Dear Davis: Relationship Advice for Entrepreneurs, Part II

Mahatma Gandhi once said, “Where there is love there is life.” He was talking about love, but the quote works just as well if you’re talking about raising money. Raising money for the worthy venture is the lifeblood to entrepreneurship, innovation, and progress of the life we are experience here together. In honor of Valentine's Day, here’s some more relationship advice for entrepreneurs fundraising. You may think that there's not a lot of connection between the two subjects: finding love and raising money but if you dig a little deeper, I think you'll find that they have a lot more in common than at first glance. Here we go. 

Dear Davis,

It seems like there’s a huge hurdle getting that first date with a venture capitalist. So, what is the best approach to get in front of a VC that you’re not directly connected to?

Tentative Match

 

Dear T-Match,

Great question. I think the answer is in how investors must spend their time. Look, when you boil down the job of a private equity investor, we raise money from different investors and then deploy that capital into companies with the capacity to grow faster than investment opportunities in other asset classes. Now, knowing our job is to find new companies to invest in, one might think it would be easy to connect – so why is it so hard so often?

Speaking for our team, we talk with hundreds of entrepreneurs over a year for Prelude and we will connect with another 2-3X more across the whole platform of Mercato Partners. We want to talk to you. Seriously. But we have a lot of things on our plate as well. We have deals we are chasing, deals in the pipeline, deals that walk-in the door, deals introduced by friends of the fund, deals our internal processes are uncovering and deals that are in the closing process. 

I know we are all looking for ways to get the “VIP pass” to life. The key to breaking through the noise when it comes to connecting to investors is network, network, network. If you utilize those in your life that have a vested interest in your success, who are connected, you will open doors for yourself and others.

Some of the best approaches I have experienced connecting with founders.

• Networking 101: A warm handoff from a trusted party.
  • Get on LinkedIn or other platforms and learn about who knows your target VC in your network and get them to say something nice about you and commit the VC to meet with you.
  • It is super helpful if you provide your network connector with the email or paragraph that allows them to make the into to the VC quickly and with the correct voice/info.
  • When the intro is made, be responsive.
• Networking 102: Create a lasting memory
  • Get your network connector to invite your VC target to an event that you will be attending as well.
  • Do some research and find out what is interesting to your target and make the outing memorable. Doesn’t have to be extravagant or expensive.
  • Dinner, lunch, NBA game (watching, not playing), skiing, mountain biking, golf etc. 
• Networking 101.3, Offer something before asking for something.
  • Do some research and find out what are your target’s cultural or academic interests. Package it up in a meaningful physical gift or email, pick your moment and send it to them.
  • Then close the loop with them directly or through a trusted network connector.
  • What are some ideas?
  • Physical books, e-book recommendation, industry article, Netflix documentary, music recommendation, or restaurant recommendations in their city or another if you know they travel there often or will travel there soon. If you look and listen hard enough you will find something meaningful to offer them.
  • After you garner respect and a connection of your own, invite the conversations.

Your follow-up question might be, well who in my network should I think about reaching out to first?

I would leverage those in your network who are community service providers. VCs and service partners typically have close relationships. Think about all the people you know who are attorneys, CPAs, accounting firm leaders, accelerator leaders, university leaders, business focused magazine publishers, PR article editors and regional banks/lenders to name a few.

These people should have the ability to make a warm trusted connection to the right people. They have a vested interest in your success as a network connector of yours, but they for sure have a financial incentive to help as you grow your business.

Dear Davis, 

How do I know I’m getting a good deal on my money from a VC firm? Seems like a much more difficult process to get some comps than the average purchasing experience.
What Am I Worth?

 

Dear WAIW,

Please to hear from you. First, I want you to know from me you are worth it. Entrepreneurship is noble and I applaud you for your strength and willingness to push boundaries.

You question is great but the answer is not easy. No two businesses are valued the same. That is the art part of raising capital. You need to have a meeting of the minds with your target VC to find the equilibrium that will propel your project into the main stage.

The data is out there, that would allow you to narrow in on values that are being provided by investors for businesses like the one you are building. A great place to start is other financial partners. If you already have a banking or CPA firm, sometimes they have access to industry data publications that would allow you to vet prices.

Also, you can connect to online sources and pay for the most relevant data, which usually comes out at the end of each quarter. Places that are useful are Carta Founders Center, Angel Resource Institute (Halo Report), Cooleygo/trends, and capital market reports from Aumni.

If you are a university student you also should be able to get a free or discounted login for private data market tools like Pitchbook or CapIQ, which will allow you to find private and public comparable companies to yours and see what they are trading for.

Dear Davis, 

When I first met our investors, it was like a dream come true. They were kind and generous, interested in everything we wanted to do. We were walking around in a daze. Now, a year later, it seems like we can’t do anything right. They’re always nagging about sales forecasts and operating plans. We are burning too much cash. We don’t make enough money. Is this what it’s really like? 
Honeymoon Hungover

 

Dear Hung,

I’ve seen what you’re talking about. Where’s the friendly, cheerful investment team that wined, dined and diligence us? You wake up the day after the term sheet is signed and it’s like the all the magic is gone.

