Tips On Closing Your VC Deal
I was giving a phone recommendation for an investment banking friend yesterday and while talking about the work we've done together, the interviewer touched on a VC investment that we closed fourteen years ago.
"How long did it take you to close that deal, start to finish", she asked me.
"Six weeks, start to finish", I answered.
"Wow", she said. "Six weeks. That's really fast."
I thought about this comment later, and realized that in the course of the tens of millions of dollars of investments that I've been involved in since, six weeks is not only at the lead edge of the bell curve, but it has yet to be repeated. Most of the investments I"ve worked on have taken far longer - twenty weeks, on average.
I'm repeating this here for a reason - sometimes people that are looking for capital, or involved in a transaction, have extremely unrealistic expectations as to how long it will take. A guy that I spoke to the other day, who was just starting out, was appalled that I though he should allow three to four months (and those of you that know the busines will know I was being kind, right?)
"Four months?" he exclaimed. "Why the hell is it going to take four months?"
The best way to answer this is to break it down. Let's assume the typical closing takes twenty weeks, and explore ways in which we can shave some of that time down.
1. Do Your SWAT Up Front (Saving: 4 weeks)
I'm always amazed at the poor quality of most investor presentations, and the poor prepartion of most teams when they first start the pitching process. Very few do a great job of describing the business and the market, and few tell the story from the point of view of applying capital to value creation. Almost no companies that present have a solid grasp of the subset (not the superset) of the market they are likely to win.
And sometimes, entrepreneurs take some of their best assets - and bury them. I recently saw a presentation in which the leader of the team was a recognized sales leader, in the "billion dollars of revenue per year" category. Not many people are in this category. The fact that he had sold billions a year in his last job wasn't even in his PowerPoint. That is the kind of asset that rarely accompanies a new idea.
Another important point is to showcase your weaknesses alongside your strengths. Investors need to know where the gaps are - if you point them out up-front, you will save a lot of time, and you'll be amazed at the resources many investors can bring to bear to solve these problems. Example: Many VC firms have in-house "Recruiting Partners" whose job it is to find you a CEO, CTO, head of marketing, head of development... so don't try and hide your weaknesses. Get them on the table and you will gain trust and respect, and save a ton of time.
Getting the packaging right can shave weeks off the amount of time you will need to raise capital. Using up valuable meetings with intelligent people for the purpose of gaining tips on how to better present your brilliant idea - or restructure your company - is a waste, and will reflect poorly on your ability to manage your business, going forward.
2. Target The Right Investors (Saving: 4 weeks)
Let's assume, for starters, that you've got an amazing business idea and a great team, and your packaging is superb. While not uncommon, this combination isn't enough to win capital. To get funded, you need to get this plan in front of the right group of investors.
Few entrepreneurs realize how statified the investment community is, and view venture capital as a rather large homogenous pool of talent and capital. Nothing could be more wrong - and pursuing the wrong investors will not only lose you time, it may demoralize others on your team when they hear a "no" and fail to realize that the same investor would have said "no" to Google five years ago - because they are "late stage", "geographically focused", "focused on a certain segment", or don't actually have any money available to invest.
Do your homework - and you'll save a ton of wasted time. And by the way - though you need to target the right investors, you shoudl "speak" to everybody. In my experience, when you call folks that are not investing in your segment and ask for help/advice, it is readily offered. Utilize folks that are not investing in your area to reach those that are - and you'll make the most of your contacts.
3. Demonstrate Commitment (Saving: 4 weeks)
The best advice I ever got (and I've blogged about this before) was given to me more than twenty years ago, during an investment pitch in Los Angeles: put your money where your mouth is. In that meeting, the guy I was meeting with reached out and put his hand on my arm and stopped me mid-sentence. He asked me if I would put my own money behind this, and if not, why not?
The bottom line was, the idea wasn't yet baked, and he knew it, and, after the intervention, I knew it. I went off, worked on the plan, then came back and he became a big fan. Ultimately, he didn't get to invest because there were too many folks interested and he was just a small company. But he made an investment in me that I will always remember - be prepared to put your own money/time/assets behind your idea.
4. Dating and Due Diligence (Saving: 4 weeks)
If you know the investors you're approaching, and they know you, you can save a lot of time. If you have a track record of trust and success, you can shave several weeks off your fund-raising process. When you hear about someone who got their money in days or weeks, think back on this point.
For those of you that don't know the folks that you're going to be approaching, and don't have anyone on your team who knows them, you need to allocate several weeks just to allow the folks you're meeting with to get to know you. A lot of times, this is jokingly called the "dating" stage, but it's not a whole lot different than the activity that is referred to. When you start out dating someone, though interest is typically high, levels of trust and understanding are typically very low. Dating is all about increasing trust and understanding towards rewarding ends.
We all know what happens when you try and push the timeframe forward a little too quickly - you can very quickly find yourself back at first base, or worse. Spend time letting people get to know you, and you'll get to the term sheet faster than not engaging - if that sounds like simple advice, ask yourself how often you picked up the phone this week and spoke to the folks interested in investing in your business. In my experience, if you're not talking every day, the deal just isn't going to happen.
5. Negotiations, Closing and Legal (Saving: 0 weeks)
They are a lot of lawyer jokes out there, and some might view "zero weeks" as a stab at my legal friends, or simply as facitious. But the simple fact is, there is a ton of legal work associated with investing in a new company, and it takes a certain amount of time to do it. I bought a company a few years ago, and we got the deal closed in three weeks. Our law firm - a major East Coast firm - told us it was the fastest they had even seen a deal that complex go down.
Also, you should not assume that once you've agreed terms, the capital is going to come in "in a few days". If you need capital, use the term sheet to organize a bridge loan - but don't expect that process to take days either. Legal work for putting a bridge loan in place will take you some time as well.
The bottom line: there are things you can do to save time when raising capital. But the most important thing is to have the right expectations when it comes to capital raising - this knowledge will help keep you and your team sane and motivated while you move through the process.
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