26. February 2013–
Sascha Kellert is the co-founder and CEO of printing app ezeep. Here, he shares his commandments on how to get VC funding.
I presented my lessons learned from raising VC capital at General Assembly‘s one-day conference Assembled Capital for VCs and founders. I gave tips encapsulating tacit knowledge for early-stage entrepreneurs on fundraising – most applicable up to and including a Series A. My advice may be a little controversial and taboo…
Before we begin…
It’s only fundraising if there’s no fun in it…
In my opinion and for the sake of this post, raising VC and Angel investments is only fundraising when you’re not oversubscribed.
I’m defining “fundraising” as a situation where you’re looking to secure investment that relies heavily on storytelling. Fundraising is when not a lot of “rational” decisions are being made on the investor side, or decisions that can be backed by science.
Rain check – are you even VC material?
In all likelihood you’re probably not VC material (either never or not yet). The typical VC would define an interesting deal as one with extraordinary potential for fast growth and a big exit in a short period of time. This is rarely the case. I meet a lot of entrepreneurs who are great, they’re just not VC cases but more for seed or angel investments.
The fact that VC cash is for later stages has been watered down. Currently, there’s a lot of competitive pressure for VCs to move down-market into smaller tickets. This leaves a lot of founders confused and considering VC deals or pitches when they absolutely shouldn’t. It’s understandable, as most VCs have big brand names that come to mind when you’re looking for cash and there aren’t enough “super angels” like Thomas Mygdal or Christophe Maire to pick up the slack.
The first time you reach out to a VC that puts you on the map – you’re in the system and they’ve started tracking you. Delay that for as long as possible….
Fundraising lessons learned
1. Know the game: It’s about psychology. Inertia and FOMO gets deals done
Fundraising is about psychology, not business school fundamentals. There are two fundamental aspects to successful fundraising – getting the momentum going and getting it closed quickly. And if you’re not yet familiar with the two strongest forces in the universe that you need to deal with here, let me introduce you to them: Inertia and FOMO (fear of missing out).
The holy grail of fundraising is creating a situation where several VCs spring into action and move towards closing a deal without knowing about the other. Make sure that everyone involved understands that it’s a once in a lifetime investment opportunity. You want to avoid getting a “no” early-on from any VC you’re talking to.
In Europe, you probably have a window of two to three months to ideally close a round. The shorter the better. Anything beyond that and most VCs will start talking about you and your deal, or even worse – talk about why they passed it up.
Pro Tip: Speed is important. But be careful with “closing deadlines” – this can backfire quickly, especially when your VC isn’t committed to the deal yet.
2. VCs will always do what they think they have to do
No-one is born a VC. You learn to be one. Like many social systems, VCs are a self-referring clique which does what they think they need to do. That’s not bad thing – it’s human. A prime example is that most VCs won’t give you honest feedback on why they don’t want to invest, when that would set themselves favourably apart in the eyes of good founders.
3. You’re never raising when you’re raising
As with everything during the entrepreneurial journey there are no answers – just paradoxes and oxymorons. The same goes with advice – “you’re not raising when you’re raising”. When you need to raise cash, you look bad to a potential investor. Make sure you appear to be in a comfortable position and that you can take cash because you want to, not because you need to.
4. VCs have to raise too – know where your VC’s at
A VC’s fundraising climate heavily affects your fundraising efforts. An example: startups are currently a hot asset in high demand by everyone from family offices to pension funds – making it easy for VCs to raise and invest. However, on another level – with consumer startups offering disappointing IPO performances, a general social app fatigue setting in, higher exit multiples in B2B SaaS and so on, be aware of such macro-economic effects and thus your ability to raise.
Everything is cyclical, but you can also talk to a startup lawyer to get a good idea of what’s going on locally. They tend to know what’s in fashion as they see dealflows and have intimate talks with VCs.
Another thing to consider is the phase the VC’s fund is in. VCs are businesses that need to deliver a return at some point too and thus roll up their fund. If your VC’s fund is in harvest time or running out of cash you may want to steer clear.
5. Timing: VCs have spring breaks too…
But it’s not in spring. It’s some magical time of the year where VCs flock like birds to the most remote places on earth. Apparently there’s deal to be had in St Tropez around August. Make sure you’re closed before then, otherwise you may need a life-line of cash to survive.
If you know your target firm figure out how many deals a year they do, where they’re at, and if they tend to invest most before the year’s end and so forth. A VC that’s just closed a new fund may be more willing to invest than someone close to harvest. Do your research.
6. Courtship: Don’t sell yourself – it should be win-win
There’s no need to be shy when pitching to VCs. Both parties need each other, and ideally both parties benefit from each other. VCs need first-time founders for a better overall return on investment on their fund – it’s basically where the margins are.
A serial entrepreneur is not “fundraising”, they select cheques, probably invest their own money and might not even take VC cash if cheaper money’s available elsewhere. Build a relationship with a VC confidently – not like a beggar, but don’t be cocky either.
7. Don’t send a deck – take a meeting (with the right person)
There’s a billion posts out there about the perfect pitch deck. I’ve stopped sending decks all together. Creating a deck is a massive pain and I don’t know one founder who’s happy with the deck a month after creating it. Everyone’s embarrassed by it. Most importantly, a deck is a poor medium for the message.
