm who will be the champion of your venture and arm him or her for selling your firm. Each partner may have a company that they want to get funded. If the firm has 8 partners, but only makes 5 investments a year you could get left out in the cold. Even if there are only 3 or 4 partners your partner has to convince all his or her partners that your firm is worthy of an investment.
If a VC expresses interest at a pitch competition or other event and asks for your pitch deck make sure that your email with the deck is a sales document. You can’t let the pitch desk standalone. Your email is likely to get forwarded to others in the firm, perhaps an analyst, an associate, or another partner. Summarize in your email why the firm should invest in your venture in three bullet points, no more, no less.
Once you have gotten a partner interested in your firm you need to equip him or her to sell your venture to his or her partners. So you are in a two-stage sales process: first, sell a single partner on your venture, then equip that partner to sell the entire partnership on the venture.
Here are some sales weapons to arm your VC partner with:
- A great deck – that goes without saying
- A great executive summary – may be requested by the partner or not, but have one ready. Keep it to one page.
- Testimonials from your customers – make sure you get their permission, that they understand that they are going to be called by an interested investor, and they should be prepared to explain if they are actually using your product, not just having bought it, and are they satisfied with both the product and the firm.
- Financial projections backed with solid assumptions – Here are two posts I recommend you read: What’s the most important part of your financial projections? and Know your numbers when raising money!
- People who can vouch for you: once the partners agree you’ll enter the due diligence phase of the sales process, which is a whole other issue. But if you can find people who know you and who know the partner and will vouch for you, that’s a big plus.
But before you start on selling the salesperson on your firm, please read the following post provided to me by a VC I knew: A list of questions that a pitch to a VC should address and make sure you and your team can answer them all.
And keep in mind the two key acronyms known by all great sales people ABS and ABC: Always Be Selling and Always Be Closing.