The Art of Approaching Venture Capitalists
This article on how to approach venture capitalists was was co-authored by Christine Karslake from the SLEDP and Greg Johnson of Prolog Ventures.
There are two different narratives regarding venture capital today. One is that it has never been a better time to raise money — venture capitalists (VCs) are handing out money like candy. The other is that getting money is so competitive that venture capital remains a pipe dream for most startups.
Both of these narratives have a kernel of truth to them. There is a lot of capital flowing in the market today, especially for financing software firms. Valuations for the hottest software companies are in the tens of billions of dollars, even in spite of rather minimal (or no) revenue.
On the flip side, the process of receiving venture capital is incredibly cutthroat, and many promising companies can’t get a foot in the door. These challenges are sometimes noticeable in St. Louis, where we have a nationally recognized startup ecosystem that continues to grow and develop but we don’t have an abundance of venture capital firms — yet.
There are a wide range of reasons that financing is difficult, but some of the issues stem from unfamiliarity with the venture capital process. As those who have spent a bit of time in the venture capital world, we’d like to offer our advice for leaders as they tackle the fundraising beast.
Of course, if you have a substandard product, poor financials, shoddy leadership or any other major red flags, even the best approaches will get you nowhere. Venture capitalists are highly skilled professionals who aren’t going to blindly invest in something that doesn’t work. But if the house is in order and you’re ready to hit the money trail, you need to know the process.
Know which funds cater to your industry.
Think of raising money like a job search. In a job search, it’s best to target key people and companies in the industry where you want to work instead of throwing your resume around to determine what sticks. You don’t want to waste your time on firms that are a bad fit.
The same advice holds true for capital seekers. There are nearly 1,000 venture capital firms in the U.S. that receive pitches every day. Blindly targeting funds won’t likely lead to positive results. Instead, you need to do a lot of research to determine the best funds to connect with.
A good way of determining whether to target a fund is by looking at its portfolio, which is generally available on the website. From that, you can get an idea of what kinds of investments the fund targets.
You can usually determine how hands-on the venture capitalists are in the companies they invest. Will they take board seats? Will they choose the management? Or will they just check in with you once a quarter?
And you can determine if they’ve invested in a competitor. If they have, you won’t receive any money from them.
Investment style is very important.
It’s just as important to understand the firm’s investment style as it is to understand their niche and management style. For instance, what kind of risk do they tolerate? What kind of returns are they looking for? Does the firm have an overall investment thesis?
Sometimes, this information sits on the fund’s website, but you’re more than likely going to need to do a little bit of digging. This will involve meeting venture capitalists and talking to them about their specific approaches. The best place to meet with VCs is through venture conferences, but they can also be spotted at events such as trade-shows and demo days.
Understand how to get through the door.
Now that you’ve figured out your target firms, it’s time to connect with them. But you have to know the right way to go about reaching out.
Cold calling won’t get you very far. Venture capitalists sometimes see hundreds of deals for every one they invest in, so your chances of catching their eye by blindly reaching out is slim to none. And, in case you’re wondering, sending 50 emails to VC partners and demanding a meeting won’t get you very far.
In order to be successful, your best bet is to get through with a referral. One good way of doing this is by connecting with a limited partner (LP), or someone who invests their money directly in the firm.
Other good sources are current or successful past portfolio companies, industry figures, and consultants or advisors to the fund. Reaching out to syndicate investors (alternative accessible website) is another good option. VCs ultimately want to maximize return while minimizing risk — and having other investors on board improves your odds of receiving capital.
Other people to talk to include advisors and board members of your firm, who might have solid connections to VCs. Moreover, reach out to angels or others who gave you seed funding — many of them are well-connected to venture capitalists.
And you should still make an effort to attend events such as venture conferences. Those are excellent opportunities to connect with venture capitalists. They also provide the opportunity to connect with more junior members of the firm, who might have more time on their hands but who can also get you in the door.
Try to encourage them to include a cover letter and brief executive summary if you can. Include within that cover letter some way to catch their attention and demonstrate that you understand their fund.
Familiarize yourself with the ins and outs of the process.
Although you don’t necessarily need to be an investing whiz, you should have some idea of how venture capital works. For instance, it’s important to know the terminology that venture capitalists use.
Before going into a meeting with a VC, you should brush up on some of the common terms: pre-money, post-money, dilution, common stock and preferred stock, for starters. Many uninformed entrepreneurs find themselves agreeing to terms that they later regret because they didn’t understand the terminology.
Also, many people who go through the venture capital process for the first time think that the process works like the TV show “Shark Tank”. However, it is very different in one very important regard: You do not set the valuation.
We repeat: YOU DO NOT SET THE VALUATION. You must let the venture capitalists conduct their financial modeling and then come up with a number.
The last person who puts in the money holds the sway.
You should expect that the funds that make the final investment in your startup will have the most power in the future of your startup.
This is because the last firms that put in money has structured the most recent valuation of the company. If a very hands-on firm is the last one to put in money, the firm’s leaders might take board seats.
They might inject themselves into day-to-day management. They might require a change in management altogether (including replacing you). And, frequently, they require companies to relocate closer to them.
Customize your presentation for each firm.
Again, raising money is like searching for a job. You can’t send the exact same resume to different companies — you have to tailor them to the specific job.
Of course, your presentation should remain similar across the board. Your company is the same no matter who you pitch to. But you have to tweak your elevator pitch and investment deck based on the VC firm’s investment theses. This means, as outlined before, you need to do your homework and figure out what is important to each firm.
Go back for another round … the right way.
Perhaps you’re a later-stage entrepreneur who has already had a successful Series A round and is looking to go back for a Series B. Note that venture capitalists don’t generally invest in the same company more than once. However, they can be a tremendous resource throughout your journey as a startup, and they can help you get your foot in the door at other firms.
Raising money is a very difficult process for any entrepreneur. But if you mess up the easy parts, you can take yourself out of the running for dollars very quickly. So, bottom line: When it’s time to raise money from VCs, you must know your targets, know why they’re targets and always be prepared no matter who you’re meeting with.