How to Create the Next Facebook: Seeing Your Startup Through, From Idea to IPO (12 page)

It’s inevitable that you’ll make lots of mistakes along your entrepreneurial journey, and the good news is that these slip-ups more often than not serve as great learning experiences. But some mistakes can be easily avoided. Here are the most common mistakes new entrepreneurs make when raising capital:

• Requesting a signature on a nondisclosure agreement (NDA):
  Regardless of how great or groundbreaking your product is, a reputable investor will not sign an NDA because doing so could prevent them from looking at more deals. It may even lead to lawsuits.
  
• Sending unsolicited e-mail to an investor:
  If you are targeting top investors, sending them unsolicited e-mails is a big waste of time. These types of e-mails are almost in line with those that everyone seems to get from Nigeria, asking the recipient to pony up $10,000 cash in return for a $10 million reward! The best way to connect with a qualified investor is through a referral or an introduction—not an unsolicited e-mail.
  
• Pitching to the wrong investor:
  Many angels and VCs focus on specific tech categories, investment levels, geographies, and so on. Before making your pitch, do some research on the investor to ensure that your business interests and theirs are aligned.
  
• Asking for a referral:
  If an investor tells you, “No,” then take it at face value and, more important, do not ask for a referral for other investors. Doing so creates an uncomfortable situation. Besides, do you really think the VC will make an enthusiastic introduction for you?
  
• Don’t hit your head against the wall:
  If you aren’t getting much interest from your pitch, then you need to revaluate the situation. What’s the problem? What parts of your pitch are being met with the most skepticism? Figure out what’s broken, and fix it. If you don’t, you’ll probably remain on the proverbial treadmill.
  

Without a doubt, giving your pitch can be a nerve-wracking experience. It’s not easy to anticipate the questions that potential investors may have, and it’s also tough to engage their interest. Are they zoning out and thinking about other transactions? Or are they engrossed in your presentation and brainstorming new applications for your product?

Fortunately, there are a few tricks you can deploy when giving your pitch that might help improve your odds:

• Timing:
  Try to schedule your meetings with potential investors in the morning. The VCs will be more energized and less frazzled, which means they should be able to focus on your deal more. By the afternoon, however, they may want to bolt from the office.
  
• Funny:
  Don’t be overly serious in your presentation, because this can be a big turn-off for investors. Instead, try to be loose and conversational. It’s also a big help if you can provide some humor—but don’t go overboard. One joke is fine.
  
• RetailRoadshow.com:
  This web site hosts videotaped presentations given by executives of companies that are up for IPOs. No doubt, the CEOs featured in the videos are pros at raising capital, and as a result, it may prove helpful to study
  their presentations. You can also get slide ideas from their decks.
  

It’s a good idea to test your pitch—but not on VCs with whom you want to make a deal. You should never throw away a meeting on a must-have investor just for the sake of refining your presentation. Instead, before you begin scheduling meetings with VCs to whom you want to make a real pitch, you should start by pitching friendlies, who may include your advisors, trusted friends, and investors you are not particularly interested in working with.

The more you pitch, the better off you’ll be. You should be able to do it almost reflexively while making certain your pitch is natural and smooth—which shouldn’t be a problem if you believe in your company’s mission. When getting feedback on your performance, tell your listeners not to hold back with their criticism and comments. Sure, it can be brutal and uncomfortable to be informed of your shortcomings, but if you want to become a pro at raising capital, you need to know your weaknesses.

Once you feel comfortable giving your pitch, put together a fundraising plan that outlines the steps you plan to take—as well as the timeframe in which you’ll take them—to finance your company. Keep in mind that raising capital can be a time sink—a Series A round of financing alone can take anywhere from one to three months to complete—and your pitch is just the start of the fundraising process. You also need to allot sufficient time to engage in negotiations, perform due diligence, and finalize the transaction.

But don’t give yourself too much time to complete your fundraising plan. Why? Because it is very easy to lose your focus on managing your company during the fundraising process. It makes sense, right? The more time you spend pitching VCs, negotiating terms, and signing contracts, the less time you have to commit to the essential day-to-day operations of your company. What’s more, VCs have a good sense of when a company is deteriorating, and they usually are not afraid to take advantage of the situation.

A shortened fundraising schedule is also important because of the tight-knit nature of the VC community. When VCs see a deal they are interested in, they tell their friends at other firms about it, which helps build buzz for the company in question. Then, if word spreads that the company is approaching potential deals with a sense of speed and urgency, investors may jump on board simply because they don’t want to miss the train before it leaves the station. On the other hand, if the buzzed-about company spaces out its meetings and drags its feet on drafting term sheets for investors, the initial
buzz and enthusiasm surrounding the company may subside, diminishing the company’s investment prospects in the process.

So, how do you avoid creating a time-intensive fundraising plan? Easy: condense the time period you have designated for fundraising. Draw up a list of VCs you want to pitch to, and schedule your meetings with them during a short time period. The latter shouldn’t be too difficult to achieve, because many VCs in Silicon Valley (at least the ones that matter) are concentrated along Sand Hill Road. As much as possible, talk to lead investors, which are firms that manage the investment process for your company. If you have several lead investors at the table, you may be able to create a bidding frenzy, which will lead to a higher valuation for your company—not to mention a shortened fundraising period!

