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What can I do to control the timetable/reduce the time it takes to raise venture capital?

Twelfth 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.

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image My last post in this series explained why for most startups it is sensible to allow six to nine months for a fundraising process to get from start to completion.  This week I’m going to focus on what you can do to get that time down, and what you might do to get VCs operating to your timetable rather than the other way around.

There are, I think, three reasons why VCs can take a long time to make their minds up about a deal:

  • The longer you spend getting to know a company the better you understand it, and with better understanding comes less risk.  (One way of looking at venture capital is as risk management.)
  • Watching how a business performs over time tells you a lot about how it might perform in the future.
  • VCs and their partners (generally) work hard and are very busy.  Finding the time to build consensus around an investment opportunity can take time.

The one thing that stands out above all others as the best way to get a deal done quickly is to get to know your potential investors long before you hit the fundraising trail.  If your potential VC has been thinking about you as a prospective investment for some time she will have been keeping tabs on the market, taking soundings from friends on you, your business, and your opportunity – all of which are critical to building confidence in an investment opportunity and are more difficult to do in a hurry.  This directly hits on the first of the points above.  Additionally, if they are any good, your potential VC will have regularly asked you how your business is getting on and thus watched how you perform over time – hitting on the second of the points above.  Finally, your VC will probably have reasoned that if you have got to know her you have probably also got to know some of her competition, and since she has invested time into getting to know your company already (and presumably likes it) she will prioritise your deal over the other calls on her time – hitting the third bullet.

For this tactic to work it is important that your potential investor understands your business and sees how it progresses.  Simply knowing them to say hi to and have a beer isn’t the same (although will still help).  Since most of the ‘getting to know you’ will happen in a social setting there is a delicate balance to strike between getting enough of your message across and over-pitching.  The right balance will depend on the individual and how excited they are by your opportunity, as with any sales situation (and remember you are selling shares in your company) it is important to look beyond the words used to the meaning behind them.  If you have a pitch that is in any way credible most VCs will be polite and encouraging, but look for the ones that are really excited, where you can sense a passion for your idea.  If you can’t find anyone who responds with passion take that as a piece of feedback in itself.

Beyond getting to know your investor the best way to get a deal done quickly is to make the process competitive.  This is more easily said than done for most companies, but if you can time your discussions so that everyone feels that multiple termsheets are going to arrive over a two to three week period then you should do that.  Advisors are skilled at creating the feeling of competition which helps with valuation as well as timing, and this alone can justify their fees.  Few companies manage to pull off this feat though, and when it goes wrong it can undermine a fundraising process.  When we hear from a company that a termsheet from someone else is imminent we sit up and take notice, but then if that termsheet doesn’t arrive on schedule, or at least within a week or two, then the perception inevitably shifts and we start wondering whether anyone else is really keen on the deal after all.  This applies equally to processes that are advisor led.

Finally, two other points that relate to managing discussions:

  1. Be prepared – have the information about your company ready before hand.  It is good practice anyway, will make you look like a better organised company and eliminates wasted days whilst the investor is sitting on their hands waiting for you to respond – often a significant source of delay.
  2. Understand the processes of your investors and where you are in them.  Then at every stage simply ask what you need to do to get past the next gate.  If the answers aren’t clear you should assess whether you are wasting your time, and if they are clear you know where to focus, and where to keep your investor focused.  The best example I have ever seen of this was Rikki Tahta, founder of Covestor – at the end of every meeting he would ask me what was stopping me issuing a termsheet and then in the next period he would make sure we were overcoming that obstacle, and then when we eventually came to the one that we didn’t get over it was very quickly apparent to us both, and we quickly stopped our discussions.
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  • http://twitter.com/Karstarkuk Dan Tomas Ishigaki

    Interesting… Adding to the issue of ‘selling the deal to other general partners’, it depends on who’s doing the selling as chances are there is an unwritten hierarchy within the firm (though they won’t advertise this dynamic). Some senior guys have a lot of clout and could fast-track this process.

    The issue of mentioning other firms you are talking to is a tight-rope act. On the one hand you need to make sure the VC in front of you is aware of the competitive landscape and level of excitement of others, but on the other you don’t want to be pushy. Any tips Nick on maintaining balance?

  • http://www.theequitykicker.com brisbourne

    HI Dan – another good observation in your first paragraph. Re the second I would say that early on the process it is best to be vague – e.g. say that you are talking with a couple of other firms who seem to be progressing fast, and maybe giving some of their characteristics by saying something like ‘large London based’ – and then as you get through the process and establish more trust it is ok drop enough hints that the investors have a pretty good idea of exactly who they are competing with. My final piece of advice is to avoid the temptation to exaggerate.