We just raised $1.6 billion for our most recent fund, BVP VIII. In January 2011, my partners requested me to lead our firm’s fund raising efforts which I did, along with Bob Goodman and Ed Colloton. We are supported by an excellent team of Sandy Grippo, Sara Byrne, Scott Ring, Robin White and others. The quarterback role for this fundraising fell on my lap not because of any special skill, but because I led the fundraising efforts for our last two funds, respectively raised in July 2007 and February 2009.
Now with three fundraising experiences under my belt, I have learned a few lessons. I believe these lessons apply not only to venture capitalists raising funds from limited partners but may also apply to entrepreneurs raising capital from venture capitalists. So, with an objective of helping any entrepreneur seeking to raise capital, I pass along what I learned.
1. Build trust by being transparent.
The foundation of any long term relationship is mutual trust. In the investing world, this trust is best built by being transparent. If you hide issues or blame others for your issues, you damage your credibility. As an example, in the very early days of our last fund, I was involved in making a bad investment. It unfortunately happens. I was very upfront with all of our investors about it right away and then worked in a transparent way to recover our investment. As it turned out, we recovered 97% of our cost basis from this investment. More importantly, by being very transparent in the process right from the beginning, we built up some trust with our investors. Consequently, when we approached these investors for our next fund, they had a lot of comfort working with us.
As an entrepreneur, if you are attempting to raise capital from venture capitalists, don’t hide your weaknesses or issues. Invariably, there is something about your company which is perhaps not yet fully proven, or a part of your team which isn’t as strong as you like. The more honest you are about your issues, the more confidence you’ll build with your prospective investors about your clear thinking, leadership and integrity.
2. Show that you value the relationship.
Put yourself in the other person’s shoes. Does he have a boss or other partners? Does he need approval of an investment committee? What due diligence must he do? In our fund raising process, with each of our limited partners, I tried to understand their situation. Rather than impose a process onto them which they wouldn’t be able to accommodate, instead we tried to work with them in their process. By showing that we valued the relationship, it created a better outcome. Often, I was encouraged to outsource investor relations to a third party or to a junior person. I think this is a terrible idea. If you value a relationship, you have to devote personal time and attention to it. If you outsource what you value, then how will the other party view the relationship? They will view it instead like a transaction.
As an entrepreneur, if you are going to raise capital from a venture capital firm, try to understand the situation the partner you are working with is in. How much experience do they have? How are their investments approved? What is the process this partner must go through? Are you asking them to break an organizational rule in order to work with you? The more you put yourself in their shoes, the more you exhibit genuine appreciation for the relationship.
3. Find your perfect match.
It is hard to sell an umbrella on a sunny day. A very important part of fundraising is screening investors to find the perfect fit. For our partnership, this meant focusing our effort on investors who were seeking the type of investment we are offering. My experience is that by taking the care up front to screen investors will result in a far more productive use of time. Most people tend to target investors who have large amounts of capital or have a strong brand name or are known to be active. I don’t think this really helps. It is far better to do much greater level of research before you approach them.
As entrepreneurs, if you are approaching or meeting with a venture capital firm, try to figure out if they are really going to be interested in your company or not. Have they already invested in another company in your space? Does the partner you are approaching have the time or his portfolio already too large? Do they have capital left in their fund? Is the amount you are raising consistent with the amount they usually invest? The answers to these simple questions can save you a lot of time.
4. Have a coherent strategy.
Venture capital is all about future projections. Past results don’t matter or may not even exist. So, it is all about what you and your company might deliver in the future. Certainly, as an asset class, venture capital hasn’t delivered very good returns over the past decade. So, an investor in this asset class is going to focus quite intensively on the quality of the people, the process, and the strategy in order to develop some perspective about the type of returns he might realize in the future. Therefore, your strategy must be somewhat unique, differentiated, yet also be internally consistent. For example, the amount you invest each year needs to be consistent with the team size. The return you forecast must not assume you’ll have Facebook in your portfolio. The timetable for investing must not assume you’ll have to double your average investment size. You get the idea.
As an entrepreneur, if you approach a venture capital firm, I believe the strategy you present for building your company is among the most important elements of your presentation. If your strategy is well thought out and you can demonstrate that it is working (e.g., consumer usage is growing 10% per month), then you’ll be deluged with many term sheets to pick from. If you don’t yet have proof that your strategy is working, then you must at least show enough substance that an investor can come to the conclusion that it will work.
5. Stick to the timetable.
Work expands or contracts to fit available time. So, if you have a timetable for your fundraising, it helps to set all parties expectations for the deadline. Often I observe some folks are reluctant to offer a deadline for fear it might yield a ‘no’ answer. Frankly, with a deadline looming you can more easily figure out who is really interested and who isn’t.
As an entrepreneur, if you are raising capital, I think it is important to give the process a deadline. Otherwise, the fundraising becomes an overly consuming activity. You will always get a better valuation next quarter if your business is growing. But do you want to keep dragging out the fund raising circus month after month?
6. Offer a fair deal.
My most controversial piece of advice is to avoid offering ridiculous terms up front. Offer a fair deal. My local and favorite real estate agent in Palo Alto has built a legendary track record for selling homes by always offering a fair deal. It invariably leads to bids far higher than the listing price. By contrast, another real estate agent I know always wins the listing by telling the seller about a really high price. Then they are forced to cut the price later in order to sell it. The same mindset applies to venture capital.
As an entrepreneur, you are much better off if the venture capitalists are outbidding themselves to win your support. That is a much better outcome than you making an ‘ask’ for your valuation which ends conversations quickly.
7. Be graceful.
There is perhaps no greater discouraging experience than flying out of town on a Sunday, spending a night away from your family, in order to present to an investor on Monday morning who spends the hour with you distracted by his email or texts or chats on his phone. If somebody has flown out of town to meet with you, then perhaps you could avoid the distractions long enough to give the poor guy a solid hearing.
This isn’t really a lesson for an entrepreneur. But is certainly a lesson for us venture capitalists to apply. Perhaps entrepreneurs should punish the venture capitalists who are least graceful, by denying them the opportunity to invest in their business?
I hope these suggestions are helpful. Good luck in your fundraising!