Venture capital funding is capable of super-charging innovation, financing high-potential start-ups at their most risky stage. Of course there are clear pros and cons to seeking venture funding. How do you know if the venture capital (VC) route is the right one? What does it take to raise VC funding for your start-up? Especially today, raising money is not an easy feat, nor is venture funding always the best answer. I had lunch with J-F Gauthier, founder and managing partner of VC Negotiators to get answers to these and related questions. In 1995, at the start of his successful career, Gauthier ranked #1 negotiator out of 810 in his Harvard Negotiation program. Since then he has worked many angles of the business world, as CEO, consultant, banker and more. Today, he works with entrepreneurs to raise money and negotiate favorable terms with VCs. Gauthier contends that unless you are an experienced financier and negotiator, all entrepreneurs can benefit from guidance when seeking funding. He shared with me some guidelines that can ease the process.
Echoing a sentiment I’ve heard from many, including Wired’s Daniel Roth, Gauthier posits that while there are very tough times ahead for all businesses, now can be a good time for a business to get started and for innovation to happen. Start-ups who “make it through (the recession) will be rewarded with reduced competition. Starting a business now is smart if you can survive through the recession as there will be funding available in a year and a half or so and little competition.”
Things to consider as you determine your funding needs
Are you sure you want VC funding?
Only a few businesses fit the VC profile by nature. And the reverse is also true: getting venture capital fundamentally changes the nature of your business. VCs fund companies that are aiming for explosive growth, i.e. have a real chance to achieve $100M in revenue within 3 to 5 years. They gain a certain degree of control of the business that some find undesirable. Entrepreneurs should ask themselves if they really want this: “Is my company shooting to be a billion dollar business?” and “Do I want VCs as my business partners?” Gauthier explained. “The VC becomes your husband or wife. Are you sure you want to get married?” Ironically, the average length of a venture capital relationship is longer than the average marriage in California.
If so, invest in thorough research and preparation
Gauthier notes that the biggest problem entrepreneurs face in obtaining funding is lack of experience and insight into what VCs are looking for. Entrepreneurs are a rare breed of individuals who are often highly confident in their skills, and for good reason. However, excellent entrepreneurs are rarely excellent at raising VC financing. Negotiating skills aside, it can be hard to even get your foot in the door; Bill Burnham posted a helpful list of steps to getting a meeting with a VC.
Determine your goal and objectives, and how you’re going to get there
This starts with the need your idea solves and your solution to it, but also with your vision, strategy and operational plan. And only once these fundamentals are in place should you define whether you need funding, how much, and as importantly, from whom.
Understand what a VC firm is looking for
Educate yourself on what VCs are looking for and how your vision meets their criteria. Gauthier describes a fundamental rift between an entrepreneur and a venture capitalist that interferes with smooth dealings: “The biggest problem is that entrepreneurs don’t know what VCs really want. Even if they pour lots of hours into their presentation, it’s usually not quite what the VCs are looking for. This is because what an entrepreneur cares about is not what will get the VC excited about the idea, so it’s hard for an entrepreneur to speak to a VC. Venture capital firms are excited about an idea only if it has a huge market potential and there is a pretty clear path to making a lot of money with it. Meanwhile an entrepreneur is passionate about the idea itself and all the technical details, and believes, often blindly, that it inevitably means it will make a lot of money…without having a realistic path to get there.” In most cases, to get venture capital, you must convince the VC that your business fits a big need in the market that many people are ready to pay lots of money for, or millions of people will be ready to pay some money for.
Emotions are critical
The reality is that “If you can’t excite a VC in first 5 minutes of your presentation, they will most likely never invest” Gauthier explained to me. According to Gauthier, entrepreneurs tend to be left brained and expect business and technical details to create excitement. They neglect the good old emotions that come from an enthusiastic voice, a few big points, and a short, exciting “story.” Venture capitalists are often leaders, ex-bankers and sometimes ex-CEOs – heavy on soft skills and less analytical than you would think. Their desire to invest starts (or dies) with a gut feeling, then they analyze.
Seek input from people with first-hand VC experience
Entrepreneurs think they can excel at everything, including fundraising and negotiating, but Gauthier explains that this is rarely the reality. You’ll want to ask for help, which is best coming from an ex-CEO who has raised a Series A with venture capital firms (not from just any founder or executive of a VC-backed company, nor from a CFO since they are almost always hired after a first round). Raising Series B is not nearly as hard since you then have a CFO plus your own VCs working with you (hopefully!).
Don’t lose hope, but learn from initial conversations
VC’s don’t give feedback, Gauthier points out, so entrepreneurs don’t get the chance to learn from their mistakes. You will need resiliency to deal with hearing ‚Äòno’. After a handful of ‚Äòno’s’ you may consider that either your business is not a good match for the type of VCs you are approaching and/or consider re-tooling your pitch to speak more quickly and clearly to the VC’s interests.
Landing VC funding may not be the best growth plan for your business, but if it is, make sure you’re prepared to speak the VC’s language and don’t be afraid to ask for help.