Raising Venture Capital: The Road to Success

If you are an entrepreneur seeking to raise venture capital, this article should help you to organize your activities to maximize your chances of getting funded.

By Edwin A. Goodman

At Milestone Venture Partners, hundreds of business plans from early-stage companies cross our desks each year. We select what we see as the most promising businesses for further study and evaluation, eventually investing in just a few of them. In this article, I have attempted to encapsulate some of the basics of the capital-raising process.

If you are an entrepreneur seeking to raise venture capital, this article should help you to organize your activities to maximize your chances of getting funded. From planning right through to closing, the article will provide you with some critical insights to help you make the capital-raising process more efficient and more productive. 

Begin with Rigorous Planning

Successful entrepreneurs plan assiduously. If you review the history of successful mountaineers, the triumphant climb to the top may require two to three weeks, while the planning that is prerequisite to the ascent often engages the group for two or three years. This is an apt analogy for capital raising in a very competitive market.  In my experience, entrepreneurs who have successfully raised capital, have thought long and hard about their opportunity and how to seize it. They have engaged in a cool-headed self-assessment to ensure that the management team they have assembled is sufficiently competent and diverse in their skills to satisfy the needs of the business, as well as to respond to the tough questioning and requirements of venture capital firms. And they have been thorough and rigorous in the creation and development of their business plan.

Be Aggressively Proactive in Starting the Business

Beyond rigorous planning, successful entrepreneurs find a way to creatively and aggressively begin. They frequently commit their own money, and also assemble a small round of financing from family and friends -- a so-called "angel" round. In addition, moonlighting may be necessary -- whereby the team keeps their day jobs, but begins to work on various facets of the startup business. This may involve any number of tasks, such as conducting market research, contacting as many prospective customers as possible, writing the business plan, completing a piece of software and, most important of all, capturing an initial customer. Venture investors find it comforting to assess a business opportunity that is more than an idea. And they are frequently drawn to the projects that are sponsored by demonstrable self-starters.

Researching the Venture Capital Community

In parallel with the business-building activities, entrepreneurs need to research the venture capital community to identify venture investors that would be most interested in the business. The Internet and its associated search tools have greatly facilitated this task. Enterprising entrepreneurs are now able to assess funding sources regarding, among many aspects, areas of investment interest, size of their capital base and the professional expertise of the general partners. They can also vet each venture firm's investments and answer the question -- would my firm be a logical addition to this portfolio?

After the initial search for the most logical group of venture firms to approach, the entrepreneur should search for introductions. Today, the Web makes possible "virtual networking."  Using Google or other search tools, you should be able to identify an individual whom you and a partner at the targeted venture firm both know, albeit perhaps in very different contexts.  For example, you may have used the services of an attorney who also acted on behalf of one of the venture firm's portfolio companies.  Such a mutual point of contact will help to ease your path to a hearing.  Although a "cold call" and the submission of a cogent executive summary can also secure a meeting, this is a much more difficult proposition.

Identify, and Contact, at Least Five VC Firms

Be forthright with prospective investors, but not naïve. Try to orchestrate a capital raising campaign which, at least in its early stages, engages five different funding sources in discreet conversations.  This is the best way to establish the market "price" for your equity.  If one drops out, replace that funding candidate with another prospect.  Over time, pricing parameters will emerge and you will reach terms with a potential "lead investor," at which point it behooves you to introduce that firm to the other interested parties to encourage the formation of an investment syndicate.  If you are fortunate enough to engage the interest of several parties, your decision as to which partner you select should be guided by personal chemistry, confidence in the integrity of your putative partner and the conviction that you will receive valuable advice and assistance beyond capital.

Selecting Appropriate Advisors

Advisors can be helpful in a variety of ways – in both the business-building and capital-raising functions. They can take many forms, ranging from knowledgeable friends to senior executives familiar with your target market. Such advisors can be helpful, but also disruptive (not always a bad thing if they help to move the business forward).

Among your advisors and angel investors, I recommend including an industry luminary. This will lend gravitas and credibility to your enterprise, a particular plus for youthful entrepreneurial teams.

If you want to use a paid advisor – such as an intermediary, a business broker or an investment banker – to help with the capital-raising process, you should be aware of how such intermediaries operate and how they earn their fees.

