One of the most mystifying processes in the start-up community is how to get to a ‘yes’ from a venture capitalist. Between the often-opaque internal timeline and the seemingly ever-shifting criteria for investing, it’s an understandably frustrating process for entrepreneurs. In addition, the numbers can be daunting, with VCs touting sub 1% rates of funding companies that they see. Although every firm has a different process, most venture firms do share a few commonalities in the way they evaluate investments.
- Building trust with the venture firm is the single most important thing that you can do to improve your chances of getting an investment
Despite all of the science behind investing, venture capital investing is at its core at least as much art as science. The idea that a firm will invest millions of dollars in an up-and-coming business with minimal (if any) traction is one of the riskiest bets any investor can make. In addition, with so many talented people trying to create the next success story, it becomes a sea of business plans and big ideas, which ultimately becomes very hard to separate from one another. At the end of the day, the VC is usually betting more than anything on the founders/management team to be a steward of capital and turn one dollar into ten.
- How to build trust? Get an introduction from someone that the firm trusts and demonstrate that the team that has executed (and will continue to) execute
Other things have been written about the importance of a warm introduction, but it’s worth re-iterating the importance here. VCs get hundreds of ‘cold’ calls, e-mails, etc., that more often than not end up unread. This is an unfortunate reality of both pattern recognition (not having much if any success with cold introductions in the past) as well as a time management constraint. With so many new companies to look at every day, not to mention existing portfolio management, an investor only has so many hours in the day. If a friend of the firm sends a detailed, warm introduction, the likelihood of a partner spending the time to review goes up exponentially. When their friends and colleagues make introductions, the company gets respect by the transitive property, which helps open the door.
- Once you’re in the door, demonstrate that the team that has executed and will continue to execute
Once the door is open, that initial trust has to be confirmed and mutually built up over time. Many entrepreneurs unfortunately seem to believe that VCs will open up their checkbooks after one or two meetings with them but as discussed above, the ‘art’ part of investing has just as much to do with the decision as the business metrics. Although VCs usually tout quick decision-making processes, frequently that is reserved for entrepreneurs that they’ve known for years. The best way to optimize the chances for investment would be to use the warm introduction to introduce the VC to the management team, company, and its long-term goals. After that, provide periodic updates so the company can demonstrate its track record of execution and the VCs can refer to old meeting presentations/notes to see that the team delivers on their promises. If an entrepreneur consistently hits their timelines and metrics, after a few months or a few years, investors will eventually take notice and be likely to pull the trigger.
- Finally, while talking with the VC (or even before), do your homework to make sure the company is working on a problem that piques the interest of the partner that would lead the deal
Every investor will say that they are interested in companies that are solving big problems in big markets. This naturally has led to innumerable slides about $B+ markets with the numbers frequently being so large that it actually hurts the credibility of the team. Although investors have a responsibility to make money, there is no one specific path to do this, and as a result human nature compels most investors to focus on problems and/or markets that they are personally interested in. Although a startup may seem to fit all of the ‘listed’ investment criteria, this is one thing that is extremely difficult to overcome. Entrepreneurs need to make sure to do their homework and make sure that the mission is a fit with the VC partner specifically. Ways to do this include reading blog posts, listening to speaking engagements, or asking their friends and colleagues for insight. VCs will usually tell the world what they are looking for, entrepreneurs just have to spend the time to find the information and take it to heart. VCs take notice of prepared entrepreneurs and once the presentations turn into discussions about the future, the VC starts to think of themselves as a potential partner.
About the Author
Eric Zimmerman is a managing partner of Novateur Ventures and a former healthcare venture capitalist. He focuses primarily on early to mid stage biotech and medical device financing, strategy, and investment. He enjoys helping entrepreneurs tell their story and spending time with his family in Austin, Texas.