You have positioned your company for success, you have happy customers, and you feel confident about the future. Now you realize it’s time to work on multiplying your revenue. And for that, you’re going to need more capital and –most importantly — the right investment partner.
There are six key steps to finding the right growth stage investor.
- Identify the investors that will add the most value
- Be realistic about top business risks that could prevent funding
- Pick the metrics to obsess over
- Build the story
- Hit your top targets
- Establish a framework for making a decision
1. Identifying investors
Choosing investors is an irreversible decision. They are along for the ride for longer than almost any employee. It is therefore critical to pick investors that have experience in guiding companies whose patterns you want to emulate.
The process of identifying investors should be ongoing. Ask for warm introductions to investors whose market views, operational expertise, or track record you admire. They should be the type of people that make you suitably nervous and always leave you with an insight.
Reference check. Then reference check. Then check again. Do not rely solely on the references the investor provides. Speak to CEOs of companies that have struggled, sales leaders, and even investors at other funds to understand how they are perceived in the market. Ask your existing investors for their take, and judge cohesion between them and potential future board members. Conduct reference checks early in your investment process and spend about as much time pitching to them as conducting references on them. You do not want to have to stall the investment process to conduct references. Ask questions like:
- Would they be the first person you would call to invest in your next venture?
- When have they been most helpful on your board?
- What metrics do they care the most about?
- When was a time they were trying to be helpful and just weren’t?
- How did they react to a down quarter or a piece of bad news?
- How would you have changed the way you worked together?
- What is their superpower?
2. Identifying top business risks
Use fundraising as a forcing mechanism to spend time on risks that could cause major strategic issues for the business.
This might be identifying and rectifying key employee flight risks or a product usage statistic that is not trending in the right direction. Whatever the issue is, get a SWAT team in place to deal with it, and at least be in position to articulate the long-term solution to this problem. Earlier companies should focus more on product, while later companies should focus more on distribution.
VCs at series B and onwards obsess about your distribution model. Do you understand why customers are coming to you? How well thought out is your go-to-market strategy? Are you purely running on inbound? How have you bolstered your best channels? What do you know about productivity and sales efficiency?
3. Knowing your success indicators
This is one of my favorite questions from investors. It helps them assess your ability to run an organization efficiently and provides an opportunity for you to show a deep understanding of your market.
Present indicators of the health of your business:
- Do multi-year contracts matter for your business?
- Is net retention an issue?
- How do you use product usage metrics?
- Is your annual contract value (ACV) increasing?
Ideally you write a quarterly email for existing investors about the state of the business and the challenges that could prevent you from reaching your next inflection point. Then you could just send the previous letter to any prospective investor.
4. Creating your story and data room
Build your pitch deck with the team. This is a fantastic opportunity to resell your executives on why they show up to work every day. You should also use your existing investors to give you pitch practice and refine the story (thanks, Sarah and Greg from Benchmark).
For example, at my company, we believe a societal change will occur when cryptocurrencies are used for everyday transactions. This isn’t a view everyone holds, but it’s important to start with this as it is core to our company’s mission and, if nothing else, will disqualify people who don’t share our worldview. What do your investors need to believe for your business to be a $1 billion company?
Build a simple spreadsheet to track prospective investors. Know which investors you would like to speak to. Keep tabs on how you have been introduced to each, and ensure you keep everyone in the loop on progress week over week.
Create a shared folder with an index and owners for the different files you wish to put in the “data room” you plan to share with VCs. Ideally you are raising soon after a great quarter and you can give static EOQ numbers.
Two pitfalls to avoid:
- Sharing your data room with too many VCs that could end up investing in a competitor
- Allowing too long between data room access and their term sheet decision, as everyone is looking for a reason not to invest
5. Contacting investors
Speak to partners. They are going to make the decisions and ultimately will be on the board. On the other hand, associates, principals, and vice presidents are helpful in assessing the culture fit of the firm, navigating the way to the decision makers, and geeking out on the details of the business. It is great to build a rapport early on and schedule afterwork drinks or breakfasts with your top targets. Ultimately, the principals write a lot of the investment case, so they need to be excited about the opportunity. However, a lack of partner time is a bad signal for both long-term involvement and short-term interest.
