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Treat capital raising like a sales process

I’m involved in a lot of capital raising conversations – companies looking for money. One thing that never ceases to amaze me is how narrow minded many companies are in how they approach this process. Forget the obvious stuff about doing research on local VC firms and their investment focus to make sure you are a match before sending them your “next generation toaster oven/microwave” business plan (yes –  I actually received this plan) or targeting VCs that are particularly knowledgeable about your industry or have made money investing in businesses with similar characteristics – I’ll assume (wrongly) that most people already do that. I’m talking about treating interactions with potential funders as relationships – listening to what they have to say in response to your pitch, taking notes about what whatever it is that’s on their mind when you’re meeting with them and then creating some kind of database to capture this information and plan regular follow-up. Many entrepreneurs treat a VC pitch as a one shot opportunity rather than the potential start to a relationship. Since the typical result of these meetings is a turn-down the relationship starts and ends there – perhaps taken up again when its time for the next round of funding or if you happen to bump into each other somewhere. This is a huge mistake. David Beisel correctly points this out in his recent post on the things smart entrepreneurs do when interacting with VCs. The kind of periodic follow-up that David talks about in his post almost never happens in my experience. It’s a shame, too, because some of my fondest entrepreneur relationships have started with me turning down an investment in their company. Venture deals can take time to come together and someone who turns you down for round 1 may be in a position to invest in round 2 (or in round 1 itself if it takes a while to come together). Reaching out to VCs that showed interest in a way that is meaningful (and as David points out aren’t overly intrusive) can only lead to positive outcomes.

In talking with the VP of Sales of a company that I recently turned down for investment I told him that he should treat his interaction with me like he would that with a sales prospect. I was extremely explicit that I was not shutting the door and gave him specific reasons I wasn’t going to pursue an investment in his company right now. I pointed out that he wouldn’t stop pursuing a sale if the decision maker said ‘interesting but not now” and he shouldn’t make that mistake with me or with other VCs that he was taking to. Hopefully I’ll hear back from him one of these days . . .

November 1st, 2005     Categories: Venture Capital    
  • http://southerncrossventures.com Daniel Nerezov

    Good post Seth!
    The word “patience” comes to mind, but there is more to it.
    CEOs are accountable to co-founders, earlier investors and other stakeholders in the venture.
    If I said that I am going out to raise funding for the business, but the process is more like me periodically chit-chatting with any number of potential financiers without having a clear guideline for where exactly am I in the funding process, what milestones are being met and when is the whole thing going to end – there’s going to be a problem.
    It’s like this; people ask, “Hey, Danny, what’s going on with the money”, and I have to tell them “Oh, we’re talking”. You can’t get away with saying something like this more than a few times before people really start getting annoyed.
    Relationships are great, but there is still room for clear, measurable, bilaterally understood guidelines for initiating, courting, negotiating and closing early stage deals- and everybody has to be on the same page.
    It’s all good for the vc to kick back, gather intelligence, and casually observe the company’s progress with helpful updates from the CEO – but founders don’t have that luxury- they need to close the deal, meet the company’s needs or get fired by people who lose faith them.
    It’s a two way street. In as much as it’s important for the CEO to persist beyond initial rejection, vcs ought to give explicit reasons and incentives for the entrepreneur to come back and persist with the deal.
    Having a “1-2-3 strike and you’re out” system would be nice. That way, I would know where I am with the relationship and how many strikes I’ve got left before a definite turn down.
    Basically…friendships are great, but business still needs to get done and it needs to get done in a timely, accountable manner. Sending emails back and forth which will probably lead to nowhere, is not a way to go about doing this.

  • http://financialrounds.blogspot.com The Unknown Professor

    Seth:
    Your approach makes a lot of sense, and not just in fund-raising. It all comes down to horizon – are you in it for only the next “round”, or for the long term? I’ve had a lot of things come my way because of relationships that started “unsuccessfully” almost 10 years ago.
    In one case, a school that initally turned me down for a job subsequently hired one of my students four years later. In a second case, I’m now on the short list of candidates for a position at a school that subsequently rejected me (and twice yet!) Since it’s one of my “dream” schools, I’m glad I kept in touch with the faculty there after the rejection.
    It always pays to keep lines of communications open – particularly if you can take rejection with good cheer, and subsequently offer to buy the rejector a drink the next time you see them.
    A lot of this came from watching my father operate – he owned a very successful small-town insurance agency, and he taught me that there’s always another inning to the game. So, over the long term, facing “defeat” graciously and not taking it personally often ended up paying handsomely. He said that “You never know when a person who turns you down today will become one of your biuggest allies next year”.

