Ninth in a series of weekly posts by myself and Nicholas Lovell of Gamesbrief which answer the fifty questions you should ask before raising venture capital. We expect the series to run for a year after which we will collate the posts into a book. You can find the rationale behind the series here, and the list of questions here. We welcome your comments on any and every aspect of what we are doing.
Up to now my posts in this series have largely dealt with the structure of the VC industry, the background if you like. Now that the the fundamentals are explained I can turn to the more practical aspects of what it is like for entrepreneurs to deal with venture capitalists, starting with the question ‘How long will it take my company to raise venture capital?’.
The simple answer is that 6-9 months is a prudent amount of time to allow for raising money, although there is significant variation between companies (and over time). My advice would be to allow more time than you think you need and to be honest with yourself about the extent to which you can hope to be faster than average.
Many companies that set out to raise venture capital fail in their endeavours, but usually only after trying for a year or more, but excluding these companies from the sample I would guess that the median time for a successful fundraising in Europe at the moment is probably around six months. That means for the average company it is prudent to allow nine months from deciding to formally start raising money to the point when the cash is needed. (I doubt there are any statistics on this as they would be very difficult to compile because startups that are planning on raising money at any point in their future should maintain an active dialogue with VCs at all times and there is unlikely to be a clear start point to a fund raising process.)
Nine months probably sounds like an awfully long time, certainly that is the feedback we get when we pass this message onto the CEOs in our portfolio, but it pays to be prudent. Raising money in a hurry against a hard deadline (e.g. cash runs out) is a demoralising process that is unlikely to end with a happy result. Investors can sense desperation, and it is not attractive.
You will have heard stories about companies raising money much faster than nine months, perhaps most famously Clickmango’s record of eight days to secure £3m back in the heady days of 1999, but that is very much the exception rather than the rule. As I’ve said above the prudent course of action is to allow nine months, however, if your business/fundraising process has any of the following characteristics you might be able to get away with less (which will allow you more time to build value and get a higher valuation):
- company and founders already well known to VCs – this is the biggest lever available to management
- company performance is stellar on key metrics (typically either revenue or traffic growth)
- market and/or sector is hot
A realistic assessment of these factors is critical and the vast majority of mistakes I’ve seen have been to err on the side of optimism rather than pessimism. Most VCs have closed deals far quicker than 6-9 months and in early discussions will quote their fastest times to you, on the assumption that the company and market will be hot and they will have to move as quickly as they can – be aware that they are talking the fastest likely time rather than the average (note there is no dishonesty here – in the early stages of discussions excitement is typically high on both sides and everyone is operating on the assumption that the deal is hot). Remember that for VCs a quick decision is almost always a less thorough one. Clickmango didn’t turn out well.
If you are lucky enough to have a super-hot company then you might manage to raise money in 2-3 months. My recent record is 83 days from first meeting to cash in the bank and I think other VCs in London have done the odd deal a little more quickly than that.
The deal process has two parts, pre-termsheet and post-termsheet. The post termsheet part should largely be for legals and confirmatory due diligence which shouldn’t take more than 1-2 months. The process of getting to termsheet can be much longer, as it involves writing an investor presentation, contacting VCs, getting them interested in a meeting, scheduling the meeting, and then scheduling follow ups, and building excitement and momentum within the VC fund. Each of these stages can take weeks.
Next time I will answer the question ‘What can I do to control the timetable/reduce the time it takes to raise venture capital?’.