Well, I’m here to say two things. First, some change is inevitable. Relationships pre and post term sheet are as different as pre and post money valuations. Our relationship is more serious. The stakes are higher and so too is the level of trust and transparency and accountability. Of course, it cuts both ways. Like any good relationship, entrepreneurs should expect things from their investors as much as it goes the other way. The bottom-line is that the honeymoon was AMAZING, but it is now time for us to provide for one another. 

That said, it should still be fun, and you should be able to spend hours with your partners and enjoy the journey. If that is not the case for you anymore, please make sure you don’t make the same mistake on the next round of financing. You can avoid any surprises or misunderstandings by doing your own diligence on your future money-in-laws. Reach out to other portfolio companies, listen to what they as well as the investors say about the philosophy, working style and other characteristics of the relationship. Go out and get to know you next investors now, it is never too early.

It is ok if there is not a good cultural or personality fit. Life is too short to work with anyone you don’t enjoy. That’s one of the things the investors will be thinking about when they are doing diligence on you. Aside from the idea and the team and the financials is the idea of fit. Sometimes a deal can check all the boxes except fit. In those cases, the smart money will take a pass and so should you.

Dear Davis,

I have developed an NFT platform, based on NFC, KFC, MMA, and MBA technologies. We are getting approval from the SEC, FCC, FDA, FIFA, and the cast from the O.C. We are taking bids starting at $100M for 2% with a board observer seat, a Yeti Rambler mug, and a Patagonia puffer (only XXLs left, sorry). Call me.
Not Lizzie Holmes

 

Dear NLH,

Thanks for the offer but I think we just ran out of checks and the new ones are on reorder.

Similar in the realms of love, realistic expectations of your future partner are helpful in landing a deal.

Dear Davis,

My fellow start-up buddies and I were hanging out and we started talking about valuations. Well, before you know it, they are all out there and it’s clear that their valuations are a lot bigger than mine. It was kind of embarrassing. Maybe I should have held out? 
– Objects in the Mirror

Dear Mirror,

Size is just a number. There are big downsides to an upsize. Suppose you get a big valuation. Great. Makes you feel positive, especially if you have a college reunion coming up. I think you’re better off renting a Ferrari Monza. Here’s why.

A bigger valuation, all other things being equal means that you and your friends are really going to have to hit on all 12 cylinders and deliver the anticipated growth. Miss revenue targets, hit an economic downturn, fail to launch new product on time, and now suddenly, you’re looking at a down round and your left holding your deflated valuation. If you want to go for it, go for it.

I might advise to focus on the real. The goal to a healthy, long-lasting startup valuation is the one that continues to grow with every new stage of maturity. What are you building? Who are you building it for? Who are you building it with? What do you personally value and what do you collectively value together? Building an innovative business that will provide value to the families and individuals involved for generations if special. As the founder making sure you keep the company on a healthy growth path is paramount to the future vision. Valuation ain’t nothing but a number but an excessively high valuation leaves you a lot less room to maneuver in the future. It can also make you lose sight of the vision and force different decisions in the short-term.

Dear Davis,

I have a question. My partners are really pressuring me to do a SPAC. I’m not sure I’m ready. Of course, I’ve read all about Special Purpose Acquisition Companies and I admit, I am a little curious, but I don’t know it’s something I feel comfortable with at this point. Maybe in a little while but the timing seems rushed. What do you think?

Spatchcock Chicken

 

Dear Spatch,
 
Of course, the decision to do a SPAC is a deeply personal one. Some have done it and had a life-changing experience. Others vow never to do a SPAC again. How can this be? Why the big variation in responses? It all hinges on what you want. 

SPACS are a great way to gain access to public financial markets. It’s a big world out there and no longer will you be beholden to a handful of PE investors or angels. On the other hand, it is a big world out there and there is no guarantee that you won’t be beholden to a handful of activist investors. Also, remember the added requirements for public companies, reporting, disclosures, analyst calls, etc. 

Ask yourself why you want to be part of a SPAC. If it’s just to drive a liquidity event for founders and early investors, there are other ways like direct secondaries that can do the trick. If it’s to finally swim in the ocean of publicly traded stocks, a SPAC can be the most efficient way to get there.

As I said last year, like love, fund-raising and running a startup is tricky at times, but very much worth the journey if it is right for you. Also remember, your capital partner relationships are long-term commitments. Don’t rush into them and don’t settle. Most startups are 5 to 8 years before an exit from the initial fund raise, some much longer. If you don’t get along with your financial partners during this time, that is large portion of your professional career that could have been more enjoyable than it was.

Happy Valentine’s Day to all and good luck out there.

 

TechBuzz welcomes back guest author Davis Warnock for Part II of the Valentine's Dear Davis Entrepreneur-VC relationship advice series. A seasoned early-stage investor, Davis was one of the founders and is currently a GP at Prelude, Mercato Partners' venture capital fund. Alongside his partners he invests a newly raised fund into General Technology, SaaS, and Cyber Security companies. Davis can be reached at davis@mercatopartners.com