Thursday, October 25, 2012

Practical Advice for Raising Early Stage Venture Capital

Most great businesspeople I've met would correctly advise an entrepreneur to avoid raising money if possible. Easy for them to say, right? But there are good reasons to bootstrap. First, you maintain control of the company. Second, maintaining control allows you to experiment and learn where the business is "naturally" going. Third, if you own the company, you can have a great exit at a low price. Fourth, if you're able to build the company without significant outside capital that may mean your business has even more "real" legs.

But raising venture capital is sometimes a great idea. If your business has high velocity, high margins, and a huge market, venture may be a good road for you. There are some helpful resources out there on venture terms, good venture funds vs. bad ones, and questions you may want to ask a venture capitalist if you meet one.

The notes below are practical working tips on how to go about navigating venture capitalist conversations. Some of these might be surprising or seem hard to follow. But, in my experience, they're good medicine.

  • Never start your fundraising process by meeting the top funds first. When you are ready to raise money, scratch Sequoia, Kleiner, and maybe one or two other top dogs off your preview list. It's hard to overstate the herd mentality of the venture community. If the top guys pass, everyone below them will be too afraid to do otherwise. Get your practice reps in with easier audiences.
  • Don't respond to inbound inquiries from anyone but a partner. Many entrepreneurs are excited or flattered when they hear from associates or analysts at venture funds. Don't be. An "associate" at a venture fund is not a venture capitalist; she is an outbound prospector. Junior members of VC teams are paid to source information about companies. Their job is to make contact, extract information from you, get a PowerPoint deck, and build a profile of your business and industry. They are not qualified or authorized to do deals. If a junior member of a venture firm recommends your company to her superiors, it may actually be a negative signal inside the fund rather than a positive. Wait to connect with partners. (Depending on the firm, exceptions can be made for individuals carrying the title Vice President or Principal.)