Raising Your Institutional Round: Chapter 3
This is the third 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 3: The Arc of an Investment Decision
Fundraising is the art of sales— never forget that. You are selling ownership in your company in exchange for capital. Therefore, raising money requires a nuanced sales process of moving prospects from the top of the funnel (first call) all the way to the bottom of the funnel (termsheet and money in the bank). Your customers in this case are VCs. The promise to all parties is an outsized financial return. In this chapter, I cover what the arc of an investment decision typically looks like so you have a high level understanding of the journey. In Section III of this book, I will walk you through more of the detailed choreography of moving investors from the top-of-funnel to the bottom— what to say, what not to say, how to pace, and how to lead. The process isn’t prescriptive— I am just sharing an archetypal process here so you can manage and lead the arc of an investment process.
First Meeting: Initial Screening
The VC will conduct an initial review of your opportunity to determine if it aligns with the fund’s investment thesis, focus area, and risk appetite— this criteria isn’t always transparent as each fund’s economic construction is different. Some funds, for example, are much more rigid about ownership % than others. Other funds might be more flexible but will expect more de-risked attributes such as greater traction, stronger growth efficiency, and a proven enterprise/up-market motion. In our experience, it is not worth over-researching each firm to figure out their criteria.If they clearly don’t invest in your space, invest at a different stage, or have invested in a direct competitor, you do need to be aware of that but investing too much effort in researching the nuances of their internal decision making process is unnecessary prior to kicking off the process. It is better if you run the process and let these firms filter themselves out. There are exceptions to this recommendation, of course. For example, if you are already backed by Tier 1 multi-stage institutional investors— they might have strong insights and access to other Tier 1 institutional investors. In this particular example, you can use these insights to your advantage. However, most startups reading this book are unlikely to be in this advantageous situation.
When requesting for a first meeting with a VC, they will quickly be able to assess if they are in alignment with your startup’s market potential, business model, team, and technology solution. More often than not, a VC will expect a deck before committing to a meeting— this is fair and helps streamline their processes. Many VC’s won’t even take a meeting if founders are too cagey about their deck. Some founders have tried to gain leverage in the process by being cagey about their deck to create the perception of their being special. However, VCs know this game and most are tired of it.
I am amenable to founders providing a deck and a brief blurb ahead of time— it is a fair exchange that enriches the knowledge of the innovation ecosystem. I think leading with transparency is one of the things that make SV’s learning flywheel so strong. Of course, your deck (I will cover this in more detail later in this book) doesn’t need to give away every nuance of your business. Onward.
Assuming there is interest in a meeting— they will schedule a 30-minute call with you. This meeting will be an opportunity for you to get to know one another. During this brief call, it won’t be you walking through the deck in a pitch-format— it’ll be more of a conversation (Q&A) about you and your business. It is also an opportunity for you to understand their perspective about your opportunity and what their investment process looks like— you have every right to ask them about this.
Typically, they will have briefly reviewed a short deck/blurb about your business ahead of this meeting. However, don’t assume they properly understood your business— they are evaluating numerous deals at any one point in time. We recommend asking them what their understanding of your business is so you can fill in any gaps or clarify any misconceptions.
Your goal for the first meeting: understand their investment decision making process (high level) and get a second meeting. Remember, you are moving them from the top of the funnel to the bottom of the funnel. They are not going to commit to investing after just a 30-minute call. If the investor you spoke to is a partner (we will cover more detail about how to set this up in Section III of the book), and they haven’t given clear guidance on next steps— you are within your rights to suggest the next steps. For example, you might suggest you walk them through more of a deep dive into our Go-to-Market motion on a second call— and schedule that on the spot if you can. The worst thing you can do is let the call finish with them saying something to the effect of, “We will get back to you.” Appreciate that investors can be overloaded with other commitments— other screening calls, investment opportunities, and portfolio management— they are human beings! You don’t want your process to slow down because they have forgotten about you.
Second Meeting(s): Early Evaluation
If your startup passes the initial screening or first meeting— they will want to follow-up with another meeting. Or, you might have taken control of the process by suggesting next steps. This will include a deeper dive in key aspects of your business such as:
Go-to-Market
Product
Market landscape and competitors
Business model and financial projections
Leadership team
That means a second meeting could be two or three 60-minute meetings— I just lump this into the same stage of the funnel. Depending on your confidence in key leaders and your involvement in their functions— I suggest inviting key team members to these meetings where they can lead or co-lead the meeting with you. For example, having your VP of Finance present for discussions about the business model and financial projections. Or, having your CTO or VP of Product walk the investor through your product. By doing this, the investor gets to learn more about your business and meet key leadership team members simultaneously. Furthermore, how you and your team interact with the VC will be telling of your leadership style and strength of team.
