Venture Capital: The 5 Essential Fundraising Rules

Entrepreneurs are faced daily with so many unknowns, so much chaos and survival pressure.  Adding fundraising into the mix can often feel overwhelming. How do they keep their heads above this murky water and avoid the many obstacles that lurk below the surface? I’ve distilled out five rules that apply to all fundraising activities as a series of guiding principles.

1. Timing is everything.

Sharks can detect a drop of blood from a long way off. Investors can similarly detect fear from a distance and this can negatively impact their view on investing in your company. At worst they will walk away, at best they will command a much lower valuation and more onerous terms.

The worst time is when you have little capital left and a very high burn rate. It would be far better to close a fundraising round ahead of needing to increase your burn rate.

Similarly, putting your product out into an unprimed marketplace that ignores it or does not deliver the level of hockey stick growth you were wanting will send a negative signal to potential investors. It would be far better to raise capital so you can use it to generate the right level of publicity and interest in your product ahead of its release so that there is pent up demand for it.

2. Fundraising is not transactional.

Think of raising capital as a continuous process that starts when you launch your company and ends when you sell it.

Always be raising based on your continuum of growth needs. But never be raising at some juncture when it is critical that the funds come in or your business will falter, as per the point made above.

Also factor in that however long you thought it would take to close a round is probably only about half as long as it will actually take.

3. Funding marketplaces are cyclical.

Be aware that the climate for funding can shift markedly. At one moment there can be a funding frenzy with investors desperate to get into specific opportunity spaces. This will drive up valuations and give you a feeling that funding is easy, that you can demand better terms.

However, just as quickly the market will freeze over and it can become much harder to raise money either for a specific sector or overall.

Currently we are in the middle of a slowdown. The frenzy is over. Investors are taking their time doing due diligence and forming relationships before they ink deals. At this point you need more patience and to be more realistic on valuations than a few years ago.

4. Leverage funding inflection points.

Make sure you raise the right rounds of funding to match your position on the growth continuum.

And raise only enough to progress through the risk reduction you aim to achieve in that round. Too much funding may allow you to skirt through this risk reduction process and continue down a flawed pathway, building a delusional sinkhole that you cannot escape.

Continuously pare back on opportunities that present themselves to focus on core activities that progress you through each round’s inflection point.

Seed funding should be used to build a basic, but demonstrable validator for your hypotheses. Ideally this should be scalable – starting with a bare minimum validation but then progressively adding to it so that your product begins to approximate, but not reach product market fit. Remember to listen carefully to market feedback at this point and don’t power ahead into that delusional sinkhole when all the signs are there that your hypotheses are not being validated.

Series A funding is raised to get you to product market fit and the subsequent market traction that this enables. Investors prefer to come on board when they can see product market fit on the horizon as this allows them a more reasonable valuation than when customers are banging the door down to get to your product.

Series B funding is used to deliver scalable growth. You’ve built the rocket ship, you now need to scramble out of the growth engine room and into find the command console so you can steer your business into directionally correct territory that sets you up for the next round of funding.

Series C funding is perhaps the hardest round to raise as it is the real truth seeker. Up until now you could have relied on buzz to generate growth, but now you need to prove that you have the right unit economics in place to ensure sustained, profitable growth. This is a crucial time to be aware of that delusional sinkhole again. If you’ve raised too much money you could be plowing it into revenue growth and delaying the hard conversation you need to have around the economics of your unit growth. Revenue growth must convert into positive unit growth or you will sink your business as you expand it.

There are always exceptions, but raising outside of these inflection points is exponentially harder.

Coming back to the key point that timing is everything you should factor in about two years between each of these funding rounds. That gives you enough time to focus on growth for a full year before picking your head up for six months to raise the next round, while maintaining a six month contingency as a buffer.

5. Optimise your fundraising for success.

Does the investor or group of investors you are bringing into a round have what it takes to support you, over and above the capital infusion?

If you answer a resounding yes, then find an approximated win win deal and close the round. You could keep negotiating them down on deal terms or look elsewhere for a higher valuation, or a bigger named venture firm. But that would be a distraction. A financing deal is one moment in the growth continuum of your business. Keep your eyes on the prize: business success.

You are taking on a venture capital partner because you want to build a bigger business at an accelerated pace to what you could without their funding and guidance. Don’t over obsess about your equity stake. Think more about how much more you can grow your business with their involvement so that you all win, big. Keep that goal in mind and view each funding round as a mile-post on that journey. It is an important enabler, nothing more, nothing less.

By investor I refer to the sponsoring partner at a venture capital firm, not the firm itself. Your relationship with them is going to be a lifelong partnership, not a transactional, deal-based one-off interaction. Are you comfortable they would take your call at 3am in the morning or delay their Wednesday afternoon golf game to attend an emergency board meeting? Think of them as talent you are bringing onto your team. Talent you are prepared to take advice from and whose counsel you would trust implicitly.

I hope these rules assist you in your capital raising endeavors and provide you with much needed perspective to view funding as a part of your growth journey.

