Why Entrepreneurs should approach VC Fundraising much like Selling their Product
Most founders view fundraising as a necessary evil. Necessary because product startups need money to build their products. Evil because it’s a huge distraction for the management team from doing what’s most important – building their product and engaging with customers.
We recommend treating your fundraising as a set of sales steps in order to reduce the time, mitigate risk and increase the success of your fundraising efforts.
Last week we discussed the importance of creating effective sales materials and targeting your audience. Here’s what you should do next:
- Generate Leads
Your target audience for investment is likely to be a lot smaller than your target list for sales so generating leads is going to be done through personalized emails and direct phone calls rather than mass distribution campaigns.But like any lead generation campaign, the messaging and call-to-action are critical to success. It needs to grab the attention of the potential investor by getting right to the point and telling them why they should be interested in investing. VCs want to make a 10x return on every investment they make so you need to quickly and clearly tell them exactly why your company is well positioned to do that. If you don’t get that across in the first couple of sentences their likely to move onto the next thing.
- Maintain a Pipeline
The most successful Fundraising campaigns involve many potential investors so you need to maintain an investor pipeline just like you would in a customer campaign. Keeping detailed notes on investor sentiments, objections and proposed deal terms is important and will allow you to better measure which investors to focus on as you get closer to the finish line.
- Know your Value
Investors will ultimately set the price on any investment round but that doesn’t mean you should leave it up to them to decide. You should have a clear idea of what your company should be valued at and it should be based on real world data. Look at comparable companies or companies in your space and how much they have sold for. Look at public companies in your space and see what they are trading at relative to revenue. Then make an educated guess at what investors will be willing to pay and how much you’ll need in order to hit your objectives so that you have a clear ask of investors as a starting position.Part of knowing your value is understanding what objections investors may have and being able to address them, just as any experienced sales rep would objection handle. If you can address these issues ahead of getting a term sheet then they won’t surprise anyone during due diligence and risk the investment going sideways.
- Ask for the Business
Good sales people need to be super comfortable with asking for the business and raising financing is no different. You want to be very up front about what you are asking for and prepared to discuss specific terms of the investment. It’s a good idea to have a clear understanding of what deal terms may come up so that you are prepared to discuss them in advance of getting a term sheet.
- Gather Feedback and Iterate
Raising financing typically requires you to kiss a lot of frogs. But there’s learning to be had and the more you gather feedback each time, the less frogs you’ll have to kiss. If you get rejected, ask why and ask them to be specific. If you hear the same feedback multiple times recognize that it’s something you’ll need to address either in how you tell your story or in how your business actually operates. Then iterate and improve. You may want to consider saving your very best prospects until you have had a couple of iterations to work out the kinks in how you tell the story.
Most successful entrepreneurs intuitively know how to sell their products and should leverage those same skills to get the financial backing they need.
Treating fundraising like a sales process should not only demystify it, but make you more successful in less time.