In this interview with Jeremy Glaser, who is a partner at the law firm Mintz Levin and also serves as Co-Chair of the firm’s Venture Capital & Emerging Companies Practice, we discuss the process of raising startup capital from outside investors for your company, why you can’t short circuit the process, and how to solicit critical feedback about your investment materials from prospective investors.
Jeremy: Unfortunately, most entrepreneurs try to short circuit the process.
They don’t understand that they need to have all of these building blocks down below before they can say, “Now why is this a good investment opportunity?” We need to pull them back a bit and say, “Spend the time doing the things that are in your book.” What are the fundamentals of the business? What’s the market?
Patrick: Do the homework. Do the prep work. The fundraising process, in my experience, is a gut-wrenching arduous process and you don’t know if you’re going to be successful at it or not. No matter how well your company is executing, no matter how good it is, there is so muck skepticism out there. It’s a numbers game, like anything in sales.
Let’s say that you have a venture capital firm with a $200 million fund. They have to make investments over successive rounds. If they’re a Series A investor, in order to maintain their investment, they need to keep some dry powder for Series B and Series C investments. Maybe they have three or four partners. Each of those partners might do four deals a year.
Jeremy: It might be less per year. It might be two.
Patrick: You have two deals on the low and with three to four on the high end. That’s a big fund. If they are a mega-fund, they’re going to have more partners. They’re looking at so many deals. Maybe they are interested in your company, but the timing is not right. Maybe they believe the business idea is good, but not the team.
They might think, “I’ve already made an investment in this space so I’m not going to make another investment in this space.” You can’t take it personally and think, “I’ve had 30 meetings and I haven’t closed a deal yet.” This is hard work.
Jeremy: I agree. We’ve been talking a lot about what you have to do to get ready to write your executive summary. You need to make sure it’s the right one. You have to practice the pitch. All of that is really important. The one thing that we haven’t talked about is, once you’ve done all of that and you have your pitch down, there is the process you need to go through in order to find the investor.
I’ve been lucky enough to work with a lot of folks who assist companies with fundraising. I’ve been involved with helping companies get introduced to VCs. I’ve personally developed a process that I use, that I’ve found effective. It results in what you’re describing.
You work very carefully with someone like us or another outside professional to come up with a list of the appropriate investors. These are the ones who invest in that space and still have dry powder in their fund. You put that list together. Then you identify who you know.
You want to have a warm contact. Sending a pitch deck without that, it’s very unlikely that you’ll get anyone to read it or get feedback on it. You identify these folks. Who do you know? Who do you know that knows them? Once you do that, you blast out an executive summary to all 100 of them at once, right? Of course not. But that’s what every investor does that is not properly advised. No. You never do that.
Patrick: Is that a general solicitation?
Jeremy: I believe it’s not. We could get very technical about how you found these people and emailed them. In general, it’s probably not.
As a matter of whether or not it’s going to be effective, it’s so wrong. I’ve tried to educate folks. It’s not an event. It’s going to be a process. It’s going to take time. You want to identify 5 to 10. I prefer 5 for the first go.
These are going to be funds that know the space, know one of us well and who will pay attention and give us good feedback. We’re going to send them our materials. The likelihood of those first 5 or 10 investing is close to zero. That’s not why we’re sending it to them. We’re sending it to them because we’re going to learn a ton.
Despite our best efforts and homework, we’ve missed something. We’ve missed some gap in the market. We’ve missed some gap in the competition. We’ve missed some gap in the revenue streams. There’s something that we’ve missed. We’re going to learn a lot and iterate. We will probably do that at least two or three times, which is why I like to do five. You do five, and you iterate. You do five others, and you iterate.
Maybe within those first 10 or 15, there are one or two who say, “After you’ve made these changes, come back and see me.” Maybe. Sometimes you don’t get that. Once you’re 10 to 15 in, you have something where you think, “This is pretty darn good. I feel more comfortable.” Now we can start going out to a broader audience to see if we can get some real interest in the company.
This is Patrick Henry, CEO of QuestFusion, with The Real Deal…What Matters.