“The partner is likely writing just two or three checks this year. How are you going to convince them you’re one of those companies?” This was the way a friend described their mentality in pitching VCs on A, B or C round financing. What he meant was, the average venture capitalist at those stages will only be funding a few companies each year but seeing many pitches. In that sense it’s not just about proving that you’re a great opportunity, but also that you’re worth the opportunity cost of using one of those “slots.”
I’m thinking more deeply about the A Round fundraising process as the set of companies we’ve backed start to mature. At least three will be out in market this year for their next financings, and in other cases, pre-emptive interest is starting to bubble. The potential I want our companies to communicate isn’t just their own traction, roadmap and strength of vision but that they’re one of the best opportunities the VC is going to see this year. How do you signal that and what are some strategies?
I don’t think it should be a large part of your initial deck but do recommend a few minutes and single slide (or whiteboard sketch!) to educate the VC about the dynamics of the market you’re in and why the timing for disruption makes sense. A founder’s unique insights are always captivating – at least to me.
For some it’s also about matching the type of risk inherent in your business to the partner or firm who (a) is comfortable with that risk and/or (b) believes they can help solve it. For example, your billion dollar outcome might have some regulatory speedbumps along the way. For some firms that’s a very scary issue and maybe even a deal killer. But others feel like they’ve seen those navigated before and perhaps even can assist you in doing so. By looking at their current portfolio and talking with some of their founders you can map which partners like/dislike specific issues (note, in some cases the reverse might be true -> continuing the example above, if their portfolio is already full of regulatory-challenged companies and they don’t want to bear any more of the same risk).
Finally, and the most direct, is just naming this during your pitch process. “Look, I know you see a lot of deals and the sheer law of numbers say that you’re not going to fund most of them, even ones you like. We believe we’re one of the 10 best opportunities you’re going to see this year for reasons A, B and C. Do you agree? What else do you need to figure out in order to agree with us?” Of course some investors might be put on their heels with your directness but I think that’s fine – you’re not being inappropriate, you’re trying to find out how their process works and what questions they have. The investor who can’t articulate what they’re trying to learn from you is an investor who is unlikely to ever commit!
What are some ways you’ve been able to signal to investors that you’re one of the 10 or 100 best companies raising this year?
As an aside, here’s how Homebrew’s process works:
Stage 1 – you meet with Satya or myself. We’re taking the meeting because based on what we know about you, we think we might be a good match for your company. The goal of phase 1 is to see if we can get from *think* to “this IS interesting, pending some more discussion around points A, B, C”
Stage 2 – with those specific points named, the other partner joins the conversation so you can get a sense for both of us. We try to work through the open questions – with you, with data or references you provide and on our own. Our goal is also to make this part of the process feel like working together, not pitching one another, because we’re also trying to give you a feel of what it’s like to work with Homebrew.
Stage 3 – even if we’re still working through some of the points, when we reach the point of conviction we’ll provide you guidance on the way we were thinking about participating in the financing (terms). That helps you react in a concrete manner and also know where you stand.
We’re still tuning all of this for efficiency and speed.