Venture Capital

Venture Deals - Spring 2023 Course - 1. Capital Ecosystem

Notes from Lesson One of the Venture Deals Spring 2023 course, focusing on the capital ecosystem.

Recently I've been learning about venture capital financing. I wanted to understand how founders can be better prepared when fundraising. The Venture Deals course was designed to level the information playing field between founders and venture capitalists, making it an optimal starting point for my studies.

Brad Feld, the cofounder of Foundry, Techstars, and Venture Deals, and Jeff Harbach, CEO of Kauffman Fellows created this course, and the following venture capitalists contributed their insights and opinions:

Brad originally wrote a book called Venture Deals with Jason Mendelson.

Course Structure

The Capital Ecosystem, Investor Engagement, and Best Practices – 8 takeaway points

The key players in the capital ecosystem

  • Institutional Investors. They are known as Limited Partners (LPs) and act as the source of funds.
  • Venture Capitalists. They are known as General Partners (GPs), and they raise funds to invest in companies.
  • Corporate Venture Capitalists. Typically, large companies earmark capital for venture deals.
  • Accelerators/Incubators/Studios. As their names suggest, they nurse startups and get them up and running. They provide introductions to investors and are often the source of early financing.
  • Angel Investors. Angels are typically high net-worth individuals and sometimes were even founders themselves. They most often invest at the earliest stages.
  • Entrepreneurs/Family/Friends. Many companies get off the ground through the help of family and friends.

VCs make money when...

A portfolio company has a liquidity event. A liquidity event could be a sale, merger, or initial public offering (IPO). The fund will return that capital to investors, and the VC will keep their share. This description is intentionally simplified. To explore this further, see The Basics of Venture Capital Fund Distributions.

VC is a high-risk form of financing, and not all portfolio companies return capital to the VC. This fact means that VCs must seek out companies with tremendous growth and disruptive potential because those investments generate massive returns for the VC fund. It pays to be bold in your vision when pitching VCs.

Building human relationships with VCs is important (surprise!)

Most founders would say this is obvious, but I've seen startups violate this repeatedly. This usually occurs because of the startup being in a rush for cash, or the founders lacking prior relationships with VCs, or inexperienced founders not knowing how to raise funds.

Investors "invest in lines, not dots." To summarise this principle, speak to your potential investors early. Imagine the investor wants to plot you on a graph. If you reach out only when you're ready for investment, they can only assess you based on that one data point. Conversely, if you forge a relationship earlier, the investor can plot your progress on a graph. This approach will give the investor several data points to assess your growth and delivery ability.

When your company draws up a prospective investor list, target individual VCs at firms and consider creative ways your founding team can form bonds with them, like common schools attended, similar hobbies, or both belonging to an underrepresented group. Find a piece of content they've published that you can reference when you do connect with them. Work your own network to find people that know the VC. Don't know someone that knows them? Form a relationship with someone who does know them. Aim to find at least two people per VC, one who can make an introduction and another who can follow up for you later.

Engaging with investors is like dating, emphasising a human relationship, authenticity, honesty, and delivering on commitments. Handling rejection well can still lead to future opportunities.

When fundraising, your objective is to achieve a yes or a no quickly from an investor

Watch out for the 'maybe' investors. Many investors will say maybe because they don't gain anything from rejecting you early on. They might want to see if there is interest from other investors before they decide (FOMO runs strong in the world of VC!), and this slows down your process. Once you have established a relationship with the VC, achieve a yes or no quickly.

Choose a lawyer that has venture capital deal experience.

This approach will save you time, cost, headaches, and your investors will also thank you! When an inexperienced lawyer raises objections or clarifications about perfectly standard clauses in financing documents, it can frustrate all parties. The VC-experienced lawyer will also know how to protect your interests during the deal.

65% of startups fail due to team issues

Research by Dr Noam Wasserman, formerly of Harvard Business School, indicates that 65% of startups fail due to team issues. VCs will naturally want to explore your team and its dynamics. How do you work together? Where are your strengths? What about weaknesses? How aware are you of these issues?

Spend some time researching common reasons why teams fail. In particular, why cofounders fall out. You will spend much time with your cofounder and endure periods of high stress and tension, and it's a relationship which needs to be nurtured and maintained.

Preparing to fundraise requires good planning

The company story is essential. What's your pitch? VCs are thinking about the growth potential of your company. Would you be a good steward of their capital? What are the risks within your business? Who are your competitors? Is your market growing or shrinking? What does your team look like?

Keep the above questions in mind when assembling your pitch deck. If you think about risks and opportunities within your business, your pitch deck will address the most pertinent investor questions.

Use a spreadsheet, CRM, or pipeline software to track your fundraising process. I've created a template prospective investor spreadsheet based on the one shown in the course.

Divide the investors into three groups: A, B, and C.

  • Group A contains your dream investors, offering capital and deep expertise. These investors can massively influence your chance of success.
  • Group B includes investors who can only offer you only a little beyond their money.
  • Group C is the 'we are desperate and will take anything' group.

Pitch to your group B investors first. Start at the very bottom of your group B list. The benefit of pitching to group B investors first is that you'll learn much as you go. You'll understand common questions and how best to respond to them. You can use this information to refine your pitch and how you converse.

Once your group B is exhausted, go to your group A list.

If groups A and B get you nowhere, go to group C, but if you reach this stage, something might need to be fixed with your company. Check the feedback you've received to date and look for themes. You'll probably need to address recurring issues before completing a successful fundraise.

If you follow a structured process when identifying and contacting VCs, you'll end up with the right investors and waste less time.

Do what you say you're going to do

Nicole Glaros placed a massive emphasis on this point. She explained that often, founders say they will do something by a specific date and then don't deliver on that date. It could be as simple as replying with some data. Even if you don't have the information you thought you would have by that date, send an update and offer a revised timeline.

Take no well

There's a range of reasons why your particular company might not suit a venture capitalist right now. Many of those reasons are not in your control. Maintain good relationships and take no well; that venture capitalist might invest in you at a future point.

Up Next

Part 2 - Preparing to Fundraise

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