The Great Game: How to Raise Venture Capital

This article was originally published on 1871 here, and written by Yun Tai.

Movies, television, and myths -- these are three things that have shaped our definition of what happens in Silicon Valley and venture capital. But if you think investors really sign million dollar checks over a cup of coffee, then you’d better grab one yourself and get comfortable. Troy Henikoff, the Managing Director of MATH Venture Partners, an early to growth-stage fund managed by a seasoned team of hands-on investors and operatorsexplains how the great game really works.

Troy Henikoff, Managing Director of MATH Venture Partners, gives a presentation at Techstars Demo Day.

On average, venture capitalists will only invest in one out of every one hundred deals. And while those odds might seem high, plenty of founders win funding every single day. However, it’s not as simple as the media makes it out to be -- read on for some tips on how you can raise venture capital for your business.

  • Invest in Relationships

Henikoff says that too many founders make the same fatal mistake - they show up at an investor’s doorstep at a point in time and expect to receive a check. The reality, however, is that VC’s invest in lines -- not points. That means your best bet is to build a relationship with a potential investor instead and show consistent improvement over time. And because investors are literally swamped with funding asks, Henikoff recommends kickstarting investor-founder relationships by asking for advice not money.

“You want to have a series of meetings where you show steady improvement long before you ask for money, so the best way to build a relationship with a VC is to ask for advice first and not the money. Ask for advice, build the relationship, show that you’re growing, and the odds are going to be in your favor.”

  • There Are No Absolutes

In any given industry, there’s bound to be some advice floating around that’s just plain wrong. That applies to venture capital as well. In fact, one common piece of advice that’s heard early and often is that one needs to have a certain amount of revenue before pitching an investor.

Not the case.

In fact, Henikoff says that there is no such thing as an absolute ‘number’ or ‘metric’ in the VC space; rather, most deals are situationally dependent. He says that entrepreneurs should focus on where their own companies are and the space that they’re operating in rather than looking at what everyone else is doing.

“If there were a single right way to raise money, somebody would have written a book about it by now, and everybody would be following the advice step-by-step. That’s obviously not the case because in reality, things are far more subjective.”

  • Know Your Audience

You often hear founders asking about what VC’s look for in a business.

The truth?

It depends. Each investor has their own philosophy on who they invest in and why. For example, MATH Venture Partners looks for companies that have an unfair advantage in customer acquisition. What’s more, Henikoff says that investment strategies will vary even more from one stage to another.

“If a company is in an early stage, then it’s more dependent on its founders and the team. If a company is in a later stage, it becomes more dependent on a proven business model. So, in the early stage, where we operate, you’re going to invest in founders that you believe in because chances are, the business model may change, but the founders will remain the same.”

  • High Returns, Low Risks

At the end of the day, investors are looking for two essentials: a high return on their investment and a low-risk path to get there. You can have the most brilliant idea and/or a history of solid execution, but if you can’t show that your business will generate strong returns -- or that you have adequately de-risked the business (for the stage you are at)  -- then you’re going to have a very hard time fundraising. Henikoff says that founders often struggle to secure an investment because they can’t prove either.

“If you prove to an investor that there’s a big pot of money and that you’ve got a low-risk plan to get there, then they’re going to write you a check. Fundamentally, your pitch to an investor should show that -- yet so many entrepreneurs miss this.”

  • Back to the Future

During a pitch, entrepreneurs are expected to talk about the problem that they’re solving and the work that they’ve done. Those issues can often become the main talking points but unfortunately, that’s not all that investors want to hear about; rather, they want to know how you’re moving forward, and they want to know what your plans look like down the road. Henikoff recommends focusing less on what you’ve done and more on what you’re going to do.

“Investors aren’t looking to invest in your past, they’re looking to invest in your future. At least 60 percent of your pitch should be focused on the future and the more defined that path is, the more likely you are to get an investment.”

  • Do Your Homework

This is an obvious one, but we want to make sure you have a checklist of all the things that you need to complete before sitting down with an investor. First and foremost, make sure you do your research on an investor or firm -- you never want to head into a meeting asking to know more about the individual or individuals that you’re speaking with.

Then, as a founder, you should be able to clearly and articulately explain the vision for your company along with where it’s going and why. Additionally, founders should always know their company’s numbers and metrics along with how they drive growth for their business. Henikoff says that entrepreneurs who ramble and don’t know their own companies inside-out are a major turn-off for investors.

“I look for individuals who answer with the headline, meaning that they can answer a specific question that I ask them. Many times, entrepreneurs will give you a long explanation and it feels like they’re being defensive or that they’re unsure. If I ask you what your customer acquisition cost is, I’m looking for a number -- not a thesis.”

  • Get on the Gridiron

We’ve gone over a number of different points listing the qualities that investors look for in founders -- but what should a founder look for in an investor?

The answer is, value.

And that doesn’t just mean money; that means someone who is willing to roll up their sleeves and help when asked, whether that’s with operational experience or by leveraging their connections. A good investor is someone that you can build a deep relationship with and provide you with value far beyond a cash investment.

Henikoff suggests that founders seek investors as if they were a football coach seeking players.

“You want to fill out the places where you’re weakest, so if you aren’t great at financing, you want someone with financing experience. If you haven’t scaled a business before, you want someone who has. Just like in football, you need someone to block, someone to run, and someone to pass. Each position requires its own set of skills.”

  • The Golden Rule

We’re going to end this one with the most important decree of them all. Sure, you’ve heard it before but it bears repeating because movies and television shows seem to have an affinity for cocky, egotistical founders. In reality, being a jerk will get you nowhere. Henikoff believes that founders can quickly squander a promising opportunity with a poor attitude.

“There’s a fine line between confidence and arrogance. You want to come off as someone who’s sure of yourself but not someone who thinks they know it all, humility is essential in this business because we are all learning new things every day. It is also critical that you are respectful of everyone; you really never know who’s going to have an input in an investment decision…”

That’s a lot to take in for now. And while there are plenty of nuances involved when it comes to venture capital, these tips will help you get started on your journey to raise funding. And yes, we know it’s very challenging but, from time to time, it helps to think of VC as a great game -- the more you play, the better you get.

 

Follow Troy Henikoff on Twitter @TroyHenikoff or learn more about MATH Venture Partners by heading here.