I’m approaching Venture Capitalists and Private Equity players for one of my technology portfolio companies at the moment. It reminded me how difficult the process can be for the uninitiated. So for all those folk who are trying to choose a financial backer here’s my punch list:
Early Work
- Study their web site to discover:
- their portfolio
- previous exits
- investment criteria
- bio of partners
- Status of their various funds?
- Are they actively investing the money they have just raised or are they winding down an old fund?
- You really need an intro to a relevant VC once you have drawn up your shortlist. Hit LinkedIn hard for that intro!
- A really good Executive Summary and a few punchy slides is the most effective method of getting their attention.
Give Yourself Choices
- The executive summary has been sent, hit the bull’s-eye and has resulted in a face to face meeting. How do you handle this meeting? Words of caution …… the first 60 seconds are unreasonably important.
- Lead with your strongest, most remarkable statement. Remember eye contact is vital so ensure that your audience doesn’t get lost in deep and meaningful graphs instead of looking at you. Length of presentation? Maximum 20 minutes with big changes of pace every 5 minutes. Talk slowly. Use a maximum of seven PowerPoints. Involve key members of your team to make key points. Finish with a very strong 60 seconds bringing together the proposition and clear next steps.
- Most funders will want to move to an exclusive discussion before investing too much time but I would resist that until you have a detailed term sheet.
How Do You Make Them Love You?
- The VCs will want to conduct – “Commercial due diligence” – an examination by the funder of the fundamental logic of your business plan and the market you are attacking. All the policies will be examined from business models to marketing strategies to your product strategy. The key market drivers, competitors, legislative changes, technology threats will all be reviewed. Of course a switched-on funder will know all this stuff already and if fact if they don’t, you are probably in front of the wrong funder!
Fundamentally they are making a judgment call on the following:- Is the CEO credible and has he assembled a great team?
- Does the market have an itch worth scratching; is it a need to have or a nice to have?
- Does this business plan make money and can it scale to a substantial business that buyers will love to buy.
- Can this team define and dominate this market? What edge do you have on the existing and future competition?
Getting Offers on the Table
- It is important to issue strict guidelines on your requirements. This will minimize surprises and allow comparison of rival offers. All information, business plans, supplementary answers to questions are packaged up and made available to all interested funders. This ensures a level playing field
- Set out a deadline for Term Sheets and send to all interested parties.
- Review all Term Sheets and list clarification points including terminology that is unclear, conditions that need more detail, and commercial terms that seem uncompetitive.
- Go back to all parties and ask them to address the issues identified in your Term Sheet review and ask them to issue their final and best offer by the agreed deadline.
Criteria to Help You Choose
- Assess the following:
- Equity % requested for their money. Model the likely IRR % the funder is expected to achieve based on reasonable assumptions.
- Chemistry of the deal leader who will be attending Board meetings and the fit with the management team.
- Understand their approach to future funding needs.
- Early repayment penalties if any.
- Approach to salary and incentive schemes.
- Information requirements on an ongoing basis.
- Previous track record and references.
- Synergy/conflicts with other portfolio companies.
- Type of fund being used to do the deal.
- House style of management, hands off or micro managers.
In the end there are no guarantees in the fund raising game but these pointers should help you find the ideal partner for your business, if they exist.