If you had to choose between condensing something as complex as your business into a PDF versus talking with someone and demo-ing the product, what would you pick? The number of “confidential” decks of startups I’ve seen lying around VC offices is staggering.
Decks live on in a VC’s memory, are easily circulated to other VCs and tend to communicate a lot about your product: tactics and differentiators that you may want to keep in-house. Just meet them and build a relationship. Your chances of success are much higher.
Which brings me to the next point – meeting the right person. Juniors at VC firms all over will hate me for this but here it goes: Don’t take a meeting with a Junior at a VC firm. Sounds arrogant, but if you do you’ll be making life harder for yourself than it already is. You’ll add a second layer to the decision-making process. Don’t do it. Go straight to the top and get intro’ed in.
8. Don’t pitch – tell a story and talk about the “why”
Don’t ever pitch. Tell a story. Great stories work with empathy and great storytellers know that people follow the “why” – the reason you’re doing something, so hone your message in on that.
To avoid first conversations with a VC being a complete train wreck, practice. Practice on VCs that aren’t important to you or aren’t AAA, or with founders who’ve closed with a VC.
Understand your situation and audience and define a single targeted “win” scenario for each interaction, whether it’s via email or in person. If you’re in a partner meeting presenting your business to the entire firm for the first time, what’s your objective? It’s not to convey all the intricacies of the revenue model and technology – leave it to due diligence. At this point, your job’s making sure that the entire firm is excited, understands your story and that you can make your vision a reality.
9. Don’t optimise for valuation
Just don’t. At the early stages you’re more likely to fail. There’s a time to optimise for valuation and there’s aspects where you should honour the scarcity of equity. But in the early days I’d rather take a hit on valuation than work with a VC that’s useless or proven to be a pain. VCs brand themselves on “value added” or “giving money earlier than others” to stand out, but in the end you want a VC you can work with, is smart and doesn’t fight on the way down.
10. Don’t sign an exclusivity deal. Ever
When closing, everything’s negotiable – don’t let them tell you otherwise. I got a lot of VC pushback on this at the conference but I believe that you shouldn’t sign exclusivity on a Term Sheet – ever. Some founders may want to sign exclusivity on closing with a particular investor or agree to cover some of the due diligence costs if you pull-out of a deal, but under no circumstances would I sign a “no shop” clause.
In the end it’s not economically prudent to sign exclusivity in the early life of the company. As an executive director of the company, you have a responsibility towards existing shareholders and I’d argue that in a scenario where you need cash and are essentially approaching insolvency (otherwise you probably wouldn’t be fundraising) artificially and voluntarily reducing your runway by signing an exclusivity agreement, is a breach of your fiduciary duty and for me – a reason for dismissal.
In situations where your company is much further in terms of revenue, where investments by both parties in the deal are much higher, and the life of the company doesn’t depend on signing exclusivity, it’s a different story.
11. Know the VC process
Do your due diligence on the partner and VC. What’s their typical process? Who calls the shots? What are the internal politics like? These are questions you need to find answers to. Talk to entrepreneurs who pitched there, and old partners who worked there. Call entrepreneurs they invested in and chat with their lawyer. Be aware that some partners or juniors run around and may get over excited in talking to you and exceed their authority; either dishing out a term sheet without being allowed to or saying it’s a “done deal” when they haven’t run it by the committee. Don’t fall for it.
In addition to knowing the firm you must know the partner. Each person has preferences and individual knock-out criteria that you obviously don’t want to tick in the first meeting. I recommend you call every portfolio CEO, particularly from companies that aren’t breakout successes – to see how the VC acts when things go awry.
12. When closing: Traction is what you say it is
Traction – the most elusive of concepts. The world has been looking for a definition forever. Most VCs can’t even give you a straight answer as to what traction really is beyond saying – “I know it when I see it”. I’ve come to understand there’s only one universally applicable definition of traction – it’s what you say it is.
Traction equals results over promise. The more you promise, the more you set yourself up for failure. Promise €100 in revenue in the first year, make €200 in revenue and you’ve got yourself mind-blowing traction. It’s that simple.
End note: Be prepared for the closing… Bring Veuve Cliquot and Dunkin’ Donuts
Germany is peculiar in a lot of ways, for instance its notary system. I deeply respect notary officials – a lot of time and commitment is required to become one. Nevertheless, in closing your round, the authorised official reads out documents and occasionally corrects typos or non-sensical errors.
When investment contracts and accompanying documentation are over 50 pages with font size 8, it may take a while. If you’re not using a POA for everyone, then my ideal notary meeting survival kit is as follows: at least one co-founder, two bottles of Veuve Cliquot and a box of Dunkin’ Donuts.
© Viorel Sima: Fotolia.com
Prom queen: Flickr user nhsalumni
“What to do”: Flickr user marcoarment
Cash: Flickr user louish
Fundraising: Flickr user jdhancock
Spring: Flickr user mendhak
Build a relationship: Flickr user 78855484@N03
Messy desk: Flickr user mrsdkrebs
Story quote: Flickr user jillclardy
Stop: Flickr user juan-antonio-capo
Beware: Flickr user atoach
Questions: Flickr user demibrooke
Traction: Flickr user mytudut