In many ways, attracting venture capital isn’t that different from landing an angel round, says Matt Ehrlichman, a serial entrepreneur in Seattle whose latest venture is the home-improvement site Porch.com. It’s about your knowledge and experience in your business’s particular area, surrounding yourself with A-list co-founders and having a credible strategy for tackling a real market opportunity.
However, the VC process is more formal. It involves much more scrutiny of your business and the market, many more meetings – and giving up a measure of control as a VC takes a seat on your board and a share of ownership in your company.
“At the end of the day, you need to show that your business is going to be a really big business,” Ehrlichman says. “What makes the model work is the home run deals. VCs want the big win.” That means you have to prove the size of both the opportunity and the market, and demonstrate that your approach is not only distinct, but that it will remain distinct, ideally forever.
“In the late ‘90s, you could raise $5 million to $7 million on a PowerPoint and a resume because that was the money you needed to actually go build the product,” notes Indranil Guha, principal at Bain Capital Ventures’ Palo Alto office. “Now you can build a product that works really well and scales really well for a half-million dollars or $1 million. So, to raise $5 million to $7 million, you have to have proof that the product has appeal.”
Guha, who invests in early and growth-stage cloud application and Software-as-a-Service companies, says background in the area is especially important for enterprise ventures. “Then it’s what progress have you been able to show off since your angel round? Do you have customer validation? Do you have three or four customers who are actually paying you? What that means is that the products – or at least the vision for the products – is compelling,” he says.
Dice News asked VCs and entrepreneurs who had closed VC deals for their best advice on landing an investment. Here are some of their tips.
Do Your Homework
“What tends to happen,” says Guha, “is that founders optimize for valuation or optimize for the prettiest offer on the table instead of being proactive from the start, instead of saying, ‘Which one has done interesting investment in my field?’ ‘Which ones have I heard great references from other founders?’”
In other words, it’s not just about finding VCs willing to invest, but finding those who can most benefit your business.
“It’s so important that you have partners who add value, who are a great fit for your company strategically,” says Ehrlichman. “It’s such a unique time when you’re bringing in other owners of your company, and it’s so critical to get the right people participating.”
Get to know a relevant set of venture capitalists before the fact. “Don’t treat fundraising like a push-button process,” says Guha. “A Series A can be a seven-year, eight-year marriage. That’s a really long time to be in business with your first investor. You’ve really got to make sure they can help along a bunch of different dimensions — bring customer introductions, etc., have great chemistry with you, can support you through different stages of your growth.”
It’s the Story
You have a short window to capture a VC’s attention, so you have to nail it quickly, says Ashish Mistry, co-founder of BLH Venture Partners, an Atlanta-based early-stage firm that invests in e-commerce, information security and SaaS.
“If you can’t communicate effectively, getting a second meeting or getting to diligence likely won’t happen,” he says. “What we see are people who have some semblance of a business already. Getting beyond the initial cursory meeting, we’re really talking about having metrics and things that the entrepreneur can fall back on. Having a good story is the top end of the funnel.”
Illustrate the Vision
“We’re looking for a sizeable opportunity,” Mistry explains. “The entrepreneur has got to show us a path and a vision and articulate how they can get there. We’re buying into the people element of the business and putting our risk capital on the fact that they can execute.”
What is Your Unique Technology Edge?
Do you have either some core piece of technology that’s hard to build, or an approach to delivering a technology or service that’s totally unique? “That comes up over and over,” says Guha. “Can we make this defensible enough to make this a big business? Can we give ourselves enough runway to attack this market opportunity?”
Back It Up with Metrics
Entrepreneurs must be able to show that what they’re talking about is based in fact, even if it’s in broad brush strokes, says Mistry. “Having traffic to the website, being able to talk about conversion, dropped carts and all those interesting data points. Things like that resonate with VCs. When that happens early on in the conversation, having a second meeting becomes a lot easier.”
It’s About Execution.
“It’s about the track record,” Mistry says. “Even if it’s for a short period of time and it’s for only a few things, [you need] good, focused data and good, focused, measurable success.” Top-line revenue is one thing, he adds, “But being able to say, ‘Hey, we’ve got something that’s repeatable and if we put more money into advertising or more salespeople on the street, [what] we’ve created has the potential to create a significant outside return.’ Those are attractive opportunities.”