What To Know When Approaching A VC A Primer, and a few important tips.
What We Will Cover1. VC Econ 101 – Know Your Customer2. Profile of a Hot Deal3. The Stage/Company Match4. Getting a Meeting5. Pitch Essentials & Common Pitfalls6. The Match Making Process7. Some General Advice
Part I: VC Econ 101Raising capital is a sales effort, so you need to knowwhat motivates your customer to buy.
The Single Deal Axiom“Your company must exit at a pricethat repays your VC’s entire fund.” Typical VC funds are $200 million in size. Typical VC stake at exit is 10-20% Since Profit = Exit * %Ownership…
“Backable Early Stage”1. A Company with no business traction, but a great team and really amazing concept.2. A Company with really amazing business traction and a team that can execute.3. A Company with some exciting early traction and a solid team.IMPORTANT: Nobody but friends and family will fund abusiness with an unproven team and no traction!
Who Should You Target? Proof Points Team Strength
Reach Out Over Email Send a short thoughtful note Why they are a great investor for your company Why they should be excited to meet with you Attach a slick, scaled down pitch (10-15 slides) with the essential elements. Send these emails Tue-Thu. Partner meetings are on Mondays, and Friday emails get buried. Never send anything important late on a Friday
Be Persistent Anyone on the buy side in finance has a great barrage of incoming. Assume that your first note was glanced at on a smart phone and forgotten. Use your warm intro connection more than once and as a back channel. Good News – Getting a Meeting is by far the easiest part of the process. The hurdle rate for a meeting is low. Bad News – Getting a meeting does not mean an investor is interested. It just means they are allowing for the possibility they might one day be interested.
Must Have #1: TAMTotal Available Market = TAMTAM = ($ from one cust.) x (# possible cust.)If you are selling accounting software, your TAM is not theentire software market. It is (the number of firms thatwould possibly choose your software) x (their totalpopulation in the world.)
Must Have #2: The Ramp Your ramp exceed $40 million in year 4
Must Have #4: Concise Pitch Plan for 30 minutes of presenting time. If you plan to talk for an hour, there is no way on earth you will finish.
Other Important Tips… Avoid Slides that look like this one. There are way too many words on this slide. It is boring as hell, and the title doesn’t make an affirmative point. Never discuss valuation. Say how much you are raising, say if it is a note or equity, but don’t presume you are in a position to dictate terms. Pitch to a Partner. It is always best to pitch directly to a check writer. If you approach an associate and get turned down, it is very hard to recover.
Your Goal is to get a2nd meeting. Get themexcited, and don’t bury them in detail.
Size Matters Bigger is not better They can take longer to make decisions They have more complicated decision making which makes it less likely they will say yes They tend to “upgrade the team” earlier. They always play for upside, and tend to turn down what the founders would consider attractive acquisition offers. The partners are often spread thinner, so you might not get much attention post investment.
Size Matters Taking biger fund money also has advantages for the founders: Larger firms are great for deals that require large amounts of cash rapidly Pharma Semiconductors B-C plays Large brand name funds attract follow-on capital and executive talent They can afford to pay up for deals they really want
Choose the partner not the firm Shared vision of target market evolution. Personal Chemistry Right mix of help and patience Know when to ask the hard questions Know when to leave you alone History of success –> has clout with partners.
Experience MattersYou don’t want this guy You want this guy (even after a 31-0 loss to Buffalo)
Talk to other Entrepreneurs Go to meetups, network, network, network Information is power and the more you know about the people you are speaking to the better Are they knowledgeable about your space? Have they done a lot of deals already from their current fund? Who are the decision makers and how do decisions get made (firm led or partner led)? With whom do they typically syndicate?
A Serious Commitment Once you take investment this is no longer your company no matter how much you own With great dollars comes great responsibility Share holders Employees Management team career paths
A Serious Commitment You have committed to do great things Once you take VC your new found friends have very real and very big expectations and its your job to meet them No small ball. Raising VC is an enabler not a milestone Many entrepreneurs think that once they raise VC they have made it! Your business is probably more risky now than before you took investment capital
Scott Johnson firstname.lastname@example.orgJim Schoonmaker email@example.comMatt Brendzel firstname.lastname@example.org