Looking for Funding? Ten Tips for Raising Venture Capital

I had some hunches, but not wanting to speculate I probed a little and discovered that after nearly a year of trying to raise capital, this entrepreneur had no prototype, no serious market validation data (let alone sales), and no other team members, all things that would be in place, he said, if he could just raise some capital.

Sound familiar? Having advised hundreds of entrepreneurs over the past decade, I can affirm that his situation is not unique. While the path to funding is different for every company, knowing what angels and venture capitalists (VCs) look for and how the process works can significantly increase an entrepreneur’s chances for success. Here are 10 tips to consider:

Tip #1 – Understand that Size Matters: Investors look for big, bold market opportunities representing hundreds of millions, if not billions, in sales potential. While investors have plowed capital into every industry imaginable, the vast majority of funding these days goes into information technology and life science plays targeting huge, rapidly growing markets.

Tip #2 – Show Some Pain: Investors love pain. Entrepreneurs targeting markets that are experiencing excruciating pain coupled with an elegant, scaleable solution will almost always have a rapt audience with investors.

Tip #3 – Validate Early: Before attempting to raise capital, entrepreneurs should always validate their offering. In other words, the product should be technically feasible and target customers must be demonstrably willing and able to pay for it.

Tip #4 – Hock Some Assets: To be taken seriously, an entrepreneur must put some skin in the game. Few investors will fund a raw concept, so entrepreneurs should expect to bootstrap early-stage efforts like writing a business plan, building a prototype or product demo, and validating market demand. While some angels and VCs do invest at this phase, it’s rare and usually reserved for successful, serial entrepreneurs.

Tip #5 – Assemble an A-Team: In the end, investors back teams, not ideas. Investors look for teams with relevant industry experience, deep technical expertise, and a track record of proven successes. They rarely back solo entrepreneurs, so even if capital constraints prohibit early hiring, potential team members should at least be identified and engaged in some capacity prior to raising capital.

Tip #6 – Don’t Cut Corners: Contrary to what many new entrepreneurs believe, incorporating a business online or moonlighting as the company PR agent are false economies. A reputable attorney with a firm specializing in serving new ventures will not only provide invaluable strategic guidance, but also make vital introductions that could expedite the fundraising process. Likewise, skilled PR agents can build early brand awareness and get a startup on radar screens of the right investors, which will also facilitate fundraising.

Tip #7 – Think like a Boy Scout: Be prepared! Prior to approaching investors, an entrepreneur needs a concise business plan (25 pages max), an executive summary, an investor presentation, and five-year financial projections. Investors today are more discriminating than ever, so it’s advisable to take the time to create professional documents with defensible data points and projections.

Tip # 8 – Respect the Pecking Order: When targeting VCs, an entrepreneur should try to pitch first to local, top-tier firms. Since early-stage deals are time intensive, local firms are usually the best bet. Plus, out-of-state investors are always a bit suspicious of companies that don’t have local investors in first. Also, as a rule of thumb, entrepreneurs can trade down, but not up. In other words, a deal pitched first to a third-tier investor may never get an audience with a first-tier VC. But all protocol aside, although I’d target local investors first, I’d also aggressively pursue the VCs with the most successes in my target industry — no matter where they’re located.

Tip #9 — Get Introduced: The best way to get an audience with an angel or a VC is through a personal introduction. If that’s not viable, an entrepreneur should research the backgrounds and affiliations of targeted investors to find a common link, and avoid breaking the two-degrees of separation rule. Once introduced they should quickly follow-up with a pitch letter and an executive summary — and ask for a meeting!

Tip # 10 – Mitigate Deal-Breaking Objections: The first meeting at a VC firm will typically be with young, ultra-bright gatekeepers who diligently scrutinize market opportunities and teams before giving them the green light to pitch to the check-writing general partners — the wise-looking ones who often have more gray hair and competing lines of hope and disappointment etched into their faces. To prevail with either group, entrepreneurs must be prepared for every possible objection with stats and expert endorsements, and should never, ever lose their cool.

Once an investor decides to back a startup, a term sheet will be drafted, negotiations will ensue, documents will be signed, money will be wired, champagne will be uncorked, and the new venture will be on its way. Sounds simple, eh? The truth is that fundraising is often long, complex, and agonizingly humbling — and only 10 percent win through. But any entrepreneur not dissuaded by this statement may well possess the most important ingredient to successfully raising capital: unwavering persistence.