5 Tips for Raising a Venture Round

While certainly not every business needs to raise venture financing, it is the path for many high-growth technology startups. Therefore, going down the fundraising path is something many technology entrepreneurs will need to do and is a critical step in the development of their business. This can be an intimidating experience so I’ve put together a list of five tips for raising a venture round. This is by no means an exhaustive list so I’d love to hear other suggestions from you in the comments of this post.

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Tip 1: Make Sure You Are Ready to Scale

First, before you even start the process of raising a lot of money, make sure you have figured out your model and are truly ready to scale. Earlier this week on ReadWriteStart, Steve Blank used research at The Startup Genome Project and explained:

One of the biggest surprises is that success isn’t about size of team or funding. It turns out Premature Scaling is the leading cause of hemorrhaging cash in a startup, and death.

If you’re early in the investment process, a small angel round or partnering with an accelerator may be the best approach. In fact, research conducted by the Startup Genome Project found that the best practice in the first phase, a.ka. discovery, is to only raise between $10,000 and $50,000.

Tip 2: Have A Real Lead

Next, if you are going to raise a round, find one or two partners to do it with. As Mark Suster pointed out yesterday on his blog, he’s seeing more and more cases where “entrepreneurs are working hard to make sure they have as many VC names and famous angels on their cap table for signaling value.” He explains five problems with this and I couldn’t agree more. Remember, once you screw up your cap table it’s really hard to go back. So in your first few funding rounds, try to raise money from as few people as possible and make sure they really will help.

Tip 3: Conduct Diligence on Your Potential Investors

When you get close to finding a lead, don’t be afraid to ask to speak to some CEOs who have worked with the firm. They are going to poke and prod your business to figure out if you’re someone they want to work with. You should figure out the same thing. Pay special attention to investors who are willing to introduce you to CEOs of their portfolio companies that went through hard times. This is when your potential investor will really show how committed they are to the companies they invest in.

Tip 4: Really Understand Key Terms

Once you get the term sheet make sure you know how to read it. I strongly recommend reading Brad Feld and Jason Mendelson’s Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist. This will give you tons of information on all the terms you’ll encounter when raising a venture round and how they could impact your deal. This includes things like how liquidation preferences impact future rounds and ultimate liquidity, to why VCs ask to expand an option pool before investing as part of their term sheet. Too many entrepreneurs focus exclusive on the valuation number and this book can really help you understand all the implications around the term sheet you receive.

Tip 5: Remember Time Kills Deals

Once you have a term sheet you are happy with, don’t over negotiate. You have a business to run and more importantly don’t forget one of the first principals of any sales process: “time kills deals”. The worst thing that can happen is for you to drag your feet over some meaningless terms (which you’ll understand are meaningless thanks to reading Brad and Jason’s book above) and end up having your potential investor get cold feet or even have something that’s outside your control change. Just get the deal done once you’re happy with the material terms and have an investor you trust and want to work with.

Bonus Tip: Run a Great First Board Meeting

When the cash is in the bank, you’re not done; in fact you are just starting. Once you’ve raise your round, you’ll almost certainly end up with at least one new board member. It’s really key that you run a great first board meeting at this point. If this is your first round, this may be the first formal board meeting you’ve had, so prepare for it and make sure you know what you want to accomplish. This will set the tone for future board meetings so make sure that board members take your meetings seriously. There are a number of great posts on this topic and I may try to summarize these in a future post, but one of my favorites for now is from Guy Kawasaki on “The Art of the Board Meeting.”

As I said at the beginning of this post, this isn’t an exhaustive list. I’d love suggestions in the comments below for other tips when raising a venture round.

Thanks to Mark Coggins for creative commons use of the photo.

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