John Gray’s book Men are from Mars has the subtitle ”The Classic Guide to Understanding the Opposite Sex”. To some entrepreneurs, Venture Capitalists might as well be the opposite sex. Many entrepreneurs don’t really understand them very well. In a good blog post by ex-VC and VentureBeat writer Tom Tzach, he offers 4 good tips to entrepreneurs. Here are my comments to his tips:
1. It’s a numbers game. Expect casualties.
Tzach reminds us that VCs get a huge number of requests for their time and money. If you are an entrepreneur seeking capital (especially if this is your first time), then you will have to play the numbers. You might need to pitch to 50 in order to find 3 who are truly interested. You might need 9 who are truly interested before you find one who will give you the funds. Just like sales, it is a pure numbers game and the odds are not great, especially in today’s market where many investors are (un-admitably) scared.
I was at a venture meeting in Lisbon a few weeks ago and talked to one of the really classy European VCs (Diana Saraceni from 360 Capital Partners in Milan). She said that even though they have only 4 partners at her firm, they received 1202 business plans last year. They held 354 meetings with entrepreneurs and closed 6 new deals. If you are one of the 1202 then be prepared for a rejection. It is not personal. It only means that there are other (better?) deals out there ahead of you in the queue.
Tzach writes that in the US less than 2% of entrepreneurs pitching get funding, and that the average time for the process takes from 9 to 12 months. Don’t be discouraged, just plan to work hard.
2. Develop a VC pitching strategy
You will certainly need a strategy or else you will just end up shooting at any animal in the jungle that moves. Tzach recommends that you develop key parameters (like history, relevance of their portfolio, location, etc.) and then divide the prospective VCs into ranked groups. Start with those that are least likely to invest so that you get some practice before you tackle the big boys. Plus, if you screw it up in the first meetings, it won’t kill you. I think you will experience that pitching is a huge (and fun) learning experience.
3. You need to play your cards right
I have always been a lousy card player because I tend to play out my cards without a longer-term game plan (OK, I have other redeeming skills). Tzach reminds entrepreneurs that the VC community is small and that VCs like to talk together a lot. Expect this, but be selective in how you handle and manage your communication. Negotiating with 2 different VCs at the same time is not an ideal situation. Try to work out your deal with one and then shop the same deal to others if you need to fill the offering. Remember that while term sheets are confidential, they will be around long after you are gone. Treat them with extreme professionalism and care. I have a consultant (who I pay with options or shares) who always helps me with term sheets. He has saved me huge amounts of money and some rather embarrassing mistakes.
4. Don’t seek funding under pressure
The best time to visit a banker is when you are not in need of a loan. The best time to start your fundraising work is long before you actually need the capital. Fundraising will take a long time. It is like selecting a wife – you should use a lot of time to get to know each other before you tie the knot. VCs are smart and they will sense it if you are under pressure, plus when you show them your cash-flow budgets and financial statements, they will quickly figure out your predicament. Plan ahead.
Just as 50% of all marriages end on the rocks, only about 10% of all VC investments actually pay respectable returns. Realize that this is the reality and plan your strategy accordingly. Good VCs can be fantastic partners who can help you (not only with capital, but also with lots of assistance) to grow your business much faster than on your own… But you have to play by their rules in order to get them on your team.
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Contact me to discuss Executive Coaching, Group Facilitation and Management for Hire services for technology companies. You can learn more at www.ricksalmon.com , www.xelerator.com and at www.e-unlimited.com. Rick Salmon is an energetic entrepreneur who lives in Norway and believes that European startup companies can succeed and grow quickly if only they get the proper help and assistance. Please join the discussion and leave your comments. Subscribe to this newsletter/blog to receive frequent updates and tips.
