(Written by Taneli Tikka a serial entrepreneur in the consumer Internet space, on the same day for the http://tane.li blog.)
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A lot of startups think they are ready to receive venture capital, risk capital, or some sort of “real” financing. I recently had to count; how many rounds of financing have I “done?” (not solo, they are always teamwork) It took some plain old organic memory search, and if I have it right that would be a total of 9 rounds so far. (just as a remark: IRC-Galleria had zero rounds.)Based on that experience; When are you ready?
Here’s my take on that: 1. You have the right attitude. You and your startup need to be very good at what you are doing. You need to have your act together. Know your stuff. Know your competition. Already have plenty of things done instead of “just planned”. You need to be there to succeed and as part of that attitude you need to be humble enough, yet know that you are a “catch” for them to have; and that you are the client shopping for financing services for the price of equity.
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2. Your materials are in good condition. Yesterday a highly competent venture capitalist (managing partner, none the less) said to me: “the good VCs know that the excellent companies probably don’t have time to prepare a 50+ page business plan and perfect materials”. Agreed. I think you do not and should not need a very long business plan and a beautiful polished power point. Many of the 9 rounds I have done have been done without the one of the other, sometimes without either.
What do you need then? You will need a very good executive summary. You will need to be ready to talk about your stuff at a “championship level”. Solid financials are needed. And a good representation of your overall plans and goals. Specific roadmaps and such should not be so important – because they will change anyways, and the good VCs know this extremely well. Many VCs don’t read plans. They only read summaries, 1 page or 2 pages. Even the legendary Sequoia Capital asks everyone to send a maximum of 15-20 slide summaries, as they say “all that’s needed”. What did Eran Davidson the CEO and Managing Partner of Hasso Plattner Ventures say on stage at SIME Helsinki? “I’m a VC and I don’t read business plans”. There you have it.
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3. DD preparation is done or underway. Check my earlier post about the DD. Make sure that’s at least in progress and you can answer questions about IPR and such in a very competent level and detail.
4. You have an investor plan. You have mapped out multiple investors. Actually found out about their investment focus, criteria, space, latest deals, terms, etc. You have schedules for the whole thing to progress, your team has divided the responsibilities of preparing everything, and you have created the most important thing: a shortlist of investors most likely to realistically invest into your startup. Where to find VCs? Check my previous post for a few ideas.
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5. You have time to raise capital. It takes a while. In this economic climate it takes a while and then some. You need to have that time, no hurry. Sizeable startup rounds (a few Big MOs) can go through in as little as 2 months, but that is an extraordinary accomplishment that does not happen often – there needs to be a real match between the startup and the investor for a deal to move so fast. Angel rounds can be faster. Typically it takes at least 6 months, and now quite possibly more than that. This old comic from the Dot-Com era sums it up nicely.
6. You have already engaged customers and partners. One thing that will greatly speed up your VC deal will be real commercial traction. Especially if you are in a space like “Web 2.0″ that’s sort of the requirement before you get any VC money. It helps significantly if you are already on a path towards growth and expansion, but would grow a lot faster with additional capital. One way to get there is to talk to your customers, partners, consumers etc as soon as possible, as much as possible. Hammer out your thing, what ever it is, in such a way that it is desired in the marketplace and has clear evidence of showing commercial traction. Score the deals. Close and sign them in. Then talk to VCs. Try to go for LOIs, non-binding contracts, MoUs, or even try to get upfront payments from the customers. Every name on the paper is tangible proof and will help you out. Try to get permissions to reference them and their interest when they sign.
7. You require money for growth. VCs don’t really want to fund things like; proof of concept, product development, prototypes, “stage 1 development”, “hiring a team”, etc. The earlier in the game you are, the harder time you will have raising any VC money. They like to fund companies that need the financing for growth, not to build something risky that might quite likely fail. If you happen to be very early, then go for Angels or “Friends, Family and Fools”.
8. Have a fallback plan. One indication of your readiness is your ability to come up with a fallback plan. If everything drags out and your startup is not picking up any interest (or just not enough of interest) from the VCs, then you need to have the famous plan B. And in this case I don’t mean buying 5 years worth of green beans and a big gun.. You need to plan for extended periods without outside money, getting the company risk level and burn rate right etc. If its not VCs maybe its angels? or maybe its your own pockets? maybe its one good pilot customer? What ever it is, have the plan in place and expect having to go for it.
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9. Have your own term sheet ready. It speeds things up and ends up in your benefit if you make your own term sheet before the VC gives you one. it helps you to have a clear sense of the kind of stuff that goes into it. You might not end up actually using it for anything else than comparing, but there might be situations where you can offer to propose the first set of terms to the VC. This is probably way more common with Angels, since most VCs have their “standard” terms sheet (with nothing really being standard or fixed in them). Preparing your own set of terms mainly helps you to think and that comes in rather handy when you actually have to negotiate the stuff – you’ll understand it better and have thought through the meaning of different terms. Actually the smart VCs prefer this as well: they would rather have an entrepreneur signing with them who knows exactly what he signed, instead of a one that has no clue at all. VC terms can vary a lot. There’s also a bit of a Gap between what the VCs say is “standard” and what they actually sign in the end. For example: many VCs claim liquidation preferences to be a standard term. Yet out of the 9 rounds of financing I have seen only two have actually had that term included. So in my book it’s rather rare to be seen. Same goes for another classic “strict term”: anti-dilution clause for the VC. Out of the 9 deals only one has had that. There’s actually enough substance regarding this matter that I might write a separate blog entry on this alone..
CC Attribution: Márcio Cabral de Moura@Flickr
10. Finally: know what you are doing, and research the investors. Partially this is a repeat of number 4 above there, but I want to separately underline this one. It is vitally important for your “VC readiness” to research the investors, really find out about them, use your contacts, talks to people etc. Talk to other VCs, talk to startups that have done deals with the VC, talk to angels, to Tekes, to who ever. Find out all the classic and generic details: “sweet spot” for investments, typical deal size, typical exit, typical terms, the likes and dislikes (and the backgrounds) of their partners, etc. Finding out this stuff will mostly help you to figure out are they the right investor for your. And if they are the info will help you in the talks. What to do if despite all of this you don’t raise attention from the VCs? Then calm down. Leave it be for about 6 months. Get back in touch (with a revenge) and update them on all the fantastic progress you should have been making by then. Meanwhile go for the angels, or the FFF, or what ever keeps you focused on the Big Plan. Don’t dwell too far into project services and selling the skin off your back, that may be a living, but its not going to be a venture backed startup any time soon. (sorry, it just rarely happens that way).