The goal of these meetings: get investors to want to dig in deeper in the form of a data-room (next phase of the process). If an investor is willing to commit their team’s time to performing deeper diligence— then you are moving closer to the potential of a partnership meeting. I even suggest scheduling a meeting off the back of releasing your data-room so you can answer any questions they have and/or walk them through key items. Again, you don’t want them to make assumptions about your business that aren’t true— you want them to have an accurate picture of your business and get to conviction (yes or no) as fast as possible. If they are already bullish about your company, the lead investor will start to champion your opportunity internally. Some leading indicators of this include:
Giving you more detailed guidance on how to frame/communicate different aspects of your business so that they can run it through their ranks.
Drafting an investment memo in anticipation of a partnership meeting.
Telling you that they thought your approach has been the right one for a long time (e.g. they have a matching thesis about your space).
Due Diligence: The Data Room & Customer Calls
This stage of the process involves more in-depth scrutiny about your company including key items such as:
Legal (e.g. certificates of incorporation, contracts, and other obligations)
Technical due diligence (e.g. IP)
Financial and operating model (e.g. cap table, growth forecast and assumptions, operating expenses, balance sheet).
Customer calls and cohort analysis. Investors will also perform their own diligence on customers by phoning them directly— you won’t be part of this process.
You can compile a lot of the information they require in the form of a well-organized data-room. I suggest scheduling a meeting off the back of releasing your data-room so that you can answer any questions they have and/or walk them through key items. Sometimes, the VC partner who is in charge of your opportunity will ask to speak to one or more of your existing investors.
Your goal at this stage: give them enough of a reason to move you to a partnership meeting. While this stage involves a lot of information sharing and clarification— I suggest you don’t get caught in the trap of providing more and more information to no end. Whenever you share detailed aspects of your business, don’t forget to bring the investor back to a higher elevation to understand why those details matter from an investment perspective:
Reward: growth, revenue, pipeline, and unlocking even larger market opportunities.
Derisked: low churn, differentiated, defensible, and efficient unit economics.
The Partnership Meeting: Your Presentation
The partnership meeting is a formal opportunity for you to pitch your company to the key decision makers at the VC firm and to address their questions in a Q&A format. The partnership meeting generally includes all the key partners at the VC firm— some who may be familiar with your industry, many who aren’t. The purpose of the partnership meeting is for all key partners to get comfortable with you and your company— not just your champion partner. If you have a good relationship with your champion, they will typically help prepare you for this meeting by telling you who the other partners are, what is important for them, what to say, and what not to say.
The goal of this meeting: gain the buy-in and trust of all key partners involved in the decision-making process so that they can confidently move you to the final stage of the process— the investment committee meeting.
Investment Committee (IC)
The IC is a group of partners tasked with evaluating the top investment opportunities and deciding which ones they want to invest in. This meeting will be amongst partners only (and potentially some advisors) — you will not be present for this meeting.
Note: Sometimes, depending on the fund, the IC meeting and the Partnership Meeting will be the same thing. But I have separated them here for the purposes of illustrating the arc of an investment.
In preparation for this meeting, your champion VC (typically a partner though there are exceptions) will prepare an investment memo for the investment committee meeting— opportunity, risks, and why this investment makes sense.
The protocol for accepting or denying an investment proposal differs amongst funds— many will require unanimous consent, others will require just a majority. If the committee approves the investment, they will move to issuing a term-sheet which outlines the conditions of investment.
The Term Sheet
Once you are issued a term sheet, you can decide how to play it. As I will cover in subsequent sections of this book, a term sheet will enable you to catalyze other investing parties in your process. Remember what I covered in Chapter 1 on herd mentality— to maximize the chance of getting one investor to move, you have to try to get as many investors as you can to move. Getting to the first term sheet is the hardest part!
Assuming you have numerous VCs at the bottom of your funnel (deep diligence and partner meetings), you can use this term sheet to start to force other parties to move to conviction, and to “shop” around for the best terms. Most term sheets are reasonably time-bound (within 5-10 working days) — this allows you and other key stakeholders (co-founders, investors, and legal team) to review and redline the terms.