How to Raise Venture Capital

We launched the second program in our Entrepreneurial Education Series, “How to Raise Venture Capital,” on June 8th with our partner 1871.

The event brought together world-class entrepreneurs and investors Al Goldstein (CEO, Avant), Rumi Morales (Executive Director, CME Ventures), Nick Solaro (Partner, Drive Capital), Adam Tilton (Founder & CEO,Rithmio), and Guy Turner (Managing Partner, Hyde Park Venture Partners) to break down the mechanics of venture capital for early-stage entrepreneurs beginning the process.

If you missed the event or just want a quick recap, read on for highlights from the discussion.

Key Takeaways

The panel kicked off with Hyde Park Angels Managing Director Peter Wilkins advising the entrepreneurs into the room to ask “how much equity are you giving away and how much control are you giving away” before and while raising venture capital to make sure their expectations were reasonable and possible. The panelists all agreed that entrepreneurs have to be conscious of both what they’re getting and giving up in any of the deals, with Peter adding “it is acceptable for a venture capital firm or investors to have [input] in running your business.” If you don’t think that level of involvement is acceptable, then venture capital isn’t the right path for funding.

The panelists also stressed that raising venture capital is a difficult, time-intensive process, with seasoned expert Al Goldstein emphasizing, “I spend ninety percent of my time looking for capital… because we need to find $10B to fund loans.” Ultimately, “sometimes you need to take massive amounts of capital” to grow and succeed, which launched the next section of the conversation on how raising a round works.

The Mechanics of Raising a Round
As an entrepreneur, it’s important to understand the different funding stages in order to plan for success and future growth. Al Goldstein did not raise $650M for Avant on day one, and though his business took on considerable capital in just a little over two years, it still followed a process.

Guy Turner laid out the funding stages in order, but more importantly, stressed that at each of these stages, entrepreneurs are expected to reach certain milestones to graduate to the next one. For example, for B2B companies, “by the end of the Series A, what investors are looking for are repeatable sales processes.”

From there, Nick Solaro of Drive Capital broke down the differences between convertible notes, safes, and priced rounds. Essentially, at a company’s beginning stages, entrepreneurs typically do convertible debt or safe deals, which allow them to defer the valuation conversation to a later priced round where they have more traction to command a fair dollar amount in exchange for an equity percentage.

Finally, Al Goldstein provided a reminder to “look very closely at the terms” and use game theory to make those terms more favorable. The best terms are the standard terms you might find in the NVCA model term sheet — nothing crazy. However, you can make sure you get them, or other key terms in your favor by leveraging a network of investors to generate interest. The most effective way to succeed in term sheet negotiations is to demonstrate demand for your deal.

Finding Investors
It’s one thing to know how these deals work, but it’s another to actually get one done. In order to raise capital, you need to build relationships with investors. There are two very simple parts to building these relationships:

1. Securing warm introductions and connections through individuals who know the investors

2. Going to investor meetings having done your homework on their respective investment theses

Nick Solaro reinforced this message by stating, “Try to understand what makes us tick. Do we like B2B SaaS or Consumer? Try to be as educated as possible,” because while Drive Capital is committed to supporting entrepreneurs and being their champions, they’re best equipped to do that when aligned right off the bat.

Adam Tilton of Rithmio contributed the entrepreneur perspective, citing his own experiences raising capital. Namely, “the VC is definitely going to have a checklist and compare you to that checklist.” You have to know how they evaluate their companies. By talking to their existing portfolio companies and partners and even just doing some basic research, you can understand what they measure.

Adam also emphasized that even investor meetings that don’t lead to an investment are valuable, either as learning experiences or opportunities for new connections. Rumi Morales of CME Ventures added, “We’re three people among twenty-five hundred. You may not get an investment out of us, but you may get a customer [out of one of our departments.”

After the Investment
As Nick Solaro put it, “Ninety-nine percent of the work we do is after the investment. Writing the check is the easy part.”

A lot of that work has to do with board participation. Lead investors typically take board seats in priced rounds after making an investment. That’s something to keep in mind when selecting investors — how they will interact in a board environment. Guy Turner said “The good [boards] are really involved in the direction of the company and are assistants to the CEO.” In other words, they’re involved, but they’re useful and likely on board with the founding team’s vision.

Photo Credit via CloudSpotter