Venture capitalists are starving, starving! for solid investments. Business Insider, for example, reported that undeployed funds now total more than $121 billion. And a lot of founders probably want a slice of that pie.
But few know how to convince VCs that their startups are worth the money. Nor are trendy artificial intelligence, flying cars and biotech requisite elements for startups to secure those funds. Take, for instance, Clutter, a company that streamlines storage solutions: It’s raised more than $100 million in a product space few would consider a particularly hot Silicon Valley trend.
What’s more, companies like Clutter don’t secure that much money on the merits of their business models alone. Founders must present a solid case and be able to close the deal with skittish investors.
The problem is that most of those founders struggle with the perplexing process of fund-raising, which may ultimately cause them to run out of cash, limp through periods of slow growth and potentially lose their enthusiasm. I’ve struggled with this situation myself a few times, but those unpleasant experiences eventually taught me a trick to master fund-raising: And that trick? Treat that fund-raising the same way you do sales.
The wolf of startup street
When startup founders design sales strategies, they consider factors such as a unique value proposition, buyer personas and channels. They fire up customer-relationship management software to track leads in a funnel, ramp up marketing efforts and qualify leads as efficiently as possible. By following this model, founders who are tenacious inevitably drive a predictable level of sales.
So why not use the exact same approach when it comes to fundraising? By following the following six steps right out of a sales textbook, founders can perfect their fund-raising strategies and claim their cut of that undeployed cash.
1. Understand the financial context.
During the preproduct and prerevenue phase, VCs don’t want to hear a pitch. Instead, as founder, you need to have a firm grasp on the minimum economic requirements necessary before you waste their time (and yours).
Your company must hit the minimum economic requirements before you can even begin talking with institutional seed investors and angel groups — and that typically means $10,000 in monthly, recurring revenue. Once your annual recurring revenue surpasses $1 million, you’re ready to meet with VCs.
Until then, focus on growing your revenue by any means necessary. Get out your Visa and American Express cards, or lean on the three F’s of fundraising: friends, family and fools.
The good news? It’s a buyer’s market, so you have a strong tail wind. Seed activity in the United States is on the rise. A recent report from PricewaterhouseCoopers and CB Insights indicated that seed activity n the third quarter of 2017 constituted 27 percent of all deals.
2. Get your documentation and pitch in order.
Successful pitches start with a lean canvas, a deck, a honed presentation, an executive summary and a term sheet. Investors like founders who know how much they want to raise, how they want to raise it and how they will use the proceeds. The term sheet is a different approach, but it has proven helpful for us and our ventures.
Be ready for standard interview questions such as “Where do you see the company in 10 years?” Investors like to use this question to gauge time to liquidity, which they generally like to reach in seven to 10 years. Companies that lack exit strategies typically don’t attract much attention from sophisticated angels and VCs.
Venture capitalists generally want to deal with savvy businesspeople instead of just great ideas. Brian Lim landed two investments on Shark Tank because those investors were impressed with his business acumen and entrepreneurial insight — not just because Mark Cuban wanted to snag a pair of Emazing Lights gloves.
3. Create buyer personas of individual and institutional investors.
Outline buyer personas for investors as though they were sales prospects. Be able to answer detailed questions about those personas. What is their background? Where do they live? What do they eat? Where do they relax? What causes do they care about? Who gives them financial advice?
Some of these answers will be easy to attain, while others might be tricky. If you’re struggling to get inside the head of a venture capitalist, do some research. Read through Venture Deals by Brad Feld and Jason Mendelson to get an inside look at how VC firms operate. There’s a reason it sits atop the Amazon sales charts for books on venture capital.
4. Define channels to acquire investors with the right personas.
After outlining your optimal buyer personas, begin to pursue investors who match the profile. Once you have a target, figure out who in your network might know him or her well enough to make an introduction. During our fund-raising, we coincidentally bumped into investors in airport lounges, at charity events, through mutual professional services and at country clubs. Some coincidence!
While not all VCs focus exclusively on Silicon Valley companies, it helps to spend some time in major cities. According to the PwC Report mentioned earlier, more than 75 percent of VC spending last year went to startups in California, New York and Massachusetts.
5. Design a fund-raising funnel.
Separate potential investors into stages — just as you’d do for sales prospects. Move them from leads to qualified leads and then to first meetings, deal discussions, documents sent and deals closed. Consider the needs of investors at each stage, and prepare marketing collateral and drip content to use at critical junctures.
With our prospective investors, we sent drip articles that sang our praises, including an interview with NPR and a mention by Phoenix Mayor Greg Stanton. These press clippings built excitement and showed that we were the real deal. Remember that investors are people and are impressed by the same publicity that entices the rest of us.
6. Once your system is built, tap channels to generate investor leads.
With a fund-raising sales system in place, start to eliminate people who are not investment candidates. Weed out the jerks before you do anything else. Their money isn’t worth the risk of entering a bad partnership — particularly when half of businesses fail within the first five years anyway, according to the U.S. Small Business Administration.
Use a detailed spreadsheet or CRM to manage candidates and keep track of your fund-raising pipeline. Note which prospects are in each stage, and either “move them through the pipeline” or “disqualify” them. Once you organize your data, you’ll be able to deduce things such as the average time needed to move investors through each stage. That’s crucial information for forecasting.
Above all else, don’t fear rejection. Embrace each interaction as an opportunity to build your network, even with people who aren’t willing to invest. Some of our rejections eventually became investments because we kept in touch over the years.
Fund-raising is more than merely a method for growing your startup. It’s also a great networking tool, providing founders with opportunities to have productive conversations with highly successful people. Just don’t dive right into a sales pitch with potential investors — you’ll kill the deal before it begins. Build relationships first, and ask for checks second.
Systems keep things predictable, repeatable and focused. Just as it’s critical to build a strong sales system, founders must establish a repeatable fund-raising philosophy. A game plan that treats fund-raising likes sales can shorten your path to checks, alleviate stress related to disorganization and sharpen your company’s system-building skills.