When it comes to finding the right VCs for your company, avoid using a “spray and pray” approach. Instead, target the VCs who are best suited for getting your company to its next level of growth. How do you do that? Go beyond the brand name of the firm and look at the other companies they’ve invested in, the stage of development they prefer a company to be in before making an investment, and what their investment successes have been. In other words, you should do a background check on a VC firm and its partners before requesting a meeting with them. You can start by doing a Google search on the firm in question and then asking your shared contacts about their experiences with the firm. Does the investor have a background in your company’s space? Can they bring strong contacts to the table? What about good advice? Or are they known to be a troublemaker? If the answers to these questions don’t meet your standards, don’t be afraid to walk away from the firm. It’s never easy to say “No” to someone who’s willing to write you a check, but in some cases, doing so may be the best decision.

Once you have compiled a short list of preferred investors, ask your mutual contacts for an introduction. It may also be worthwhile to have a two-minute phone call with each of your potential investors before setting up a formal pitch meeting with them. On the call, give the VC your elevator pitch and see if they have any interest in your company. If the investor’s enthusiasm is lacking, well, that’s one less needless presentation you have to make.

Data rooms
are secure online portals with limited controlled access that allow investors to log in and view your investor materials, including your deck,
executive summary, and due-diligence information. Although using a data room to store your company’s documentation may at first seem unnecessary, investors appreciate being able to access all of your company’s investor materials on one central hub. What’s more, constant e-mailing back and forth of documents can slow the investment process—or result in errors.

If you’re looking for a secure data room for your company, you might consider using CapLinked, which caters to early-stage companies, is easy to use, and can be integrated with outside resources, such as LinkedIn. Perhaps the most important feature of CapLinked, though, is its ability to let you know that an investor has looked at your company’s materials. If an investor has indeed been reviewing your company on the site, you may notice, based on the specific documents they downloaded, that they seem to be interested in your company’s business model and product. This information can be extremely helpful to you when reaching out to the investor in question.

It may be difficult to believe, but some VCs don’t have any money to invest. Consider that a typical VC fund progresses through several key stages in its lifespan, one of which occurs during the fund’s second to third year, when its partners start to raise capital for the firm’s next fund. If the returns on the prior fund have been lackluster, investors may not have any interest in joining the next fund—which means the fund won’t have any money to invest. So, if you notice that a VC firm hasn’t made an investment in a year or so, steer clear. This type of inactivity is almost always a sure sign that the firm has run out of investable capital.

On a related note, you should also be wary if you discover that one of the top partners at a firm has stepped down or switched employers. Why? Because, often, investors and VC firms sign agreements stipulating that the fund’s investing activity will be halted if one of the firm’s main partners pulls out. A clause of this nature is perfectly reasonable; after all, investors decide which funds to invest in based on the skills and reputations of those funds’ main partners. Why, then, would they leave their money in a fund that is managed by someone they don’t trust?

I often hear entrepreneurs say something like: “I talked to this VC the other day, and he was really excited about my company.” Not to be rude, but so what? VCs are smart and calculating individuals, which is why they generally refrain from saying “No” to any deal. What if that company becomes the next
Facebook? Saying “No” to a company takes VCs out of the game, and they always want to make sure they are in the game—just in case.

You also must realize that there is an important pecking order in the VC world, and titles matter. If you talk to a director, a principal, an associate, or a research analyst about your company, you aren’t talking to a decision-maker. People in these types of positions almost never say “No” because they are mostly keeping track of the players in the market, not making crucial decisions about which companies get what amount of funding. But if you do manage to talk to a firm’s managing director or general partner, congratulations: you are talking to a decision-maker. What’s more, they have little time to spare, so the fact that they are willing to meet you is a very good sign. In this case, you can get a little excited!

Unless you have developed a super-hot product, expect to be rejected by VCs. Any company that is attempting to pioneer a new approach should expect its fair share of rejections. And when those inevitable rejections start trickling in, chin up: investors passed on Facebook in the belief that it was overvalued or a fad. Remember, raising money is like any others sales process. You have a target audience, and there is a hit rate. If things go well, several VCs will compete for your deal.

When you close a round of funding, draft a press release that features quotes from some of the VC partners who have invested in your company; this will add credibility to your venture. You should also add an “Investor” section to your company web site that includes information about the company’s funding as well as a contact name, a phone number, and an e-mail address.

Next, typically several days prior to your company’s official funding announcement, reach out to some of the typical blogs in your sector and alert them to the news of your funding. Reporters generally hold off on announcing such news before the predetermined announcement date you set for them, but be aware that embargos may be broken. Sure, this may be a bummer, but at least you are getting exposure for your company.

Many entrepreneurs have little idea how to enlist their investors’ help. In some cases, entrepreneurs may see their investors as adversaries, especially if
funding negotiations were contentious. But this is a big mistake. Angels and VCs generally have a tremendous amount of entrepreneurial and business experience, so get your investors involved in your company as much as possible. If you are having trouble finding ways to make the most of your investors’ skills and talents, try these strategies:

• Ask for their advice on the new iteration of your product.
  
• Request that they help you lure in new hires.
  
• Propose that they put you in touch with companies with which you are interested in forming partnerships.
  
• Suggest that they give you feedback on your company’s new marketing campaign.
  

You don’t have to involve every investor in every decision you make. Instead, segment them into their areas of expertise, which should help streamline the advice-gathering process—and maximize your results.

As you can see in this chapter, you need to display a tremendous amount of sales savvy when dealing with investors. In fact, being a skilled salesperson is critical if you want to achieve success as an entrepreneur, because you are, in parallel, selling not only to investors but to potential employees and customers as well. Selling yourself, your company, and your product may be a somewhat uncomfortable experience, but you don’t have much choice in the matter. When in doubt, repeat to yourself: “Sales is not evil!”