+++++

This post was initially sent as part of the EXOscalr BeFierce newsletter. If you want to receive it directly  you can subscribe here: http://eepurl.com/bxGzD1

Tags

Related Posts

Share This

Growth.Reinvented: How Leading Companies Create a Concerted Front For Business Growth

As evidenced by numerous surveys, growth is the major enduring focus for business leaders. However, growth is tackled ad hoc across many organizations. Leading companies drive rapid, sustained growth through a concerted front strategy.

More and more companies have a leadership mandate to achieve growth, a vision of what growth needs to be and an understanding of a growth culture.

They embark on various growth initiatives, but these are mostly carried out in silos.

Leading organizations not only undertake numerous growth activities, but they also conduct them using a concerted front strategy.

They start by formulating a view across all their growth activities. They then translate that view into a business-wide operating system.

As their concerted activities mature this operating system shifts to being driven by a dedicated growth group that works across the business.

I’ve written a Growth Report that explores the concerted front strategy used by leading companies to achieve rapid and sustained growth.

The report starts by highlighting key aspects of the 10 facets for driving business growth, then considers what a dedicated growth group should consist of and what to look for when hiring the right people for it. It concludes with suggestions on how to create a 100 day growth dialogue.

You can download the full report from the EXOscalr website at the following LINK.

Tags

Related Posts

Share This

The EXOscalr Entrepreneurial Growth Program: How to convert chaos into growth

High growth scaling up is a function of converting random chaos into positive, directionally correct chaos. To do so you need to know where you are going and whether you are on track.
 
At EXOscalr we have devised the Plan Data Progress Operating System to help you transition seamlessly from startup to scaleup.
Find out more about this Operating System as well as other algorithms and methods for growth on the EXOscalr Entrepreneurial Growth Program. We have a limited number of spots available. Ping rand at exoscalr dot com if you are interested in being considered.

Tags

Related Posts

Share This

We Dare Not Fail Ourselves

Waiheke Winter Light

We live in a world surrounded by terror and unrest. The immediate agony of disease, displacement and starvation pervades. Technological advancements bring economic uncertainty to many disengaged workers.

70 years ago Sir John Gorton, who went on to be Prime Minister of Australia, spoke of a similar world. Surrounded by so much intolerance I believe his advice echoes across the ages. May he inspire all of us to be fiercer with ourselves, with our relationships and the world around us. May we never be complacent. May we be brave and not accept injustice, wherever and however we find it.

Hear his words and be watchful: –

“We cannot expect to make a new and better world as a result of the exercise of brute military force. We can only expect to achieve the kind of world we want by the use of brains and effort during peace.”

“We must raise the spiritual standard of living so that we may get a spirit of service to the community and so that we may live together without hate, even though we may differ on the best road to reach our objectives.”

Tomorrow we must carry on again. And the tasks which lie in front of us are immense and urgent as never before.”

“What can we do? Individually, it may not be much. But we can at least all think on the problems which are in front of us and be ready to act on our thoughts if the opportunity arises. We can try to reason out how we may best provide a full and satisfactory life for all our citizens. We can practise tolerance and understanding. And we can be ready always to defend against attacks, either from within or without, the political freedom, the measure of freed which we already have.”

 “It will be hard. It will mean a constant effort from all of us. Build a world in which meanness and poverty, tyranny and hate, have no existence.”

– Sir John Gorton, Mystic Park Hall, April 3rd 1946.

+++++

We dare not fail ourselves. We dare not see the chance to improve our world wasted.

Every single one of you reading this has the power to affect change. In fact, many of you have already demonstrated, in your unique ways, the power to lead massive change.

I implore you to step up, to break free from your daily busyness. Accept my challenge to make a commitment within 24 hours of reading this and join me on this quest.

+++++

This post was initially shared through the EXOscalr Be Fierce newsletter. You can subscribe at: http://eepurl.com/bxGzD1

Tags

Related Posts

Share This

Who are the 3 great executive coaches?

The 3 Great Executive Coaches Are-

Tags

Related Posts

Share This

Formulating a Quick Digital Transformation Ratio Test

The quick ratio measures the ability of a company to pay its current liabilities when they become due only from quick assets, which for the purposes of this liquidity test are defined as assets that can quickly be converted into cash within 90 days. [Hey, I do remember something from time as a trainee accountant in 1983!]

In today’s climate of almost pervasive digital transformation initiatives I questioned in a recent post whether such activities were working. Could they be measured yet?

The argument against is that innovation and change takes time to percolate. Perhaps, but that is a cop out. There is the equivalent of the quick ratio that can be used to test if a transformation activity is on track. A digital transformation can have many moving parts, and depending on the size and scope of such an undertaking it can be difficult to pin down exactly what is its end game.

This is where the quick ratio comes in. Can you quickly, within the first 90 days of its commencement, poll senior executives in a company and come up with a common view, lingua franca and cohesive support front for a digital transformation initiative? If not, then the initial dissidence and inertial dampeners that emerge as a result of not singing from the same transformation hymn sheet will grow exponentially  during the course of the ensuing months. The resultant friction may well prevent such an initiative from achieving its desired result.

One of the sharpest analysts I’ve had the pleasure to work with, Gartner’s Mary Mesaglio, has posited a step by step Quick and Dirty Transformation Test for Executives.

Tags

Related Posts

Share This