This post has been rattling around my brain for awhile now, and was finally jarred loose when reading Roger Ehrenberg's terrific post about how entrepreneurs should manage the fundraising process, rather than the other way around. If he and I were collaborating on a series on fundraising (whaddya say, Rog?), what follows would be part two. Or maybe part three. Eric Paley's post on Conviction should be required contextual reading for anyone starting a fundraise.
Roger's post did a great job describing how to manage the timing and flow of interest from a range of investors. It's very important stuff, and you've got to pay attention to it if you want to optimize your outcome while also keeping your eye on the ball in running your business. But there's another level you can take it to in working and planning to maximize success, and that's how you plan and work to make due diligence happen on your terms, not on the random terms that investors will dictate if you let them.
Having observed hundreds of financing processes from both sides of the table, there are some clear patterns as to how they play out. One of the more troubling and time consuming patterns is that of the investor who is bumbling through his processes -- and I'll tell you, process is a generous term for what we VCs frequently put companies through -- feeling pretty interested in a company but groping aimlessly in search of that thing that's going to get him and his partnership over the hump. You can burn a lot of cycles at this stage of the process. And I think it's frequently completely unnecessary.
So how can you, as entrepreneur, speed things along? My short answer is to spend some time up front with people who've seen these processes dozens of times before (ideally a VC friend or a multi-time entrepreneur) and do the work to anticipate what all those derivative analyses and data requests are likely to be. Poke all the holes you can in your business. Think about your business like an investor would. Go so far as to do your prospective investors' work for them. Assemble a collection of diligence materials in a Dropbox folder that you can give them access to. Then, when you're getting into diligence with a prospect, don't let them get distracted. Drive them through that material.
A critical point to realize here is that there are two competing threads in the entrepreneur-investor dynamic. One is the thread of your story – what is the most compelling way to engage an investor's interest and describe the problem you are solving and what your brilliant solution is. That narrative is generally best told with a real storyteller's arc to it.
The second thread is that of the investment recommendation that the VC is ultimately going to write for her partners. That follows a much more plodding and analytic approach. You'd never want to construct your pitch deck around the outline of a VC investment recommendation – you'd bore those investors to tears. But you do need to recognize that it is this framework they will ultimately need to wedge your business into. So you may as well help them do it. Here's a few key sections of that investment recommendation that you should address:
