LIVE from Nashville Entrepreneur Center: What We Can Learn from Nashville Startups
With $84.2 billion in venture capital investment, 2017 ranked as the strongest year for VC funding since the dot-com boom according to KPMG. Not surprisingly, we’ve seen headline after headline announcing startups closing their funding rounds. All that activity is exciting, but there’s a downside to it, particularly for founders seeking VC funding for the first time.
The cascade of celebratory headlines gives the impression that raising is easier than it is. Raising is a challenge. It’s stressful, time-consuming, and filled with variables that even the savviest founders can overlook. Think about all the information these stories gloss over:
In my work helping startup founders prepare to raise VC funding, I’ve seen three mistakes pop up over and over again. All relate to one thing: not understanding the strategic value of finance and accounting when raising venture capital.
This is the biggest one. Maybe it comes from the cultural expectation that tech founders be loaded with swagger. Whatever is, I’ve seen far too many founders go wing it. They think they just show up, tell their story, and get money—and it just doesn’t work that way.
Your chief job in a pitch is to inspire confidence within your potential investors. Some swagger at the beginning might help, but it will evaporate without a rock-solid pitch deck to back it up. By rock solid, I mean it includes critical pieces such as financial projections and a Pro Forma cap table.
Pieces like those, along with succinct answers to investors’ toughest questions, are what win investor confidence. Even if these pieces aren’t as compelling as what you’d like them to be, remember what it looks like through the eyes of an investor. It shows a founder who is prepared, who isn’t afraid of uncomfortable numbers, and who can show investors where the company needs help.
No, it’s not easy. But it is necessary. “Sharing what’s going wrong is how you can get the most help from your investors, because they’ve seen it before,” said Mike Preuss, co-founder and CEO of investor-reporting startup Visible, on the Igniting Startups podcast.
At the end of the day, investors invest in people, not businesses. They invest in you and your leadership team. Show them you understand your company’s financials, and that you have a business plan to improve them.
This is the next most common mistake I see. Too many entrepreneurs back themselves into a corner by thinking they can finish raising a round in a couple of months. That’s naive, particularly for startup founders in markets between the coasts. Fundraising in the Midwest is not the same as it is in the Northeast.
I tell people to give themselves a couple of months, probably two to three just to get materials ready. Then give yourself six months to get your fundraising done. All that should be done with the understanding that it may still take longer (and it will definitely take longer if you don’t include the finance and accounting pieces recommended above).
Why? Because raising VC funding is like a dance. Some investors may want to meet multiple times. Sometimes they’ll ask new questions, sometimes they’ll probe deeper on questions they’ve asked before.
Like so much in the business world, it’s about relationships. As a founder, you have to build a rapport with your potential investors. That takes time, especially through the institutional VC route. Most firms can’t turn on a dime and cut a check in a month. They have to do a certain amount of due diligence, just like you do when preparing for the round.
I brought up earlier the importance of financial pieces in pitch decks. I’ve seen far too many founders seek startup funding without a financial summary, which means they don’t have a financial model, which means they don’t have solid rigor around how much cash they need. If you don’t have that, then you can’t confidently state how you’ll use the cash your asking for (another financial piece I see too many founders not include).
You must have a financial model, ideally one where you can show you’ve run scenario analyses and that you understand the branch of potential outcomes (e.g., what happens to your cash runway if you charge X in Y market, make a new hire, or cut business costs by 10%). That way, you can confidently say, “I need a $1 million this round, and here’s what I’m going to do with it.” That might be hiring more developers, stepping on the gas on marketing, or whatever you can show will catalyze growth.
That inspires confidence in an investor. It shows you have your act together, all the more so if finance and accounting are not part of your background.
All of these mistakes (and so many more) are easily avoided by finding the right mentorship. Of course, finding a mentor is easier said than done, especially in smaller markets that lack experienced leaders. Another factor: the internet. All those headlines celebrating successful rounds lull founders into thinking all the information they need is online.
But there’s no substitute for a good mentor. Or, at the very least, someone who can show you what your materials should look like. If you can’t find a mentor, then reach out to a finance and accounting professional who specializes in preparing founders to raise. Sure, spending a few thousand for that help may not feel comfortable when you haven’t raised anything yet. But that expense will be a drop in the bucket once you finish your round.
Also, when searching for a mentor, beware of the stories you’ll hear along the way. Yes, some founders do get lucky with little preparation, but remember two things. First, a rich uncle technically qualifies as an angel investor. Second, luck is what happens when preparation meets opportunity. The more you prepare, the luckier you’ll get. Wanting to know how to get venture capital isn’t the same as having the discipline to go get it.
The first thing a firm will likely say when you reach out about venture capital investment is, “Send me your stuff.” Don’t send your pitch deck. That steals your own thunder. Wait to show it when you’re in front of the investors.
Instead, have a one-pager ready for requests like these. It should be high-level enough to whet investors’ appetites and entice them to meet you. If they ask for your pitch deck after your pitch, that’s when to send it. And congratulations, because that means the investors want a closer look at you.
Learn more from Tom Gabbert, serial entrepreneur and investor Eric Tobias, and Innovatemap CEO Mike Reynolds on the webinar “Failed Fundraises, Botched Exits, Bad Decisions: A Founder’s Secret Weapon to Avoid All Three.” It’s happening Wednesday, December 12, from 1:00 to 1:45 p.m.