Venture capital fundraising. At some point, the thought crosses nearly every entrepreneur’s mind.
But convincing investors to make a financial commitment takes time. Daniel Ciporin, general partner at Canaan Partners, likened the process to dating. An investor wants to learn more about a company before deciding whether the company, the technology and the management team are the right fit.
“It is absolutely a courtship,” Ciporin said. “And like any courtship, you’re getting to know us and we’re getting to know you.”
Just as in dating, there are are definite dos and don’ts when it comes to raising money. The financing panel at CED’s Tech Venture Conference on Tuesday touched on several of them. (The conference concludes today at the Raleigh Civic Center.)
Ciporin was joined on the panel by Peter Levine, general partner at Andreessen Horowitz; Larry Bettino, general partner at StarVest Partners; and Eric Apse, partner at IBM Venture Capital Group.
Here are some highlights from the panel:
1. Seed investing, “dating” and mixed signals
It’s not necessarily a good idea for a startup to take institutional funding when it’s just starting out, Ciporin said. Angel investors may offer greater flexibility for entrepreneurs to prove their idea. An institutional investment at the seed stage could send an unintended signal later on in the series A round. If that institutional investor doesn’t invest in the series A, others could perceive their absence as a signal of problems at the company, Levine said. Signaling can be avoided by spreading the seed investment from among several different institutional investors.
But Apse said he did not see the signaling issue as much of a problem. From IBM’s perspective, a venture capital investment can be seen as a validation of the technology – if the VC firm has done its due diligence on the company.
2. “Courting” venture capital investment
Bettino said StarVest likes to spend as much time as possible getting to know a company and its team. Entrepreneurs should do likewise. They should should start identifying and getting to know possible investors before their companies need money. It’s also important for entrepreneurs to build contacts throughout the industry. These contacts can help make introductions to potential partners or business prospects. They could also help entrepreneurs get in front of potential investors. “A reference is often a great way to come in the door if you don’t know anyone at the firm,” Levine said.
3. O.K., you’ve got a date. Now what?
In a one-hour pitch meeting before Andreessen Horowitz, the first question the firm will ask presenters has nothing to do with technology. The first 20 minutes is spent talking about people. Levine said he’ll ask about the management team and how team members got together (and how they work together). He’ll even ask for details such as where the entrepreneurs chose to go to school. “We can often derive a tremendous amout of insight based on what they’re saying,” he said.
That 20 minutes spent talking about yourselves leaves you 40 minutes for the presentation. So that 50 slide presentation? Make it 10. You’ll be asked how much you want to raise. The follow-up question is “What do you want to use it for?” It’s important to be as specific as possible. Keep your goals measureable and clear for your investing audience, Levine said.
4. This long distance thing just won’t work. Unless it does.
At a tech venture conference in the Research Triangle, perhaps it’s inevitable that someone in the audience would ask whether there is an investor bias favoring Silicon Valley companies. Levine acknowledged that most of Andreessen Horowitz’s investments are in Silicon Valley companies near his firm’s Silicon Valley offices. He said a company has to be an “ultra-special opportunity” for his firm to invest outside of the Bay Area.
But Ciporin said that Canaan is location agnostic. A region that is less of a venture capital magnet might actually be seen as a benefit – to the investor. Fewer VC dollars in an area means less competition. But investment dollars go to the best companies. “A great company is a great company wherever it may be,” Ciporin said.
5. Built to last? Or built to exit?
Some companies won’t go public. It’s perfectly O.K. for a sale to be the exit event, Bettino said. But you’ve got to make the company attractive to potential acquirers.
Apse said that the companies IBM first looks to acquire are those already partnering with Big Blue. IBM will acquire if it determines it can sell faster than the partner can on its own. But entrepreneurs shouldn’t necessarily build their companies planning that IBM will buy them. Many investors will prefer to invest in a company that’s built to last, Levine said. If you build your company to exit, all you’ll think about is the exit. Ciporin agreed adding that many company pitches include a slide describing the exit. Ciporin would prefer not to see that. “If you build a solid company, the rest will take care of itself,” he said.