In the past, capital providers often frowned on the involvement of paid intermediaries, because the intermediaries were viewed as adding a layer of cost while bringing little or no value to the prospective transaction, and often complicating the process as well. For the most part, that perception is no longer valid, and venture firms welcome contacts from professional advisors who have carefully screened candidate firms for financing, and therefore can present quality opportunities to the venture firms.

Fees charged by these advisors for such assistance are negotiable and generally range from 2% to 10% of the transaction value. These fees are paid by the company seeking the capital (but indirectly by the financing venture firm) in some combination of cash and equity participation. The range of fees is so wide because the services offered by the advisors are comparably broad -- from a single phone call introduction to extensive assistance, including: (1) preparation of marketing materials; (2) coaching regarding presentation skills; (3) participation in perhaps dozens of meetings with prospective investors; and (4) advising and playing a role in the negotiation of final deal terms. Therefore, before engaging a paid advisor, entrepreneurs must be knowledgeable not only about the prospective costs, but also about precisely what services they are paying for.

Creating the Proper Materials and Documentation for VC’s

In anticipation of meetings with prospective investors, management teams must prepare documents to tell their stories. These marketing materials should include an OVERVIEW in PowerPoint format, a 2- to 3-page EXECUTIVE SUMMARY and a full-scale BUSINESS PLAN (20-30 pages plus appendices as required). 

In today's fast paced world, the first two documents are the most critical. They are not designed to tell the whole story, but, often via e-mail, to highlight the opportunity and to capture the interest of the venture firm in order to secure an initial meeting. If that meeting goes well, an iterative process will ensue which will include a careful review by the VC’s of the business plan and its underlying assumptions and attendant financial forecasts.

This process can extend over many months.  The entrepreneur can shorten the cycle in two ways.  First, before the initial meeting, prepare a DUE DILIGENCE BOOK in both hard copy and digital formats.  Depending on the maturity of the enterprise, the book will include resumes, references -- both personal and business-- and legal documents such as articles of incorporation, financial statements, patents and patent filings, etc.

Practice, Practice, Practice Your Presentation

Your initial meeting with a prospective investor is a precious opportunity not to be squandered.  Think of it as you would a job interview or an important customer call. Practice, practice and practice some more, but don't allow your passion, enthusiasm and spontaneity to evaporate. Hone your message and make sure that within the initial two minutes, you articulate precisely what your company does. Also, be flexible.  If questions arise, address them quickly, and engage in a dialogue. This is preferable to moving inexorably through your prepared pitch.

Rapid Response to VC Questions

Respond rapidly to VC questions posed at the presentation, and afterward. Anything else will be viewed negatively by the investors. Company management should organize a “war room” such as those made famous in a number of recent political campaigns. This group's responsibility is to respond comprehensively and quickly to questions.  Inevitably, in the wake of a meeting, a venture capitalist will ask a question along these lines, "Could you please show us the impact on your cash flow in the event that your year 3 sales forecast misses plan by 25%?” Quick, accurate responses to such questions impress venture capitalists and increase their comfort level.

Choose a VC-Experienced Attorney to Close the Deal

The first step beyond a handshake is to negotiate the essential terms of the proposed financing which will be immortalized in a TERM SHEET to be initialed by both parties. Although not a legally binding document, when dealing with reputable VC firms, it is highly likely that a mutually agreed upon term sheet will lead to a financing within 60 to 120 days, depending on the complexity of the transaction, the number of participants and the amount of requisite due diligence. The selection of capable counsel is essential to obtaining a good result within a reasonable period of time.

So choose your law firm and individual lawyer with great care.  Select a VC-experienced attorney whose references include happy entrepreneurs whom he has represented. The closing documents will reflect the salient points of the negotiated term sheet but will be much more comprehensive. It is critically important that your counsel "turn" these documents quickly and that, consequently, the drafts move back and forth with dispatch in order to maintain momentum toward closing. Deals that lack momentum have been known to die on the vine, as prospective investors become frustrated by a sluggish closing process, and refocus on fresh opportunities.

Following These Procedures Will Increase the Capital-Raising Likelihood

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