How to Fundraise Efficiently and Avoid Wasting Your Time with the Wrong Prospective Investors
Imagine spending 50-75% of your time over a 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 50-75% of their time to raising money. Just like money, time doesn’t grow on trees either.
One of the most important things a CEO can do is to make sure they are targeting the right prospective investors. Make sure you’re inviting the right people to the dance.
Here are some tips to figuring out if you’re targeting the right investors.
1) Know their fund size. This is a hugely important number you need to know and I’ll explain why below. This largely drives their 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.
2) Know their investment strategy. Do they definitely invest in companies at your stage? Or are they focused on other stages?
Most VC 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 domains what stages a VC invests in, try to figure out if they have a revenue requirement for the businesses they look at. That can be a guide.
At Range Light, we’re a little different in this regard in that we invest in seed to late stage companies. We have an allocation across those stages that we’re looking to deploy, but our unique structure of not having external investors allows us more flexibility in our strategy (i.e. we want a diversified portfolio).
3) Know how much their typical check size is. Most VCs have a maximum check size they can write for any single company. That maximum allocation is usually 10% of their total fund (not always, but usually).
Pro tip: If you’re looking to raise $6M, a VC with a $40M fund likely won’t be able to write a check for the whole amount. They’ll be limited to $4M and even then that would be a very big check for them that would require significant deliberation.
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. Some investors only want to take an entire round. Some only want to follow once a lead has been established. In the example above, if you’re raising $6M, you will likely need to get a lead investor for $4M+. I define a lead investor as someone who is taking at least half (ideally 60-75%) of a round and who is setting the terms on it.
In either case, for leaders or followers, if co-investing will occur in your round, most investors want to have a relationship with the other major investors. They don’t want to invest alongside of people they don’t like.
If you’re talking with a firm who seems interested in $4M of your $6M round, it is definitely worth asking them if there are any people they’ve invested with in the past that they’d be open to considering having in this round. If they really want to do the deal, they will bring additional interested investors they trust who can fill out the round.
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 31st, tell them that.
You should also set a deadline for knowing 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.
6) Know how their investment committee process works.
VCs 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. And 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.
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. 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.