Imagine spending 75 percent of your time over a 6- to 9-month period on just one activity. Pouring your mental focus, emotions and effort into this singular objective. And now imagine if that activity wasn’t part of what you had to do to accomplish your normal, day-to-day job.
That’s what CEOs go through when they raise money. They have a business to run, but in order to keep the lights on they have to somehow find a way to allocate 50 to 75 percent of their time to raising money.
One of the best ways a CEO can improve productivity when fundraising is to make sure he or she is targeting the right prospective investors. Here are some tips to figuring out if you're targeting the right investors.
1. Know the size of the fund.
This is a hugely important number you need to know and I’ll explain why below. This largely drives the investor’s investment strategy. If the fund doesn’t state it on their website, search for press clippings, ask your entrepreneur friends or ask the fund directly. You could even reach out to a CEO of one of their portfolio companies.
2. Know their investment strategy.
Are you positive they invest in companies at your size and stage? Or are they focused on other stages (i.e. larger companies)?
Most investment firms focus on a sole stage, maybe two. If you’re raising seed capital, it will be beneficial for future reasons to build relationships with funds who only do Series A or B investments, but you probably shouldn’t allocate the bulk of your time on those investors to close your current round.
If it isn’t overtly clear through public means what stages of company a firm invests in, try to figure out if they have a revenue requirement for the businesses they look at. That can be a guide. Better yet, call up a CEO of one of their portfolio companies.
3. Know how much the typical check size is. Most venture capital firms have a maximum amount of money they allocate to any single company over the life of their investment, That maximum allocation is usually 10 percent of their total fund (not always, but 10 percent is common).
So, if you’re looking to raise $6 million, a firm with a $40 million fund likely won’t be able to write a check for the whole amount. They might only write a $2-3 million initial check and then hold back $1-2 million for follow-on investments in the company.
That doesn’t mean you shouldn’t talk with that group, but it means you need a different strategy when you do pursue them. And that strategy involves knowing if they co-invest with other groups or if they only invest when they take the whole round.
4. Know if they lead investments or follow.
Leading investments require setting the terms. Some investors want to do that and some would rather follow once a lead investor has been identified and investment terms have been established. Some investors only want to invest if they can take the entire round.
In the example above, if you’re raising $6 million, you will likely need to get a lead investor for $3-4 million or more. Generally, a lead investor is defined as someone who is taking at least half (ideally 60-75 percent) of a round and who is setting the terms of it.
In either case, for leaders or followers, if co-investing will occur in your round, some investors want to have a relationship with the other major investors. They don’t want to invest alongside of people they don’t like or respect.
If you’re talking with a firm who seems interested in $4 million of your $6 million round, it is definitely worth asking them if there are any groups they’ve invested with in the past that they’d like to have in the round. If they really want to do the deal, they might be motivated to bring additional interested investors they trust.
5. Set deadlines for investors, even if they are self-imposed.
Investors work better with deadlines. It helps them prioritize their focus. If you are looking to have all term sheets in hand by March 31, tell them that.
You should also set a deadline for when you want to know if they have initial interest or not. Investors are notorious for dragging their feet to see how many parties are interested and they are also notorious for getting too busy and putting off a response. Set deadlines. Try to run the fundraise process according to your timeline, not theirs.
6. Know how their investment decision process works.
Most investment firms have what’s called an investment committee that gives the final approval on if they are going to invest. It’s important to know where in the process that committee steps in.
Is it before they issue a term sheet? Is it after a term sheet is issued? I had an experience early in my career in which a firm issued us a term sheet prior to getting approval by their investment committee. We narrowed our process down to a couple of firms and then this particular firm revoked their term sheet after their investment committee didn’t approve of the deal. Ugh. It was a complete waste of time.
Ask the prospective investor if they have an investment committee and what role they play. Then ask them what other information they need for their investment committee to make a decision. And ask them when the next meeting will occur so you know what their decision timeline looks like.
Focus on genuine relationships; give yourself ample time.
What many entrepreneurs fail to realize is that raising money requires genuine relationships with the investors they are targeting rather than just a couple of conversations. Investors are much more keen to open their checkbook for people they know, trust, or at least have some sort of connection with. They like familiarity.
But it takes time to build those relationships. A lot of time. So, start the relationship building process early with investors and make sure you’re targeting the right ones. Good luck.
Luke Vernon is a managing partner of Boulder-based Ridgeline Ventures, an investment firm in healthy living and active lifestyle companies. Luke is an operator-turned-investor, having grown a company as the COO to $80M before it was acquired. Luke has advised and founded several other companies, including Luke's Circle which helps emerging companies find top talent.
Interested in learning more about finding the right investors & capital for your growing brand? Join us as we discuss new funding vehicles for your brand, unpack the benefits of impact investment and celebrate innovative ideas for funding the future. We’re bringing together expert panels and standout inspiring stories for a two and a half hour funding masterclass and networking opportunity you won’t want to miss.
What: NCN Funding Forum
When: 9-11:30 a.m. Thursday, March 7, 2019
Where: Marriott, Grand Ballroom F