How To Fundraise
The Sponsor, the Pitch, and the Diligence Process
The column originally appeared in Forbes.
Covid-19 has changed fundraising in the world of tech start-ups, just as it has every other aspect of business. Yet ironically, the pandemic has accelerated the venture process, rather than slow it down.
Since early summer, there has been a burst of activity in the Silicon Valley venture world. Discussions that once stretched over several weeks can now commonly take a week from a first conversation to term sheet. The pipeline of new ideas, beta products, and ambitious entrepreneurs with a solid launch of their business has only multiplied.
While venture funds stand ready to commit capital, the work of the fledgling entrepreneur to finance an enterprise remains hard. Competition is fierce. Deliberation time is limited, Zoom fatigue sets in early, and the uncertainty of markets hovers over every investment deal.
Over the past two decades, I’ve met with several thousand entrepreneurs, engineers, and tech leaders – and kept very busy getting together with companies over virtual meetings the last few months. This experience has taught me that entrepreneurs need to focus on getting three big things right to be successful, regardless of the economic environment: the sponsor, the pitch, and the diligence process.
Find the Right Sponsor.
At the heart of every investment is a sponsor. This is not the venture firm, or a partner committee, but a single individual who champions an entrepreneur and an idea. The sponsor is not merely an investor. He or she becomes your advisor, and may grow into a coach and mentor. They will serve on your board, make critical introductions, connect you to your first customers, and help recruit critical talent.
The sponsor will also be your toughest critic. Before Covid, it was inconceivable that a sponsor would back an entrepreneur without in-person meetings and informal dinners. Today, veteran sponsors may still insist on taking a socially distanced walk or having a coffee together on an outdoor patio at a safe distance. These encounters may seem time consuming or even unnecessary. When several investment firms are interested in a deal, the impatient entrepreneur may insist on going right to a full-partners meeting to strike when the iron is hot. But the venture business remains a people business. In any deal, the sponsor is the person who pulls a start-up over the line. Developing a relationship with that individual, not just the firm, is a critical step toward success. That relationship will always require building a level of mutual understanding and trust that demands some one-on-one time.
Get the Pitch Right.
In my experience, the most effective pitches invariably focus on five key areas: the positives; the problem and market; the team; the roadmap; and the uncertainties.
- The positives. Entrepreneurs usually have just a few minutes to grab the attention of a VC audience. The opening is critical. You need to make a crisp, persuasive case that you have unique insights or positive data about your product or business. If you have three customers, their logos should be your second slide. If you are still at the concept stage but have potential validation and interest from initial prospects, you should share that upfront. While every investor is interested in long-term growth, early success really grabs their attention.
- The problem and market. What problem are you solving? Why now? What is your unique solution? Even in well-known areas such as SaaS or cybersecurity, an investment team wants to hear your description of the market size and dynamics. How is the market changing? Where does your product fit into this market? The failure to insert a new offering into new or established markets and accomplish product-market fit is the undoing of many otherwise attractive entrepreneurs.
- The team. Investors will always ask, “Is this the right team?” In a pitch, they will inevitably make a judgment on your team composition, your track record, and your first hires. Inexperience is never itself a disqualifier. But don’t be surprised if prospective investors are checking your LinkedIn profile during the presentation to understand who you know and who knows you. Throughout a pitch, they are wondering: does this founder have the ability to attract and build a strong team.
- The roadmap. Many new product pitches are impressive, but a strong pitch always looks to the future. Investors always ask themselves, what can this become? In response, an entrepreneur must offer a clear vision of how they intend to grow. A pitch must clearly explain how you will address and expand a market around your business.
- The uncertainties. Every business has risks, so don’t cover them up. Your pitch needs the right balance of what you know and what you don’t know. Remember, many investors (especially your sponsor) want to help you solve a problem. It’s OK to say “I don’t know” in response to a question. In fact, the very existence of a business challenge can become a start-up’s most attractive feature: you have identified a problem no one else has solved.
Clean Due Diligence.
After a successful pitch, due diligence from investors comes quickly. Be ready with a “clean” diligence package. For first-time entrepreneurs, investors want both personal and professional references; have these lined up in advance. If you are leading a growing company looking for Series A funding or beyond, investors want to see recurring revenue, preferably broken down by customer. They also look for evidence of sales productivity: how many customer meetings, second meetings, and closes? The wise investor will seek to understand your business model by asking for pertinent data like gross margin and sales efficiency results. Hiring is at the heart of every successful venture, so be prepared with a working organization chart of roles, responsibilities, and recruiting strategy.
The venture world is full of folklore about investors looking for contrarian ideas or willing to take risks so they won’t miss out. But in the current environment, where both capital and new ideas are plentiful, getting the basics right remains critical to deal making and fundraising. The absence of personal meetings may be temporary, but the importance of sponsor relationships, compelling pitches, and clean due diligence will endure through the pandemic and beyond.