Daniel Lynch
Raising venture capital can be a daunting task. A huge challenge is to make a presentation that encapsulates all the important aspects of your business to fit neatly into 12-15 slides. During the presentation, you feel like all your work and the entire living reason are being judged. But as you go through the process and meet with various investors, there are several perspectives you need to keep in mind to understand a VC's mind.
The VCs do not create value in your business – you do.
In the first meetings, the VC initially tries to understand if your business model fits their investment criteria in terms of size, sector, stage, and even geography. Their job is to allocate capital and determine if your deal is the one to which they allocate their time. As they have yet to fully understand your business and competitive position, they are assessing you and your team as to your ability to articulate the strategy and knowledge of detail clearly, exude positive energy and drive and show a commitment to see the business through. "Is this the kind of person who will make good decisions, hire the right people, and make sure this business is a success even if it costs him his evenings and weekends?” The VC is not a referee judging and throwing penalty flags. They are trying to decide: "Do I have faith in this entrepreneur? Is this the type of business my investment committee is looking for? Where will the value creation come from so that my LP investors make money?
Is this team coachable?”
Complete due diligence on the investors, too.
Venture Capitalists come in many different flavors. The most important question for the entrepreneur is not who gives the highest pre-money valuation, but 'Which VC firm can add the most value beyond the capital they provide?' You are selling an equity ownership stake in the business. With ownership comes responsibility. Does this VC have experience in this stage and sector? What kind of experience did other entrepreneurs have with them? (Ask for references) Were they constructive or obstructionist? Where and how did they help advance the business, e.g., network, customer intros, biz dev support? If all they provide is capital, that portion of ownership is called 'dead equity.'
Don't do it alone; work closely with an experienced mentor or board advisor.
There will be many pitfalls along the road to building the business, most of which have been suffered by others before you. Having an experienced mentor who is aligned with you and the business can be most valuable. The learning never stops, so get a teacher/mentor to guide you and the business. This can move the company much farther down the road faster. Having a sage on your side of the table will give you a sounding board on strategy, feedback when interviewing new executives, knowledge about how to construct incentive plans, and much more. Moreover, their presence will not only help in avoiding traps but also in enjoying the experience. There should be alignment, which can come from their cash investment, options (with vesting), board seats, etc., but the chemistry will be the ultimate reason for the relationship's success.
Choosing the right VC investor for your business is one of the most consequential decisions you, as the Founder, can make. Contribution is more important than valuation. Rather than be intimated by the process, understanding the steps of the investor and how they are responding to your presentation can demystify the experience.
