The three core requirements for raising a strong round of financing:
- substance — vision and results, our put it another way team + traction + tech
- style — present those results in a meaningful way
- strategy — who and how you reach out and follow up
By design this framework of my own creation has 3 Ss and 3 Ts. What this post will focus on is (iii) strategy, specifically one element that is often overlooked. Momentum in a round is critical to keeping excitement and is often the forcing function to close. Rounds that are open too long lead to doubts creeping in, investors second-guessing what might be happening, and can even collapse what would have been otherwise a very good deal. Below are five actionable ways to avoid that fate using the analogy of a race.
1) Training: Doing Your Homework
Do you know enough investors and enough about them? If not, then build that foundation of trust, enough investors to fill up your round two-three times over, and spending even five minutes on their website to understand what they look for. The method and the medium for connecting are situation-dependent: email, a preview / earlier / shorter version of the deck, a real-time conversation whether text message, phone or in person. There is no guideline that works for all cases but doing this 3-6 months before officially kicking off the round is probably wise. The key at this stage is to not be pitching formally but to build a connection and evaluate how much the investor would be interested in the event round.
If the investors are open to it, ask directly for feedback. The key is to make it specific, perhaps even prompt with the question what is the single biggest concern and single biggest strength the investor sees in the business. Lest it go unsaid, approaching it as a two-way street that is a long-term relationship rather than a short-term transaction pays dividends. The vast majority of investors you interact with will not end up on your cap table but besides giving feedback they can be helpful introducing to others and vouching for your business.
2) Start: Parallel Conversations
Once the formal pitches have started it is almost always a good idea to have a few conversations going in parallel. Many entrepreneurs will have a spreadsheet, annotated with the best way they can connect with the investor, and will target 3-5 of them at any given time. If one conversation starts slowing down or dies out then uplevel another one from the list. If you are spending more than a month and not getting anywhere then probably wise to take a step back and analyze whether there is something fundamentally amiss about the substance of style of the pitch.
3) The Bulk Of The Race: Information Asymmetry
Once you are deep with a few investors, it is almost always in your favor to not reveal the identity of all interested parties to each other. All investors, especially VCs, talk to each other all the time and the excitement around your deal can also backfire if one firm declines. The chain reaction aside, your negotiation power will get reduced if too many investors start triangulating with each other around terms. The general advice is to tell other investors enough information to get them intrigued, for instance that a $200M fund in Silicon Valley strong in enterprise is now doing third meetings, and holding off on disclosing the actual name until there is a term sheet.
4) The Final Lap: The Term Sheet
The term sheet is the most powerful trigger accelerating all conversations. Most startup rounds take 1-3 months and getting an actual term sheet is what can get you unstuck. Some term sheets are exploding ie they give as little as a couple days for you to make a decision. It’s in an entrepreneur’s interest to get closer to a week’s time to accept the term sheet itself and leverage that fact to get other possible leads to get moving. Want to get into a full partnership meeting? Tell them you got a term sheet. Trying to negotiate on valuation? Disclose what you just got and that out you are holding back for better terms. If you haven’t signed anything you are legally free to disclose whatever information you want but from a practical standpoint, definitely understand how the investors issuing the term sheet would react.
5) The Finish Line: The Syndicate
If you have signed a term sheet you should be wrapping the syndicate in a matter of days, typically at most a month. If you are not getting the round together in that timeframe it will lead to deal fatigue aka both the lead and potential follow investors questioning what is going. If you have kept a steady stream of parallel conversations then you could even disclose them all to each other — effectively the dynamics go from negotiations to an auction. Also, unless there is a strong payoff of onboarding a new potential investors, you will want to only engage with investors already deep in diligence. Finally, ask the lead investor to engage with these potentials, at the very least an email / call but perhaps even sharing their diligence. The benefits: they can vet who to bring alongside, firms like knowing each other regardless to collaborate across other deals, you obviously get a big push in closing the syndicate.
Originally published on “Data Driven Investor,” am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.