Raising Your Institutional Round: Chapter 2
This is the second chapter of my upcoming book, “Move the Needle Anyway(s): Raising Your Institutional Round.” There are a total of 16 chapters. The book is currently with the publishers, however, I wanted to start sharing the content in a form of a series of blog posts so the startup ecosystem can benefit immediately. I hope you enjoy :)
Chapter 2: The Key Stakeholders
The purpose of this chapter is to summarize who is typically involved in your fundraising process and their psychology. Understanding this will help you manage and lead them from securing first-meetings to closing the round— I will cover this in increasing detail in subsequent chapters of this book.
Existing Investors: Existing investors can include a combination of friends, family, angel investors, and seed investors. Typically, they invested in your company when you had virtually nothing but an idea, a reputation, and potentially a Minimal Viable Product (MVP) with a few customers. Therefore, more often than not, these investors invested in you and they typically have a higher tolerance for risk than a later stage institutional investors. Furthermore, they were likely the sole investment decision-maker. This is incredibly important to understand and leverage especially when it comes to securing a first meeting with an institutional VC and using them for reference calls or backchannel when necessary. Here’s why: Pre-Seed and Seed investors have a different risk profile to later-stage institutional investors who want a more de-risked investment. Therefore, when crafting your narrative and pitch for your institutional round of financing, be wary of feedback from your existing investors (especially if they only invest at inception stage as angels) as they may not fully be able to separate their evaluation(s) from their own risk profile. Whereas, institutional investors will prioritize market size, traction, and paths to scale more than just you— they are evaluating the growth potential and scalability of a company and will evaluate your ability to lead a company through its subsequent phases of scale.
Institutional VC Investors (typically mature Seed, Series A and Beyond): Institutional investors manage larger pools of capital and have primarily a fiduciary responsibility to their Limited Partners (LPs). They want to move forward with founders and companies that will make them and the firm look good all-around. When they are investing in you, their reputation is at stake alongside the capital they raised from their LPs. Their hope is that one day, they will return significant money to their LPs, get a promotion (Principle->Partner->General Partner->Managing Partner) and a glowing track record that enables them to start their own venture fund. Furthermore, the feedback cycle of their investment decisions are in years not months. Therefore, appreciate how difficult it is for someone in their position to get to investment conviction— even the best of us would struggle. The institutional VC investment processes reflect this in a few ways:
No single investment decision-maker. Though a Managing Partner will have stronger influence than an analyst or associate— investment decisions are typically made by a committee of Partners who have to evaluate and vote on an investment opportunity at what is called a Partner meeting. If a Partner who is leading your deal really wants the firm to invest— they will have to work closely with you to help you navigate the firm’s internal processes and politics.
Slower wheel to turn. Typically, they will have numerous individuals working on your deal. A lead partner, their associates/analysts who will be performing diligence (customer calls, building a financial model, for example), and perhaps another partner who has a particular expertise/experience in your space that they might want a second opinion from. Furthermore, they are investing more money at a later, more de-risked stage of your company’s growth— they want to see more certainty such as consistent growth within reliable channels, minimal customer churn, and a strong leadership team. As such, they will have many questions they need answered, and will typically ask to meet your product/engineering leaders, sales leader, and finance leader to walk them through key aspects of the business.
Stronger opinions on your space. While seed and earlier stage investors might be more generalists by design— they invest in the founder, not necessarily the space— institutional investors typically have a well-formed thesis about your industry. For better or worse, this means you will have to manage their strong opinions even if you disagree with them. Furthermore, you will have to present and convince them of what you see in the space that they don’t— especially since they won’t have the vision that comes from being in the trenches of your industry.
Vague and generic rejection reasons. You will encounter very templated rejection responses because most firms won’t air the internal dynamics of their firm for everyone to see. Especially since their duty is to their team and their investors— not you. They also don’t want to say “no” forever— so often they will preserve optionality by saying something to the effect of “We could be wrong and would love to stay in touch. As you know, we invest through multiple stages of a company…” Sometimes, these rejections can feel insulting. However, your role is to move on and not take things personally. You will get a lot more rejections than you would like.
Co-Founder(s) and Key Hires: assuming you are the CEO leading the fundraising process— you will be surrounded by heads of other functions in your company such as product, engineering, sales, customer success, and finance. Each functional leader will have to bring their unique lens to the fundraising process as institutional investors will ask them for deep dives on GTM, Product & Engineering, and the Financial/Company Plan for the next few years:
Co-Founder(s): They will be considering (like yourself) the dilutionary effects of a new round of capital, control dynamics (e.g. voting rights), and how to block and tackle other key areas of the business while you lead the fundraising efforts.
Sales Leader: The sales leader will typically be most motivated by the commissions that come with meeting or exceeding quota, and the opportunity to be part of a potentially iconic company. While they are wired to sell and can help your fundraising efforts— they aren’t always wired to sell to VCs, especially if they aren’t accustomed to enterprise sales. Enterprise sales leaders appreciate the importance of taking time to establish credibility, ask lots of questions, listening, and positioning themselves as a strategic thought-partner— whilst down-market sales leaders are more likely to pitch a solution to a need right off the bat.
Product Leader: top product people start with the users and iterate on creating a differentiated experience they can’t get elsewhere. Their psychology is typically one of experimentation, curiosity, and aesthetic function. However, ‘wow-ing’ customers isn’t the only thing investors look for. You will have to train them (or work with them) to appreciate how to connect anything they present to key investment criteria such as: market capture, revenue growth, average contract value, retention and expansion opportunities.
Engineering Leader: engineers more often than not, have a default to great details. They will try to explain all the ‘how’ before answering any question directly. You will often hear this in the form of, “To answer that question… you have to understand…” While this might instill confidence in their technical prowess— they will drag investors through the weeds unnecessarily unless they get to the point straight away— which is to connect their engineering efforts to one thing: 1) How this helps the business scale quickly and efficiently, and 2) How expensive and painful it will be for any incumbent to catch-up.
Finance Leader: the finance leader (assuming they are strategic finance leaders) is closest to speaking the language of an institutional investor. While they might not be able to naturally sell the vision like the founders— they are able to communicate what the business is and how it works using a set of spreadsheets. This means they are one of the best people to walk investors through the financial model and other key aspects of the data room. However, answering detailed questions about the business can be a trap— never assume that answering more of their questions equals getting closer to investment conviction. You don’t want to spend forever answering questions without reminding them of why those answers matter in the first place— investing now is a good decision.
Customers: happy customers want two things at a high level— to continue enjoying the benefits of your product and to continually be wowed by your innovation (aka get ahead of their needs). Even more so at the enterprise or upper mid-market level— if they are reliant on your solution, then they are also reliant on your continuing to be in business because unlike individual consumers, they can’t just adopt and change solutions within minutes. Therefore, almost every happy customer will be happy to provide you a positive reference whether in the form of:
Reference calls: they will take a phone call with an investor to answer questions.
Case studies: they sign-off on case studies that you draft for them. This will also help your marketing and sales efforts.