  • http://whatsgoingon.com whatsgoingon.com

    Mobius, Rieschel go different ways
    Constance Loizos
    667 words
    1 November 2005
    Venture Capital Journal
    English
    Copyright (c) 2005 Thomson Financial, Inc. All Rights Reserved.
    Gary Rieschel is starting a new chapter in his life, sparking speculation that Mobius Venture Capital, the firm that he founded, may be winding down.
    After relocating his wife and kids to Shanghai in February, a move that Rieschel had characterized at the time as a way to oversee the firm’s investments in the region, he stepped down from his managing director position with Mobius at the end of June.
    In mid-October, he was expected to announce a new, China-based fund.
    Rieschel said in late September that he couldn’t comment on the fund until final details were hammered down, but he said that he is forming the new venture with a U.S.-based venture firm that will send one of its partners to Shanghai to manage the fund with him.
    Rieschel says that he began contemplating his own fund owing to the “fair amount of interest” that he had received from high-net-worth individuals and family offices when he relocated to China. “I want to create the best early stage fund in China; that’s the goal for me,” he says.
    Rieschel’s new gig has surprised some, given that he founded Mobius-formerly known as Softbank Venture Capital-in 1996 and was its chief until this summer. But it isn’t that surprising when you consider that Mobius has not been successful in attracting new capital since it closed on a $1.45 billion fund (subsequently cut back to $1.25 billion) in 2000. The firm approached LPs about a potential fund that would dedicate one-third of its capital to Asia but did not find strong enough interest. Of course, that was before Baidu and Alibaba caused investors to start frothing at the mouth over creating a “China strategy” for investing in the Asian hotbed.
    The investment period for the vintage 2000 fund ends on Jan. 1. Mobius has only enough capital for two to three new investments. Two sources close to Mobius say not to be surprised to see some, if not all, of the firm’s remaining managing directors-Heidi Roizen, Rex Golding, Brad Feld and Greg Galanos-start new funds of their own.
    “The Mobius guys are all wealthy enough that they don’t have a lot to prove,” says a source familiar with the situation. “They can be thoughtful about [their next moves].” Roizen acknowledges that Mobius is not “out there fund-raising.” She is also quick to paraphrase Mark Twain: “Rumors of our demise have been greatly exaggerated.”
    “People get themselves worked up because Gary is living in China and raising a fund,” she says. “Nothing I can say changes that fact, but it doesn’t mean that the rest of us are running away.”
    Roizen says that the Mobius team-which includes seven principals-still has a “huge commitment to our LPs,” in the form of the roughly 70 companies that remain active across three Mobius funds. Mobius can contribute follow-on financing for another five years to that portfolio. Among Mobius’s most recent new investments are Chinese blog-driven portal Bokee, which announced a $10 million round of institutional financing in September, Sling Media, a consumer electronics startup that has raised more than $14.5 million, and RSS startup FeedBurner, which has raised $8 million.
    Roizen notes that Mobius portfolio companies with the most revenue are Postini and Danger Inc. Mobius led Postini’s third, $10 million round in 2001. The email management and security outfit has raised $26 million from eight firms since 1998. Wireless services startup Danger, meanwhile, has long been rumored as an IPO candidate.
    Roizen insists the team is on board for the long haul. When asked whether she might strike out on her own at some point, she says: “We [at Mobius] are all highly motivated to return money to our LPs right now. We want to continue what we’re doing, and we’re committed to doing that.”

  • http://vcinthemakin.blogspot.com Ananth

    Here is a VC’s view!
    I recently heard a VC in the Illinois area who asked:
    What does a VC want to know from an entrepreneur who has come to pitch an idea?
    His answer: How much money is this gonna make!
    I would like to put this question out to all the VCs out there for their answers.
    - Ananth

  • http://www.genuinevc.com/archives/2005/11/seven_common_ta.htm Genuine VC

    Seven Common Tactical Mistakes Entrepreneurs Make in their Initial VC Pitch which are Simple to Fix

    There are a number of great blog resources out there which offer great advice for entrepreneurs giving their initial VC pitch, most notably Allen Morgan’s Ten Commandments for Entrepreneurs. This is a must-read series detailing the context surrounding …