Tech Pique (February 2023)
Investing in Relationships - Raising in the Market Today
I’ve previously written about the need for early stage founders seeking to raise capital to invest in “lines not dots” re-iterating the advice given by Mark Suster in 2010. This advice seems particularly apt in today’s market.
With rising interest rates, macro uncertainty, and global geopolitical tensions, investors are being circumspect about investing in early stage business. It is largely being left to dedicated venture fund managers who have dry powder to invest. However, those managers are seeking to ensure, where appropriate, that their own portfolio companies have enough capital to survive the downturn. Capital for new investments is scarce and being deployed more cautiously relative to the last two year.
As an investor, I’m seldom likely to invest in a new founder who pitches me an idea and then says “would you like to participate in our round today?”. Many investors see up to 50 pitches a week and differentiating yourself as a founder is key. Yes, your idea, business model and traction are all points of differentiation, as is your background as a founding team, but investors are unlikely to invest hundreds of thousands or millions of dollars after one pitch.
Advice for companies raising in today’s market
1. Allow 3-6 months to raise capital – this is for the process itself, including initial investor reach outs, due diligence, transaction documents and funds transfer. However, you need to invest in the relationship prior
2. Do your research on which investors are most likely to invest by looking at their portfolio companies
Have they invested in your business model?
Have they invested in your sector?
Have they invested in a peer / direct competitor?
Do they have capital to invest?
Are they currently investing in new companies?
3. Shortlist 5-10 investors that you think are most likely to be interested in your raise
4. Approach the shortlist 3-6 months before your raise and ask for advice not capital
“Ask for advice and you may get capital, ask for capital and you’ll likely get advice”
Explain your business and get a sense for whether they are interested
Take onboard any feedback
Subject to the feedback, explain what you are going to do in the next 3-6 months before you raise and where you want to be when you raise
5. If they indicated interest in the first interaction, reach out again before you raise to provide an update on your progress – include the good, the bad and ask for any advice or assistance (you will be surprised at the number of investors that will provide it)
Don’t hide the bad. Investors understand that not everything at early stage companies goes to plan. It’s your response that they are evaluating.
6. Start a process
Have all of your materials prepared – presentation, financial model, dataroom
Ensure a consistent timetable for all investors – try to reach out to all of them, and setup meetings, in a fairly short window (2-3 weeks) and then give them a timetable to work through due diligence (multiple meetings and Q&A) and for term sheets if they are interested. Some may work faster or slower but having competitive tension is key to get a great outcome
While the above may seem more than what you were planning to do to raise capital, it will, in my experience, significantly increase your chances of raising capital.