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Raising money for a new company can be hard. Investor Luke Vernon shares how his firm, Boulder-based Ridgeline Ventures, finds natural products companies to invest in and offers tips to entrepreneurs for when and how to approach an investor.
December 13, 2018
Raising money from investors is hard. Really hard. I have immense respect for entrepreneurs who are able to do it successfully. Not only is it difficult to convince people to give you their money, but the overall process of raising money can be exhausting both mentally and emotionally. So let’s lower one hurdle that founders experience when raising money: how to contact an investor. I’m going to share with you how we source investment opportunities at Ridgeline Ventures and then offer a few tips for how to go about contacting investments firm like us.
As context for the data below, it may be helpful to understand how our firm, and many others, are structured. We generally write initial checks to companies that are $1-5M in size. We also hold an additional ~35% in reserve to further invest in a company if it does well and if they need additional capital. In addition, we usually invest in companies that have between $5M and $30M in annual revenue, but we’ve also invested in high-potential companies that are $1-5M. Hopefully that provides context for the following data.
Sources of investment opportunities
We ran a report on the sources of deal flow for our firm over the past two years. Here’s how investment opportunities by source looked:
34.0% Investor Relationships
16.5% Industry Executives
16.0% Inbound Cold Contact
9.0% Service Providers
8.5% Investment Banks
8.0% Outbound Cold Contact
8.0% Tradeshows & Events
What does this mean?
Investor relationships: First, as background, our firm leads investments and we co-invest, but generally, we’re more inclined to be part of a company if other investors are already a part of it. Most investors have a herd mentality like this because it spreads risk and provides an external point of validation. So for that reason, you can understand why investor relationships are the #1 source of deal flow for us. We like to share opportunities with other investors.
Opportunities that are referred to us from other investors are generally not pure startups. Most of these companies have previously raised money, so it’s the existing investors who contact us to see if we’ll participate in or lead the next round of funding. If you already have investors in your business, work with them to solicit ideas on other investors they know and with whom they can put you in touch. If you don’t already have investors, the remaining sources of deal flow will be more relevant for you.
Industry executives: Relationships we have with industry executives provide a strong source of referrals as these individuals meet entrepreneurs who are raising capital. This points to the importance of building advisory relationships with experienced people and getting them involved in your fundraising efforts.
Inbound cold contacts: This represents founders who reach out directly to us seeking investment. I share more thoughts below on how to effectively do this. Although this generally providers a lower quality source of deal flow on a relative basis, occasionally we see some decent prospects through this channel. So if you compose an effective email and have a compelling business, this could be productive for entrepreneurs.
Outbound cold contacts: This is when we proactively identify a category or company that we’re interested in and we proactively reach out to build relationships.
Tradeshows and events: This category represent any opportunities uncovered in tradeshow or networking event environments. This might involve us walking up to a booth and talking with a founder or it could involve serendipitously bumping into an executive at a networking event.
Investment banks: Deal flow from investment banks occurs when a company hires such a firm to help them raise capital or sell their business. Investment banks then reach out to firms like us on behalf of the company. There’s a large fee paid by the company to the investment bank. Generally companies that use an investment bank are at least $15M in revenue and are raising large enough rounds ($10M or more usually) so they can afford paying the fee. This terms mean investment banks aren’t an option for really early stage companies. However, there are some quality boutique investment bank firms that help companies raise rounds in the $3-10M range.
Service providers: These are people such as lawyers, accountants, marketing consultants, finance consultants and banks. People in these lines of business usually know investors, so don’t be afraid to ask them for introductions.
Time of Year
We also ran a report looking at which months are heaviest for deal flow to give you some ideas on when to pitch investors. It’s not surprising that a large chunk of opportunities we see come to us in the second half of the year (almost 60%). Our report showed September, October and November as the months with the highest volume of opportunities. May was the only month in the early part of the year showing similar volume. I attribute this to companies focusing on setting their foundation the first part of the year and then wanting to close an investment as they execute on their sales projections (or miss projections and need more capital).
What does this mean?
For a tight-knit firm like ours (4 team members), a common team size for investment firms in this industry, I’d say we generally have more bandwidth to make investments in the first half of the year. That’s in part due to heavier portfolio company activity (budgeting processes, strategic planning, etc.) occurring during the second half of the year. That isn’t always the case, but it’s what I’ve noticed. However, if you have a compelling business, it doesn’t really matter what time of year you raise money with few exceptions. One exception is that investors are generally slower to move in the summer due to vacation schedules.
In the end, I always encourage founders to raise money when the business is doing well, when they’re in the middle of their peak season so their numbers look good, when they’re hitting their projections and executing on all cylinders. It provides a better story to share with investors.
How do I get in touch with an investor?
I have two suggestions for entrepreneurs in this area.
First, don’t call an investor on the phone and leave a voicemail. It’ll be unlikely that you get a returned call. The last thing that an investor wants to do is to allocate precious time to call an entrepreneur back and risk getting stuck on the phone about a company that is completely irrelevant from their investment strategy (sorry to anyone waiting on a returned call from me!). Stick with email or in-person.
Second, determine if a cold email or warm intro is better. If you know a credible person who knows a partner at a firm, a warm intro could work. However, it doesn’t do you a lot of good if the person making the intro doesn’t really know you. If an investor gets an intro from a mutual connection, he/she may ask that person if they’re just doing the founder a favor or if they really think highly of the founder. You want an intro from someone who thinks highly of you and who carries credibility with the investor.
If you don’t know someone like that, a strong cold email can be successful. Keys to a cold email include being succinct and including important data points (revenue, growth, brief summary of the company and products, why this should be compelling for an investor). Don’t go crazy; keep it succinct. Include no more than a 12-slide PDF on your company. And don’t ask for an NDA prior to sharing any info. No investor likes signing an NDA because we see so many companies and don’t want to spend time reading the details of each one and also risking being compromised by fine print. Investors have a reputation to uphold and confidentiality is part of that. That said, as a relationship progresses into a 2nd and 3rd conversation, investors may get more comfortable signing an NDA.
I know how hard it is to raise money. I deeply admire and respect every entrepreneur who can do it successfully. Good luck and I can’t wait to read about you in the news. Feel free to email me if I can be helpful.
Managing Partner, Ridgeline Ventures
Luke Vernon is a Managing Partner of Boulder-based Ridgeline Ventures, an investment firm in healthy living companies. Ridgeline Ventures has invested in companies like Bobo's Oat Bars, Beanfields, Bonafide Provisions, NOKA Organics, Cotopaxi, and others. He's an operator-turned-investor, having led Eco-Products from under $1M in revenue 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.
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