Like everything else, fundraising has dramatically transformed over the last year. At the beginning of the pandemic, the idea of investing in a founder we hadn’t met seemed farfetched. Twelve months later, we’ve invested in seven companies that we haven’t met physically.
The biggest difference is that fundraising processes — here in Europe and virtually everywhere else — have sped up. In this new reality, there’s no need to plan for travel, and the best entrepreneurs can squeeze in multiple partner meetings with VCs across the world on the same day. As geographical boundaries aren’t as important any longer, competition is also increasing. It’s now a truly global playing field.
With this in mind, here are some learnings and tips from the previous year Zooming. Let’s get going (by the way, you’re on mute).
1. Take time to present your team and build rapport.
A big part of being a VC is getting a feel for you as a founder. This is even more important if you are raising a Pre-Seed or Seed round, when there’s not that much concrete to go on. Still, many founders are so excited to present their vision, product, or technology, they get going and then only briefly go through the team way down on Slide 23.
A great idea is worthless without a stellar founding team. Dedicate a significant portion of the meeting (preferably in the beginning) to the team. Present the people who are in the room, how you met, why you’re tackling this problem (I love origin stories), and the extended team. Present it with a clear narrative of how it all comes together and make sure to address a few key questions: how will this win in the future? Why is this the team to do it? And how big can it become?
2. Remember the VC on the other side of the screen.
Understand the VC perspective. Do your homework on who you are talking to and tailor your pitch accordingly. For example: what type of growth attracts VCs? Remember that the business model for VCs is unlike any other, as they don’t invest their own capital, instead working on behalf of their clients — Limited Partners (LPs). LPs invest in many ways, allocating a small amount of capital toward VC, typically considered a riskier asset class, as it’s founded on the future success of unproven early stage ventures.
Inevitably, not every company is a winning bet. Some go bust, others return the capital invested but produce no profit. Perhaps one-third of investments might yield a positive return but, from personal experience, only 2 percent to 10 percent of companies a VC invests in will prove standout successes. If you can make a VC believe your company could be one of those standout successes, then you have sealed the deal.
3. Know how much to raise, from whom, and at what valuation.
Next comes the question of how much cash to raise. It’s widely suggested that founders must aim to raise as much cash as possible, at the highest valuation. While this view may seem logical, it is important to understand the risks involved in this approach — or, at least, why it is not a silver bullet.
Think beyond funding; some VCs might throw money at you but won’t help when it comes to hiring or expansion advice. The value of operational expertise cannot be overstated. Partnering with ex-founders and business leaders means you can learn from their mistakes without repeating them.
Also, consider future rounds. Series A valuations should ideally be at least triple that of the seed valuation; so, if the seed valuation is astronomically high, anything less than perfect looks like failure. Founders must be able to weather storms. Down or flat rounds often indicate an early-stage company is sinking, so — like sharks — they must keep swimming to survive and (hopefully) thrive.
Don’t dilute stock either. Every Euro invested by a VC means another percentage of ownership in your business you must give away. Raise enough to bring on the people who will help you reach the next level without giving everything away.
4. Be familiar with the investment process.
When getting in touch with potential investors, warm introductions certainly help, but the initial “hey” could be as simple as a LinkedIn message — just make sure it’s pithy and to the point. In one week, a VC might receive 30-50 emails from founders claiming to be investment-worthy, so you have to cut through the noise.
Pick one person from a VC fund and focus on them; emailing too many people in one firm will make VCs think you are not tailoring your approach and that someone else will reply. This is the person you will meet first before a formal pitch takes place. If you impress this person, their enthusiasm will inspire the wider team and they’ll likely be able to recruit more people onto the deal.
From here, you will get an invitation to pitch at a partner meeting. As the current crisis persists, these now typically take place over Zoom rather than anyone’s office. This might change soon but, in the meantime, keep your background clean — and a well-stocked bookshelf never goes amiss.
Timing for these meetings vary but 75 minutes is the sweet spot. Ideally, for the VC, the whole team will be invited. Founders should use half the time to present the business and tell their story; the other half should be reserved for questions.
5. Create an unforgettable pitch.
Of course, there is no use going into a pitch meeting without a decent pitch. Slides remain popular; although not to everyone’s taste, they are ideal for conveying the founding vision.
Still, the best entrepreneurs will combine this with a product demo; even though there won’t be enough time to explore the product in-depth, the purpose and passion behind its creation should be apparent.
Those who nail team, story, and vision will have the best chance of success. When it comes to later-stage rounds, this story and vision should have converted into milestones and momentum; in turn, this proves the power of the founding team. At this point, it is all about traction; the opportunity should be tangible, paving the way for growth.
Finally, don’t try to be something you are not — technical founders don’t need to talk like a CMO, for example. Communicate considered ambition and you will go far.
By: Ted Persson / Partner, EQT Ventures