Included below is some great advice we received recently at the NJ Tech Leadership Summit from some of the top venture capitalists on the east coast like Ramana Jampala and Aaron Price.
“A Seed Stage/Series A partner often lasts longer than most marriages in America – so take your First VC Partnership seriously.”
FIRST THINGS FIRST: WHEN SHOULD YOU START LOOKING FOR A VC PARTNER?
You should acquire your first set of customers or create enough market demand (think prospect list of customers or customers who are willing to put their credit card info in to get a trial of your product) before you start to raise funds. Any sooner and you risk losing a lot of equity or may end up finding a VC that is not the right fit. This is where your focus on customer acquisition pays off: In general, if you have demonstrated revenue generation this puts you in a better negotiating position.
Once you have a product that potential customers are excited about or have successfully sold to your first set of clients, you are ready to test it outside of the confines of your network. If you are ready to 10X your customer base, you will need to raise some level of funding and secure an experienced partner. But as always…
“Money alone is not the answer. We actually did not need funding but did a Series A to find a partner who could guide us, provide advice, and connect us with the right people so we could 10X our growth.”
— Marc Betesh, Founder, Visual Lease
The right VC partner acts as a mentor who is doubly vested in your interest and success of your organization. Good VC partners will have a very good understanding of your industry and have a big network and can help you find the right team. They can connect you with the perfect marketing partner and supply introductions to other startup founders who have faced similar challenges.
THE LAW OF ATTRACTION
“The number of clients or amount of revenue are not the only metrics that VC’s look at in the early stages. A strong and active pipeline can also be a good product-market-fit indicator. In the absence of customers, if you can showcase that top-tier competent clients take steps (for example engaging in or completing proof-of-concept) or move forward along the sales funnel then you have something that many VC’s would be interested in.”
VC’s have many eyes on the industry, if you are doing well, if you are starting to make even tiny waves, VC’s will start to connect with you. You will still need to nurture them but it’s a good indicator if VC’s start to reach out to you yourself.
FINDING YOUR PRINCE CHARMING – THE PERFECT VC PARTNER
Before you start reaching out to VC’s, take a little bit of time to think about the right VC Partner for you and do some research.
“A VC coming in at the Seed Stage or Series A is more than just a passive investor. While most investors want to help at all stages, early stage investors are often particularly motivated to help you find the right product-market fit. Put them to work and lean on them for introductions to talent and potential customers. Your success is their ROI too.”
WHAT ARE THE TRAITS OF THE RIGHT VC PARTNER FOR YOU?
There are three main areas where you want to make sure your business needs are well aligned with the philosophy, temperament and expertise of your VC partners.
- Growth rate—you can look at the VC’s Fund Life, the younger the fund, the less pressure a VC would put on you to grow quickly.
- Industry experience—does the VC have a track record and network in your industry?
- Risk appetite—when this is misaligned, expect plenty of frustration on both sides of the partnership.
“Look for VC’s where the Managing Partners have actually touched the product or the industry. For example, if yours is a tech product, then someone on the VC team should have created a tech startup from scratch – not just invested in a similar industry. And if that’s not possible due to financial constraints, then at least look for a VC fund that resembles your risk appetite, with your VC partners having complementary skill sets to yours. In short, don’t go for VC’s who simply went to a top tier school and grew up in the VC industry. They have nothing of value to add – beyond just providing the cash.”
PRIORITIZE EXPERIENCE OVER CREDENTIALS
Ideally, your VC partners should not be analysts who grew up in the VC industry straight from a top tier school but active VC’s who have started & built their own companies. They will understand the challenges you face and will be better able to guide you, share their network and more.
THE FORMULA – DON’T LOSE YOURSELF
How much time should you spend on raising funds vs building out your product further and acquiring customers? We believe, when kicking off fundraising, your time should be spent equally on Customer Acquisition and Nurturing VC’s.
In the case of SaaS products: one third on product development, one third on customer acquisition and one third on VC nurturing. If you have to drop the ball, don’t drop it on customer acquisition, but on product development.
DON’T KISS THE FIRST FROG BUT DO NURTURE THE RELATIONSHIP
Keep your options open, especially if you have multiple VC partners who are interested. Nurturing and developing these relationships carefully and thoughtfully is critical—in the hyperconnected VC world, you never know where a connection can lead.
Stay in touch with the VC’s you meet in the early stage, showcasing your new product features and other relevant events. Some may still invest in the next round, so keep their interest piqued with brief but compelling periodic updates (think quarterly).
Ideally, if you can get more than one term sheet (the more the merrier of course), it’s better for your equity.
HOW MUCH SHOULD YOU RAISE?
As a general rule, you should not raise more than 18 to 24 months of capital. If you raise more, you end up dissolving more equity than necessary, because of the way most contracts are written. The minute you get a big investor, the previous investors at the seed or angel rounds would also want to invest at the same time, this causes a dilution that you can’t control. Additionally, if you raise too much, you are expected to also grow even faster, and this can create undue pressure and stress.
THE BIG PICTURE
- Create a well-researched list
- Getting an offer from the perfect VC partner doesn’t happen by accident. Create a list of potential VC partners who are aligned with your business, and learn everything you can about your top targets.
- Be obsessively honest
- As obvious as it sounds, most VC’s are extremely detail-oriented and it’s always best to always get your facts straight. If there is any doubt about whether a minor item is important, err on the side of full disclosure. We have seen VC’s back out when they uncovered a small point themselves, even though they probably wouldn’t have cared if it was mentioned upfront.
- Tell a Compelling Story
- Create a great pitch deck and practice until you can deliver it in your sleep. VC’s don’t have much time or attention to spare, so if you can pique their interest quickly with a few memorable slides and data points, you will be far ahead of the crowd. They go through multiple pitch decks a day so use everything in your toolbox from design to good storytelling to data to ensure you have a story that most VC’s would want to buy in.
At Trackmind, we serve our startup clients with a methodological approach to VC nurturing – from storytelling to crafting a memorable pitch deck. Our approach is rooted in neuromarketing tactics, human psychology, and storytelling.
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