Do's and Don'ts of raising capital

Being that it is the New Year and all, I’m going to try to spend a bit of time this week sharing some insights into the world of VCs and capital providers.

During a meeting of the Globe and Mail’s Small Business Advisory Panel last week, it dawned on me that many entrepreneurs may not know the basic do’s and don’ts of raising capital. Here are a few highlights from the perspective of people who cut cheques:

Do’s:

1. When you ask to meet with an prospective investor, have a defined amount or money in mind, or at least a range, and know what the use of proceeds will be.

2. Prepare an overview, and there’s nothing wrong with PowerPoint. The pitch can be 15-25 slides long. No one needs a 50 page deck for the first meeting; there’s no way you’ll get through it all during the first session in any event (see below).

3. Ask for 60 minutes, and no more. That should be all that you need for the 1st meeting.

4. Show up on time.

5. If you are bringing your own laptop, make sure you know what you plan to do with it during the meeting: run the show on a wall, link in to an overhead projector, etc.

6. If you feel you need a non-disclosure agreement executed prior to the meeting, don’t be surprised that the prospective investor might want you to sign their own – rather than yours. If you see 100 or more companies a year, you can imagine how hard it would be for the investor to execute 100 different NDAs.

7. Review the website of the investor prior to the meeting. If you don’t know what type of firm it is (equity vs. debt vs. LSIF vs. agent vs. principal), you might be wasting your time – and theirs.

8. If you are going to engage an agent, make sure you know what role you want them to play. Some deals benefit from an outside advisor, and some may not. As much as VCs don’t like to think that entrepreneurs feel the need to spend part of the raise on fees, one wouldn’t do a deal with lawyers or accountants. But if you get an agent involved (and sometimes that agent/advisor can also be a lawyer or an accountant if they have the specific expertise), use them for the hard stuff, like telling you what is practical on the key negotiating items, what’s “market”, and so forth.

9. If you get a term sheet and are trying to compare one investor’s proposal to another, make sure you ask about prior deal references. The price/terms of a deal are only part of the decision-making process, or at least they shouldn’t be the sole criteria. Ask to speak to a couple of prior investee companies, and ask how many deals have closed in the past year or two. Do at least some due diligence on the group you are talking to, as not all teams/funds are the same – by a long shot.

Don’ts:

1. Don’t send a 10 page NDA to a firm. This is the deal: we investors promise to not steal your idea or tell a competitor about it. We promise to keep your private data private. We promise not to poach staff we meet during the process. That shouldn’t take 10 pages to document.

2. Don’t ask for a meeting, pitch your story, and show a forecast that “isn’t board approved”. If you aren’t yet ready to raise capital, why ask for the meeting?

3. Don’t go into a pitch without knowing “where your existing investors live”. That’s code for: know whether or not the current investors will play on the upcoming round or not.

4. Don’t send a PDF of your financial model. It’ll only make the investor wonder why you don’t want to share the working excel version.

5. If you are raising anything post an Angel round, don’t ask for a meeting if you don’t have a financial model ready. Having a pitch meeting and then sending a model a couple of weeks later ensures that 1) the iron may now no longer be hot, 2) the VC might have come to an uneducated, yet quick, no, or 3) you’ll seem disorganized, which may be normal for early stage companies but not a confidence-builder.

6. Don’t compare yourself to Google, as in: “What we’re doing is more robust than Google”, “What we’re doing is harder than Google”, or “We are going to be the next Google”.

7. Don’t bring five or six company people to the first meeting. There are rarely enough chairs anyway, and don’t some of these people have jobs that don’t involve raising capital?

8. Don’t say you’ll send follow-up material “in a couple of days”, and then go silent for several weeks. If you ask for a meeting to raise capital, and the prospective investor is interested, be conscious that they see 500 or more ideas a year and can’t possibly waste five minutes let alone a couple of hours.

9. When you do send forecasts, don’t send a budget that shows revenue going from, say, $1 million this year to $100 million in three years’ time. People will think – fair or not – that you’ve lost your mind.

10. When talking future valuation, don’t use numbers that involve “billions”. As in, “We’ll be worth north of a billion by 2012”. People will think – fair or not – that you’re on crack.

11. Don’t be offended if the investor turns you down, as long as they are polite about it.

These are just a few of the things that come to mind. And yes, they are all from real, live situations. Since we’re in the business “of saying yes” to entrepreneurs about their prospective deals, these simple points should help people stay clear of some avoidable pitfalls.

MRM