Raising money for anything can be difficult especially when you don't have experience. Accepting that fundraising is actually just sales is the very first step to making this process much more simple. All the steps in sales from qualifying your buyers/investors to building a solid relationship will still need to be done.
Here are the details on how to build up a strong fundraising strategy:
1. Identify the right target investors: In VC terms that means the key questions you need to answer are, is this investor:
- Geographically focused and have they invested in my geography before? (most Seed or A round deals will be done by an investor in your region so that should help you to focus. Other investors have national practices. Know which one you’re talking with)
- Right for my stage? (approaching an investor who normally does $20 million C rounds for your $2 million funding round is a waste).
- Focused on my industry? (I get approached about clean tech or biotech periodically – I don’t focus on these. You’re wasting your time with me).
- Already invested in one of my key competitors? VCs are unlikely to invest in direct competitors so you will normally be qualified out.
- Do they have money to invest? (look at how many deals the firm has done in the past 12 months. If it isn’t many (or any) that should tell you something. You can also find out when they raised their last fund. If it was more than 5 years ago you probably want to ask around a bit to see whether they’re still investing).
2. Determine how to get access to them: So your journey to fund raising begins by strengthening your relationships with other entrepreneurs. You need to build genuine relationships with these portfolio startup founders as well as trust with them and the rest will follow. Earn the right to the intro. I often recommend that entrepreneurs try to focus on building relationships with younger companies that aren’t already “big time” because they’ll have more time and willingness to help.3. Meet early: There is much controversy on this topic. I have laid out my philosophy in, “I Invest in Lines, Not Dots.” If you haven’t read that you should – it’s one of my most re-tweeted posts. There is the school of people who tell you that you should only meet with VCs when you’re ready to raise. Their arguments are:
a. Fund raising is too time consuming and meeting early is wasting time
b. The VC will get a bad impression of you and you should wait until you’re on your best footing to raise.
Both of these arguments are logical and thus many entrepreneurs buy them. They’re both flawed, though.
“Fund raising is too time consuming” … yes, fund raising takes time. If you save it all for some mythical 6-week period every 18 months where you hit up all the VCs at once – sure, it will consume much of those six weeks. But as I’ve argued before, you need to ABR (always be raising). By constantly taking focused VC meetings you’ll have relationships established for when you are ready to raise. As the CEO you have many tasks you need to do on a regular basis. Call it your functional pie chart. These include building products, recruiting, managing your finances, marketing, selling, getting feedback from customers and … fund raising. It will be at least 5% of your week so if you work a 60-hour week (I know, I know, you work more) then you should dedicate 3 hours per week to fund raising. Maybe up to 6 hours.
4. Press the flesh: Always do your important meetings in person. I can’t over state the importance of the human connection in being able to develop a relationship. If you have to travel tell the VC you’re already planning to be in town. They feel less obligation to you and therefore are more likely to say yes to an in-person meeting.5. Avoid the two big “donuts” in the year: There are two times every year where raising VC from partnerships with more than two partners is exceedingly hard. July 15-Aug 31 and Thanksgiving to New Years. I’m not saying VCs are lazy. They are not. But they are highly likely to be in the age bracket of 35-55 and often have kids. That means that they take their holidays with their families and these are the big seasons.
6. Have a narrative / make it simple: Nobody will buy what they don’t understand. It’s your job to take the complexity of your company & industry and develop a “narrative” that helps investors better understand the context. It’s basically story telling. Don’t under-estimate the power of stories. When I was reading the Fab.com website I noticed that the CEO refers to Fab’s “one thing” as being design. By talking in this way, he can create a storyline that investors can say, “oh, Fab.com. They’re the place focused on design. They think design wins. They think there’s any underserved market for young urban professionals who care about quality design and don’t want to buy cookie-cutter, Ikea furniture and accessories” (or whatever their pitch is).
Investors can agree or disagree but they know what they’re evaluating. As do journalists.
7. Create a sustained campaign: Let’s say you have a product in which the CMO of a company is your buyer. You wouldn’t imagine they’re sitting around 3 weeks after your meeting daydreaming about you. They’re under pressure to do tons of stuff. You were a priority when they agreed to meet you but since then they’ve been putting out other fires. If you start to think of VCs as a person who might buy your product like this CMO then you can plan your sales campaign accordingly.
8. Lobby: If it were a sales campaign to a CMO you would naturally think about having customer references. You’d even probably go as far as to ask your best customers if they wouldn’t mind proactively reaching out to your prospects to subtly tell them how great you are.So why would raising venture capital be any different. If the best intros to VCs come through qualified referrals from people they trust, then it follows that the best way to keep VCs interested in you is to have similar people tell them how great you are. So determine the VCs you want to influence, identify who influences them, figure out how you’re going to get these people loving your product, your company and you.
9. Recognize that fund raising is a part of your ongoing duties: As I’ve said before, ABR. Always be fund raising.
10. Test interest: One of the best sales coaches I ever worked with used to talk to me about “testing prospects.” What he meant was that since your scarcest resource as a manager or sales rep is your time you need to qualify better. Most people are afraid of asking the tough questions because they prefer to imagine that you might be a buyer than to know that you’re 100% not. I prefer the latter.
11. Take appropriate risks: I always encourage people to take risks in sales and fund raising is no different. Remember those three rules of sales?
- why buy anything?
- why buy me?
- why buy now?
Well if the “why buy anything” is testing whether you’re even compatible with a VC, the “why buy me” has got to be extreme differentiation. VCs see companies all the time. They all start to sound the same. Be bold. Make your positioning strong. Stand out. It may turn off some VCs but for others it may be a positive.
12. Understand the important of marketing: Nobody thinks they are influenced by marketing. Everybody is. Even if it’s subconscious. We tend to be more excited about things that we read in the press and/or articles being forwarded to us by our peers. It’s human nature. So make sure you have a solid PR strategy.
13. Create urgency: The final rule of why buy anything, why by me is … why buy NOW! It’s the hardest rule of sales. Why should I buy a new TV when my current one works well? I know I want one but I can always buy it next year. In fact, there will be a newer, fancier model. Same with a new car. Same with an investment. Why invest now when I can see how your company develops? Or see the next company that rolls through.
It is always important to create urgency by being competitive and showing your ambition. This will not only help bring in an investor but seal the deal as well. I mean after all, the first step in qualifying is providing an answer this age old question, “Why buy?”.
Now you tell me, why should I buy into your business?