Fundraising Big Picture Tips
Now that you’ve bootstrapped your startup (ideally out of your garage), got the first round of angel funding, maxed out your credit cards, hired a core team and got some reasonable traction with your product or service offering, the next big step is to get the first round of serious institutional financing, also known as Series A round. Here are a few pointers as you embark on raising venture capital. First, if you don’t really need the money, don’t take it. Sure, there are plenty of positives to having a seasoned investor on the board, better yet if he or she is a former entrepreneur with a strong network, but VC funding comes with major strings attached.
Over 90 percent of Fortune 500 corporations were built without a cent of venture capital. Continue to grow your business to the extent you can without VC funds. You could be in the enviable position of having investors come to you in a few years time, seeking a share of your growing pie, rather than the other way around. There is nothing ‘sexy’ about being a venture funded company, especially when the reality is that the vast majority of VC funded businesses fail.
However, if your business needs are such that some amount of institutional capital is unavoidable, then here are a few tips:
1. More than cash, chemistry is the real king: Have multiple meetings with the partner at the VC firm. Get taken out to lunch, dinner, and a few rounds of beer. He or she is going to be your trusted confidante for the next several years, and its’ critical that you are able to establish a good rapport with this person and feel confident that here is someone who will listen and is worth listening to, in both good times and bad.
2. Find out what else the investor bring to the table this could be a wide network, deep experience, industry knowledge, business development opportunities, marketplace access, customers, and so on. India is a fairly competitive VC market, so if you truly believe in your business you can, and should, be able to pick and choose, or at least try. Never say yes to the first investor willing to give you a term-sheet.
3. Know who you are dealing with who will be your primary contact at the VC firm? Is it the partner or will it be an associate or principal? Sometimes partners are nominally on the board but the real work is done by other individuals. Point one above applies to these individuals as well. How many other portfolio companies does the partner oversee? How much time and effort will he be able to spend on your company? How much clout does the partner have within his own firm?
4. Be realistic about valuation. Valuing an early stage company is more art than science, regardless of, however, many multiples or comps the parties throw at each other. It basically comes down to how much you are willing to give up. It’s far better to have a smaller share of a potentially large pie than holding 90 percent of a company that is likely to go nowhere fast.
5. Term sheets are tricky; get an advisor to help you navigate the legal jargon. Know exactly what you are signing up for. But be reasonable investors are taking on significant risk, and will insist on all kinds of protective provisions. Term-sheet negotiations and the ensuing legal drafting can be a long drawn out process. This will take even longer in today’s market where investors are in less of a hurry to fund companies and may want to renegotiate previously agreed upon terms. This process brings out the best and worst in individuals so keep an open mind and don’t hesitate to walk away.