Some potential investment partners will look to make you a pawn in their larger game. Here’s how to avoid that fate.
I’m not going to mince words: getting funding can be stressful.
I don’t care if you’re working out of a garage and need seed money, or if you’ve got a slick team that hums and you’re seeking scale in a Series C. Finding the right partner is a perilous process, full of potentially choppy water. Within that water? Sharks.
There are four things you need to do to make sure you don’t get bit.
Raise capital specific to the demands of the company, not to the demands of the fund.
If you're going to fundraise, think carefully about what your capital objectives are.
Let’s say you’ve decided you need a million dollar seed. A million dollars is great, but where’s it going to take you? Does it take you to a place where you’re fundable into the next round, and at a premium? Does it meet your operational needs, and set you up for putting the right talent together? Think steps ahead of your current station, beyond your current round. What will your capital requirements be over time?
Companies that raise capital and don’t meet the agreed upon milestones of the financing usually don’t get follow on funding, or they’re forced to take a significant haircut. Seed capital is often hard to gauge, with firms taking too little or too much. You need to know what the fundraising is going to look like over the life of the company, not just the current financing. A million dollars might be great now, but you can’t afford to just think about the present. When capitalizing your company you must play chess, not checkers!
Now, here’s where it’s important not to be a pawn: big funds want to put capital to work. You need to be raising capital specific to the demands of your company — both its current and future demands — and not to the demands of the fund. Remember, the earlier the stage, the more punitive the round from a dilution perspective. So raise what you need plus a buffer as things always take longer than you expect.
Develop a criteria of what you need from your investment partner. (Hint: it shouldn’t just be money).
You need more than capital from an investor.
As you seek funding, make sure that you’re developing your own criteria of what you’re looking for in a partner. One place to start: complementary expertise.
Perhaps you’re an ace coder or someone who’s got a true depth of experience in data science or cyber security. You understand the needs of the market and have the time-tested skills to build a killer product that will be truly disruptive. But there’s a problem: you don’t know the first thing about sales, or marketing said product. You prefer to build, and not to trumpet what you’ve built.
Or perhaps it’s the other way around. You’re sales-first and need a tech-savvy partner.
In each case, your needs are different, but there’s a common thread.
You need more from a partner than just money. You need help in areas that you don’t normally think too much about or focus on.
Run parallel processes and get multiple term sheets so you don’t get played.
If you randomly go to a single VC, he or she is going to take you into deep water. Be careful, because that’s where the sharks are.
Once you’re in deep water, you may find yourself drowning. Perhaps you’re in a place where you absolutely need capital — as in, you need to fund your company now, or you’re not going to eat — and this is it. This is your only offer, your only life preserver.
Well, congratulations. You played yourself.
To avoid this fate, understand the capital structure of your company, then build your criteria for who you want as a partner. Then, in the case that you want traditional venture capital, approach your prospective partners as part of a process. You’re not just going to a random venture guy whose job is to broker people and information and to get in on things.
Those guys aren’t always qualified, so qualify them yourself. Then, identify multiple investment targets prior to engagement, so you control process and structure.
Talk to several different, but qualified prospective investors. With more and better choices comes better terms and a better fit for your criteria, which at this point you’ve sharpened.
Some quick tips for your process:
You’re going to want to talk to VCs who invest in your space, and stage. Think about more than just the brand name of the VC firm. Dig deeper, because more important than the brand name is the specific partner you’re working with. These partners are essentially running their own franchise under that brand name.
Does the partner and the firm invest in your space? Do they have a good track record? Are they good for the specific stage you’re at? Do they have operating experience?
If you do this right, it will be on your terms. You’ll pick your investment partners, as opposed to you being picked.
Understand your founding team. You want people to bring different things to the table.
In a startup, there are two types of roles: you’re either building or selling.
You’re either getting customers in the door, or you’re making a product that delivers value to the customer. If you don't fill one of those roles, you don’t belong in.
It’s okay to have multiple people wear multiple hats. You can have multiple people who understand product. They can both be voices in the room, but one needs to be the final decision-maker.
It goes without saying, but make sure you have your bases covered. Any area where your founding team falls short — whether it’s functional or domain-specific — needs to be accounted for.
Complement your existing team with the right people, and make sure you find an investment partner who can help you do that.
If you follow these steps, you’re in good shape.
If you meet the capital demands of your company, develop a sharp criteria, run parallel processes, and compliment your team correctly, you’re moving in the right direction.
And you may be ready to create something life-changing.
