Here’s a rough transcript of a call in show I did. Not just rough, but also long. If you are a Twitter addict, just read the first 140 characters of each paragraph….
VC Fundraising: Real Advice From A Real VC
If you could have a VC’s undivided attention for fifteen minutes, what would you ask? Our Ask The VC webinar was an open forum with Sean Foote, Founder of Co=Creation=Capital. If you missed it, in addition to reading this rundown of the highlights, you can view the presentation deck on SlideShare.
Understanding what VCs are looking for is top of mind for many founders seeking funding. The more you know about their investing mindset, the greater your chances of insuring you’re a match.
How VCs Invest
The central tension between buyers (VCs) and sellers (founders) is this: buyers believe their company’s value exceeds its price. Sellers meanwhile believe the converse.
VCs are rational. They need to generate annual 30% gross returns just to be an average fund. That’s 5x in 5 years. The economics of investing: out of 10 portfolio companies, half will go bankrupt; four will break even. VCs get it wrong a lot. That means VCs need always try for winners that can return 46x — just to be average. With the stakes so high, they look for extraordinarily high growth companies that will make them the most money for the least amount of risk. They also want to invest in “intriguing companies” that have positive momentum, and make for good cocktail party chat. But their bottom-line goal is to make money for their current fund so they can raise another one.
Because of those parameters, VCs don’t want to invest in revolutionary things. They want to invest in companies that generate revolutionary returns. So your job in a pitch is to convince them that you are innovative and doing great things, but that you are not risky. When you’re making your pitch, do whatever’s necessary to reduce your perception of risk. That includes staying away from words like: novel and revolutionary. It also means knowing what your greatest risks are and finding ways to reduce them. This is key to getting funded.
2 thing you don’t know about venture capitalists
VCs are not risk capital. Opportunities that deliver good returns for a low investment is the single most important factor in getting them to invest.
Nothing gets VCs to fund a term sheet faster than knowing that there’s interest from other investors that might shut them out of a deal. Sound analogous to other situations in life?
On seed funding:
It’s a sellers’ (entrepreneur’s) market. There were 20,000+ angel investments in 2014. Seed money is raised on a concept and based on an investor believing in you. Once you get past this “concept play” stage, your revenue and business model should be vetted and investors shift to measuring you on the strength of your execution. You need to be able demonstrate what you will accomplish with investor’s money. This is an important step in the mindset of entrepreneurs.
While Sean and Co=Creation “love single founder teams” and engineering oriented founders,
once you get to the stage where you’re ready to raise VC capital, it’s great to have “at least one person on top of tech and one on top of business” operations.
On meeting startup investors:
VC see anywhere from 1,000 to 2,000 companies a year — and invest in 2-3 of them. In order to break through the noise, find a way to get introduced. LinkedIn is one source. For seed investors, try AngelList and incubators.
And do your due diligence. The relationship between VCs and their portfolio companies is similar to marriage, with at least one big difference: the lifespan of an average VC deal is nine to ten years. That’s versus seven years for the average U.S. marriage.
Think of the vetting process during your pitch as similar to being out on a first date. VCs will be scrutinizing your composure and assessing how well you think on your feet. Expect some give and take: for Sean, “intentional interruption is a good test to see how people react.”
Don’t jump the gun on valuation — “We’ll let the market set the price” is a good answer to give if you’re asked.
Don’t expect feedback at the end of the meeting, but do ask for it.
Don’t join the “race to the bottom” by skipping financials in your pitch deck. Particularly after Seed stage
As we’ve covered in earlier posts, creating a financial model with at least three years of financial projections shows that you’ve thought through your financials and understand your business model. For Sean, five years is the right time horizon. Models that show only one year of projections just don’t fly. That doesn’t mean that investors will believe your projections; “we know it’s not a real number” but your longer-term forecasts (3-5 years out) allow you to “sell some sizzle.” Just make sure your near and intermediate term ones (years 1-2) also have “some steak.” The whole process says you’ve thought about the business model.
Reading the (VC) tea leaves
Anything besides a signed (and ultimately funded) term sheet is a “no.” That’s not to say you should expect to clinch a deal on the basis of one meeting. But at some point, if you find yourself getting requests for more information or being told “let us know when you find a lead investor,” the answer is “no.” On the other hand, if the VCs you’re meeting with are discussing valuation, that is a good signal.
Finally, manage the relationship. Follow up and make sure you stay on investors’ radar. Also keep in mind that a first pitch meeting is a lot like being on an interview or a first date. Don’t burn your bridges. Even a “no” from the person you’re sitting in front of might lead to introductions to other potential investors who are a better fit. Or even a “yes” eventually. Sean’s fund invested in Pandora’s Series A after saying “no” 3 times.