by Wayne Embree, EVP, Investments and Venture Acceleration at Rev1 Ventures
Most entrepreneurs need capital to develop and grow their businesses; every investor must responsibly invest their funds with an eye on returns. This means that investors must convince the best entrepreneurs to take their money. That may seem counter intuitive to many entrepreneurs, but it’s key to making the right deal for your business.
Just because you can raise capital from a certain investor, doesn’t necessarily mean you should. Seriously consider these seven tips before any deal reaches the negotiating stage.
1. Audit investors; they aren’t the only ones who need to conduct due diligence.
Use your network to search out CEOs funded by any investor you are considering. Include CEOs who were turned down and even CEOs who were parachuted into investors’ portfolio companies. Say upfront that you are considering raising capital from VC “XYZ.” Ask about their experience and what it takes to succeed with this investor. What type of people will they bring to the board? Did the VC make a follow-on investment? Would they do the deal again? If you sense any reluctance from CEOs you talk with, re-evaluate the deal.
2. Leave the speed dating to someone else; investor relations are dancing lessons for life.
If your company culture is inclusive, open, and recognizes the bottom line benefits of diversity, insure that prospective investors are on the same page. If an investor is hierarchical and doesn’t see diversity as a competitive tool, look for capital somewhere else.
Imagine having the tough conversation when things go wrong. An advisor who will challenge your thinking in a productive way is beneficial; investors who blame and finger point or try to jump in and take over don’t help the company succeed. On how many boards does a potential investor already serve? Four to five is optimal; many VCs are on 10 or more, leaving little time for deep engagement.
3. It’s your vision, not theirs.
Seek out investors who believe in your vision. If investors express a strong preference changing your business model, product, or team, think twice. They could be right—or both the advice and partnership could be wrong for you.
Investors from the coasts may say they’ll invest locally, but if all the preliminary meetings are in New York or in Palo Alto, pay attention, even if no one has suggested you pack.
4. Raise capital as a team.
Do not attend any meeting with a potential investor by yourself, even if you are an experienced entrepreneur. All entrepreneurs want to demonstrate that they’re competent, courageous, and bold, however, always take a co-founder or trusted advisor along. Human beings are inclined to hear what they want to hear—entrepreneurs especially. With a team approach, at least one person is listening and taking notes. When investors ask for follow-up items, a second set of ears and eyes insures you don’t drop the ball. And, as we have sadly learned, there are predators in this business. Having an observer can create a more respectful environment.
5. Don’t double ice the cake.
As someone who has been on both sides of the table, I’ve seen many investors ask for a long list of extras in addition to ownership. If an ask advances the business in an open way, consider it. However, investors who demand a board seat, and then want options for being on the board or ask for extensive veto rights over certain operational matters, may be pushing the ask too far.
6. Don’t raise money you don’t need or can’t spend.
If you absolutely need $1 million to achieve the next set of milestones, don’t settle for $250,000 and try to make it work. Conversely, if your startup only needs $150,000 to validate the market and prove the concept, don’t accept millions because some VC offers it. Find $150,000, meet the milestones, build a plan for the next phase, then raise the next round based on those accomplishments.
7. Learn to decipher “no”.
There are many euphemisms for no, but only one word for yes. Don’t be surprised if you hear things like: “if you only had a few more customers,” or “we think you need a Chief of X or a VP of Y,” or “we really like this opportunity, but we’re currently raising a new fund, call us back in Q4.” These are just “no” without an exclamation point.
If investors truly like your business AND you as an entrepreneur, they will work through these situations and more to make an investment possible. If the investor is enthusiastic but the initial timing isn’t right, they will leave the door open for you to return when it is.
To paraphrase the great inventor Louis Pasteur, “Luck favors the prepared mind.”
Wayne Embree is an experienced seed-stage investor with a 30-year track record of fueling startup growth through venture capital. As the EVP of investments and venture acceleration at Rev1 Ventures, Embree brings his insider knowledge to seed-stage startups to help entrepreneurs make the most of their opportunities in front of investors to ensure their poised for scalable growth and long-term success.