Technology

The Myth of Perfect Timing

Why You Should Raise Money Sooner Rather Than Later

Raise Capital Sooner than Later‘Let’s delay the financing. If we wait two quarters we will close a couple of things in the pipeline and will command a higher valuation.’

The logic seems very solid. However, it’s usually a lousy idea. First, no one can predict the future. You may win two new key customers, but you might also unexpectedly lose two key existing ones. Second, if you are growing well enough to attract capital, the same “wait and get a better price” logic will still apply two quarters from now, delaying your financing in perpetuity.

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Customer Diligence Requests

cell-phone-annoyed-hed-2014If you sell to the enterprise and are raising capital, you need a plan for interacting with your key customers during the raise.  Potential investors want to talk with a young company’s customers to validate the customer’s intent to keep buying the product or service. However, management lives or dies with its key customers. It needs them for larger future purchase orders and prospective customer references. Asking customers to take prospective investor calls, often from multiple investors, is spending precious relationship capital.

Investors tend to be curious and skeptical types. The questions they ask about how the customer views the capabilities of the team or its products might cause the customer to view the company differently.  What happens if the company does not come to terms with an investor? The customer is then wondering about vendor viability if a funding is not announced.  The type of investor you want will respect the value of customer time and confidence. However, investors need to do this diligence to assess risk before investing.  Managing customer conversations to everyone’s satisfaction is tricky, but we have a few suggestions that have proven helpful.

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Go Get an Outside Lead

Opening door, Canon 1Ds mark IIIIndustry thought leader Fred Wilson has written recently advocating inside led rounds and assertive monetization of pro rata rights. Fred is delivering fellow early stage VCs graduate-level education on maximizing fund return. However, he is, uncharacteristically, not advocating what may be best for building the company. Once a company is out of development and focused on scaling – moving from $10 million in revenue toward $50 million – an outside lead for the next round makes a lot of sense.

I am biased. I make a living raising growth rounds of capital led by new investors. However, I choose to do this for living because I believe the process is healthy and necessary for growing companies.

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Strategic Investors Are Back. How Should You Engage?

chess figurinesNearly every financing we execute involves a discussion on the benefits of including strategic investors.  Taking strategic capital is increasingly a financing alternative. Large tech companies are becoming more active and hiring staff to manage minority investments. We find entrepreneurs often misunderstand the perspective of the corporate investor. We also see early stage VCs who are overly wary of engaging corporate investors.  We believe in including strategic investors in a financing process. A thoughtful approach can produce a good outcome. We have also learned that poorly conceived partnerships will become frustrating relationships that create a future distraction.

Follow the suggestions below to increase the odds of success.

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Reverse Diligence on Investors

Reverse Diligence on InvestorsWe raise growth capital for tech companies, so I spend a lot of time with CEOs trying to choose between Firm A and Firm B as an investor.   I wrote an initial post on questions a CEO should be asking directly of a General Partner wanting to invest in the company. In this follow-up I share some questions to be asked when talking with external references.

The most valuable source of discovery is discussions with CEOs where your prospective boss has been an investor / Director. Request a few references. Any reputable investor will have them at the ready. Most will be surprised and disappointed if you do not ask.

Pursue the offered conversations, but also dig around on your own to find references not offered. A LinkedIn or Crunchbase search of current and former portfolio companies will turn up a few former senior executives. You may even find executives who were fired by the investor. Some references will share complaints over issues they brought on themselves, but you can usually filter the feedback and learn from it.

A few good questions for portfolio executives regarding how your prospective investor behaved include:

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Diligence is a Two Way Street

 

174440819-resized-600.jpg-300x200We raise growth capital for tech companies, so I spend a lot of time with CEOs who are choosing a new investor from between Firm A and Firm B.  Picking your investors is a critical decision that has long-term consequences.  Given the investors are often future Board members; you may be hiring your boss.

While the investors are busy scrubbing your background with calls to former colleagues, customers and classmates, you need to make time to do the same to them.  The sources of information on your potential investor include: (i) the investor, (ii) the references the investor provides (usually happy portfolio CEOs) and (iii) references you discover (often less happy portfolio CEOs).  In this post I will discuss the first group.  I will follow this with a future post on questions for portfolio executives.

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