As Greek mythology goes, Achilles left for the Trojan war knowing he would die there but also fully aware that the war would stamp his name gloriously in history books to come. He made a choice and he made it with all the necessary information. While raising Venture Capital is not really the same as going to war, you best do it being armed with all the information. Most don’t and they end up in situations where Venture Capital becomes their Achilles’ Heel.
Having spoken to a lot of founders who have raised capital, I can assure you almost everyone has said some version of “oh I had no idea about this before” while raising their first round. In an effort to arm you with the necessary information, here are a few ‘no BS’ pointers:
- Is your business model a fit for VC?
If it’s surprising to you that not all business models are a fit for Venture Capital, you really need to read the rest of this article. To understand why not all models fit, it’s better to understand the business model of VC. Venture Capital funds have Lending Partners (LPs) who give them capital to invest to whom they are responsible for returns. The way they provide those returns is by investing in your company and then upselling that in the next round or more for an exit. If they don’t get an exit – all they are left with is marked up paper.
Now, in order to get an exit by investing in you, most VCs need you to grow fast. How fast? It depends on the VC and the stage of your company but on an average 200% yoy would not be inaccurate. Now, all business models either cannot grow that way or were never meant to grow that way. That is not to say the business model is wrong, it’s just not a fit for Venture Capital. If your model is one which grows incrementally instead of explosively then you might want to reconsider VC.
- Approach VCs strategically
You got your idea, made your deck and now you’re ready for the roadshow. No, you’re not. Stop. Most founders need one of 2 things in order to raise capital successfully: a) Validation of idea – strong proof of concept; or b) Strong founder name – repeat founder, strong school, strong previous work experience preferably at a startup. Don’t fool yourself with some sob story. The latter works and it works well.
Now if you are armed with either a) or b) above approach very strategically. Do not end up going to 30 VCs all at one shot. Find 3-4 that might invest in the model that you are using be it edtech, fintech, e-commerce, SaaS, etc., You will certainly find a lot out there focusing on the space you are in. Research the kind of startups they have invested in and then pitch to them. Don’t be fooled again – cold emails won’t work here. You will either need a connect or a friendly to help you out. If they want to invest, that’s great for you and if they don’t – hear the reasoning very carefully. It’s very important at this stage to know exactly why they passed. Ask for as brutal feedback as they are willing to give because you will need it. The feedback is important because it determines what you do next. If they have mentioned that they are not convinced with the TAM, or its too competitive a field, or they do not have conviction in the leadership team (yes, some will say this and its good for you) or that they want to wait to See how this space develops – understand there is no pitching to the next 10 VCs unless you have a cogent way of answering these issues. You can’t hope to just get lucky because it doesn’t work that way here. VCs talk and if you are rejected by a few, the rest will know why.
- Conviction is contagious
Try to convince one investor. If you have one, you have a better chance of having more assuming you need/want them to close the round. If the others see someone they respect and know, their interest levels will automatically get piqued.