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.

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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

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.

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.

How to Become a Great Leader & Scale Your Business

CentreCEOs want to grow their businesses, but are afraid of losing control. How can they achieve scale, while ensuring their business remains directionally correct? Former Frog and Quirky President, Doreen Lorenzo, calls for setting a strong culture, understanding the needs of your people and empowering them to stretch themselves.

Key Points:
1. Scaling up requires powering down control by ceding it to others
2. Great leadership requires understanding the needs of your people
3. Use design thinking to empower people to stretch themselves

At EXOscalr we are building up a coaching clientele of people that are already leaders and want to become extraordinary leaders. Some of these leaders are focused on building up ventures that have progressed to product-market fit stage and as these companies start to scale up, they want to increase their growth velocity.

At its simplest, achieving hyper-growth through scaling up is about adding fuel and subtracting friction. There are a whole range of mechanisms we use to add fuel, such as an infusion of funding or top talent. To remove friction we focus on how companies organize, how they manage their people and ultimately how they motivate and incentivise them.

We are eager to take on board and share insights from others who have walked the path of scaling multiple organisations and have inspiring leadership stories. In this note we spend time with Doreen Lorenzo. She spent 16 years as President of Frog, which she scaled into a global design powerhouse. She then took on the same role at crowdsourced product startup Quirky, which she put through an accelerated scaling program – fondly called “Doreen bootcamp” by Quirky’s CEO, Ben Kaufman.

Scaling up requires powering down control by ceding it to others

Doreen’s view is that scaling in and of itself isn’t hard. What is hard is being prepared to cede control to other people in order to scale a business.
“This is where the big misstep comes, because if you’re going to grow a business you have to put other people in charge of things.”

She sees scaling as being a three-stepped process:
1. Build a replicable culture – you need to have a vision and mission that everybody understands, that everybody sees as your Northstar.
2. Hire fantastic people – bring on board people that understand the vision and mission.  Diversity is beneficial and the people you hire don’t have to agree with you 100%.
3. Allow people to do the things that you hired them to do –  either empower your people, or remove obstacles that prevent them from executing against your vision and mission.

When she joined Quirky it was a young company in which the vision and mission were already very established. The question she faced was how to put the right people and processes in place to deliver on that mission and vision. She asked what they were trying to accomplish, what needed to happen to get to them to the point that sets the business up for success and then she worked with the team to execute against that.

Great leadership requires understanding the needs of your people

Doreen points out that because of all the technology that we live and work with, there is no divide and we are working all the time. In such a world the most important thing you can do for your people is to understand the 24/7 nature of work and, in this context, to understand their needs.

“It doesn’t mean you need to agree with everything, but you understand their needs and you’re making decisions based on them.”

“Sometimes you’ll make decisions that they’ll agree with, and sometimes you won’t, but they will know that you understand their needs and have taken them into account when you made your decision.”

“It is just a point of data, and not all data comes from spreadsheets, some of it comes from people and you need both to be an effective business leader.”

Use design thinking to empower people to stretch themselves

As leaders it’s your job to make sure that people reach their full satisfaction and when you see them struggling you need to help them grow, ultimately becoming better people.

“Find out where people are at, what their situations are  – it’s like doing design research, you are understanding their situation, therefore you understand what problem you have to solve.”

At Frog, Doreen helped many people change their career by giving them an opportunity to stretch themselves and do things that they never thought they could possibly do.

“When you achieve great things, you feel better about yourself.”

As a leader, when you talk to people all the time you get to understand them and you can see who is stuck, who is struggling and you can make a decision to do something to help them.

“If you think they are great people and have possibilities then give them opportunities to stretch and grow. This stuff is not that complicated, you’ve just got to invest yourself to do it.”

Does Your Business Have the Capabilities for Achieving Exponential Growth?

Growth
As CEOs and Boards you are faced with an unprecedented level of pressure to achieve growth. Your company needs to stay ahead of increasingly aggressive competition, from other companies in your industry, from outside your industry and even from scrappy startups who define their own playbook.

Growth is not a lever you turn on or off at will. It requires focus, it requires a set of core capabilities that work together as a well-honed scalable operating system. Does your company have such an operating system in place? To achieve the nirvana of hyper-growth, this operating system needs to be working at peak performance capacity. How close is your business to operating at optimal capacity?

THE HYPER-GROWTH CAPABILITY QUIZ

We’ve designed a set of questions that help you uncover whether your business has scale in its DNA, whether it will be constrained by limitations and frictions and whether it has the capability to easily add fuel into its mix.

You can access the quiz via exoscalr.com or directly here.

CEO Top Priorities: How to Achieve Growth Using the Universal Rules of Exponential Scaling

SydneyOverwhelmingly, CEOs’ mission-critical priorities over the last few years have been and continue to be dominated by growth. Their focus is increasingly on digital, and if you consider the combination of growth and information technology, what we call GROWIT, this represents a very high percentage of the priority focus for CEOs in 2015.

What is GROWIT?

Growth can mean many things, but for Fortune 500 CEOs in 2015 it mainly means moving into new geographies and new markets. Within the IT part of GROWIT there is more and more impetus around the shift into digital.

More CEOs see digital as having a disruptively deep impact than those who don’t and the vast majority of CEO’s feel that technology innovation is accelerating faster and faster.

Against this backdrop, our focus when working as transformation coaches with CEOs is to help them achieve rapid or hyper growth by utilising the Universal Rules of Exponential Scaling.

We help them focus by keeping things simple, by reducing things down to their essence and making them measurable, repeatable and improvable. At EXOscalr we make use of a very, very simple scaling algorithm – scaling involves adding fuel and removing friction.

  The higher the fuel:friction differential, the higher their company’s growth velocity.

Let’s use talent as an example. Talent is an essential area that CEOs focus on to generate the fuel needed for growth. At EXOscalr we optimise the ability of our clients to attract and retain top talent through the use of the Talent Density Algorithm –  essentially,

the higher their talent density, the less requirement for process, and
–  the higher their process, the lower their top talent retention.

In this respect, top talent becomes a magnet for other top talent, fuelling business growth. In contrast, companies that are too process heavy and too bureaucratically organized contain too many frictions for top talent either to want to work there or to stay working there.

It’s very important to understand that the Fuel/Friction differential will change over time. This is the whole point and we encourage CEOs and other business leaders to get granular with how they measure, monitor and progress their interaction with this differential.

What can CEOs do to improve their Fuel:Friction Differential?

CEOs can take control of the Fuel:Friction Differential by engaging with their executive team as follows:

  • In regular exec team meetings, let’s say weekly*, they throw up on a board all the factors that are holding the company back, and the opportunities they have to push it forward.
  • The team quickly diagnoses the current balance of Fuel/Friction forces, then ranks the items by their impact and ease of execution.  Priority is given to the high-impact, low-difficulty items first, and they spend the next week addressing these forces.  As the Fuel/Friction equation improves, the company is set to grow faster.
  • Repeat. Regularly.

* [We suggest the frequency of these meetings should depend how much growth features as a company’s mission critical priority – if it is imperative and the urgency is being driven by facing corporate extinction because of competitive threat, for example, then weekly meetings may not be the right frequency, daily may be more suitable.]