Most investment firms will have the same cadence of meetings, customer references, and data room access. They will need to spend time with the founders and understand the organization’s structure. Some of the process is ritualistic and some of it is useful for them in building an investment case document for their partners. Have data available at the right time and make customer introductions to make it as easy as possible for them to build an investment case.
Good firms that are serious about the opportunity will move quickly and either will already have or will gain market access themselves, without too many introductions. Anyone who claims there is only good feedback from customers did not ask hard enough questions or did not speak to enough customers.
Move quickly from the introductory meeting to a follow-up meeting, a partner meeting, and data room access to limit the amount of time your team and the investors spend on the nitty gritty details. Like the investors, you should have already done a lot of your diligence in advance and will be able to answer last minute data requests.
6. Readying a decision framework
Make sure you have a framework set up in advance that will help you make the final decision on an investor. Your framework should map to questions most critical to your particular company.
For example, at my company, we built a framework based on several distinct areas where we thought we needed help:
- Has this person seen enterprise software sales from early to late stage?
- Will this person have a network we can tap into for advisors and hiring?
- Do they understand the metrics we should focus on at each stage of the process?
Domain Expertise: Cryptocurrency
- Are they tapped into the cryptocurrency market?
- Will they keep us accountable to staying ahead of industry trends?
- How good is the VC brand as a company and as an individual investor?
- Do they have a reputation for picking winners in our market?
- Does the partner have a global network and outlook to support our globally distributed markets and people?
- Does the partner have experience with companies that have scaled internationally?
- How much can they think through the current product and where it might fit within the future workflow of our clients?
- How big can they think beyond the existing product lines?
- Do we get slightly nervous when we sit with them?
- Will they challenge us to create operational excellence?
- Will they create a sense of urgency?
Domain Expertise: Financial Services and Government
- Does this person understand financial services? Do they understand strategic drivers in these businesses and the companies that have been really successful?
- Do they have experience in selling software to governments?
Using the Criteria
- Who matches the above criteria best?
- Who is going to focus on the right aspects of the company to get us to the next stage?
- Can this person scale with the company for the next five years?
- Who is going to give enough accountability for the board?
- Who would be a good complementary partner to existing board members?
What it takes for investors to win the deal
If you drum up the interest, the last question a VC will ask is: “What will it take to win the deal?” The right answer is the one that meets the criteria above, but the soft touches also matter.
Things that helped Accel win the deal for our Series B:
- Maintain touchpoints for five years prior
- Speak to 20 customers
- Produce a list of obscure high quality target accounts that were not yet in our pipeline
- Reconcile our financials personally
- Dinner Monday night (San Francisco), Tuesday coffee (Palo Alto), Friday lunch (Copenhagen)
Other things we appreciated:
- Sunday dinner with physical term sheet
- Walks around Washington Square Park in New York and coffee in an investor’s house
- Cigars at the parking lot of San Francisco Airport
- Quick intros to a selection of people that are interested in the deal so we could pick the people at the firm that would be the most helpful
- Being on the industry circuit and showing deep knowledge of industry trends
Things we experienced with other VCs that were warning signals:
- Weak scheduling and follow up outside of meetings
- Slow introduction to partners or useful people in the deal
- Introductions to people who were not relevant to the fundraising process
The fundraising process is never as linear as what I’ve laid out here. There will be data requests that are scrambled together at the last minute, and there will be venture capitalists who will attempt to pre-empt the process. But sticking to some structure and framework when making this decision will help ensure good decisions and clear feedback for those investors who are not part of the round this time but might be helpful at a later stage.
Jonathan Levin is co-founder and chief operating officer of Chainalysis, a technology firm that offers cryptocurrency investigation and compliance solutions to global law enforcement agencies, regulators, financial institutions, and businesses.