In this post, Eran Bielski, Venture Capitalist, and SigmaLabs accelerator founder will review the pillars of fundraising, who to approach and how, what should I prepare and what the heck are VCs anyway.
Let’s dive right in.
Who To Approach?
Can you find the right VC in the crowd?
First thought of the day should be whether or not your business is a fit for VC money. As this subject is covered extensively in various blogs, we can skip it (I recommend 1 & 2).
Second thought is “Which VC is right for me?”. Entrepreneurs often do not think about this question enough, which results in a meeting ending before it has even begun.
There are some obvious questions each founder should ask before she/he begins fundraising:
- Are they invested in my direct competitors? (If they are, might not be the best idea to approach)
- Do they know my industry? (If they do, the pitch will be easier as they understand your surroundings and can jump to the tough questions quickly (Tip: Look at the partners’ history, companies they were involved in).
3. Do they invest in my stage? (Is the check I am asking for the check they can write?)
Apart from these, there are other crucial questions entrepreneurs must ask:
- What is the fund size?
Why is this important? If the latest fund this VC is deploying from is a $2bn fund and your Total Addressable Market is $200mm there is little chance a deal could be struck here.
2. When was the latest fund raised?
VCs typically invest 2–4 years max from the moment the fund starts investing. If the VC raised it’s last fund 7 years ago and has not raised since you are probably wasting your time approaching them as they have no money to invest in new ventures, only to follow on on their existing portfolio.
Dirty secret: they might still meet with you just to learn about your tech and/or space but will not invest as they cannot.
A smart question can be “How much of your fund have you deployed already?”. That way you can understand how much money they have left for new investments.
Bottom Line: Make sure the VC has the ability and strategy to write checks in the size you seek, in your industry.
How To Approach?
Now that you know which VCs you want to target, the question arises: “How do I reach out to them?”.
The best approach on a scale from best to worst:
- Nothing beats inbound — if you have a person close to the GP which can whisper in his ear that you are doing really well and he should meet you, that puts him “on the chase,” and you in a great position.
- Get a warm intro.
A) Best intro is from an entrepreneur who has exited with the fund or strong entrepreneurs who have worked with the fund / GPs before.
B) Smart, successful people of whom the GP might think highly.
C) A VC which thinks your venture is potentially great but does not have the mandate to do the deal (different stage, industry).
D) Lawyers sometimes send startups to VCs as an extra service to their startup clients, good lawyers send good deal flow.
E) Accountant firms send deal flow which can be outdated. The reason for this is that they see the companies in a later stage (after there is a company, employees, revenues, etc.) so they might send your deck to VCs you saw months ago (which does not look very good).
When sending the first email, be sure to make it personal, obviously state the name of the partner but, also dedicate a line or two about why you are approaching them, (example: “I saw your investments in Riskified & Fundbox, and as our venture is in Fintech I think there can be a great fit here”)
Bottom Line: try to manufacture inbound or get a warm intro by a person whom the partner will think highly.
What are VCs after?
- VCs are structures which contain LP’s (those who invest money) and GP’s (those who manage said money and invest a small %). Since VC is a highly risky illiquid investment vehicle (especially for Seed), the LP’s expect that by the time the fund is done (~10 years), they will get at least 3X on their money (This is a generalization in order to keep it simple).
The above returns force an $80mm Seed fund to return about $240mm back to their investors. Assuming they do $3mm investments and keep a 1:1 ratio of reserves for follow on’s excluding fees they will make roughly 13 investments. Early stage startup’s usually fail. That’s just a fact of life. If the VC wants to return $240mm, they need to have let’s say 2 winners which exit at a $500mm valuation, in which the VC still held 15%.
Couple those 2 X $75mm returns with 2–3 others which returned 5x-7x and you can reach the $240mm mark. Notice 2–5 companies out of 13 are the major value drivers of the fund, whilst the rest either turned to 0 or returned a 1x-2x. The above is covered extensively by some great sources; I like this one.