March 26, 2013
We’ve got a few companies going through very important financing processes right now. Fortunately, these are really strong busiensses with great prospects. There should be no question as to whether or not they are successful in raising the money they need to finance their businesses.
But as we all know, raising the money is at best 49% of the battle. Who writes the check, and on what terms, will each have enormous impact on every shareholder’s long term prospects.
Raising money is an area that we tend to get pretty actively involved with our portolio companies. Unlike most of what these companies do, it’s an area we actually have some genuine expertise! And like just about everything else, this is a process that needs to be managed strategically, with clear focus and goals.
As a rule, entrepreneurs tend to do a very good job of identifying their best financing prospects. They know who the top firms are in their space. They focus on partners who have reputations for being great to work with, have portfolios full of relevant, comparable companies, and networks that can be helpful. Left to their own devices, our companies will generally identify a great list of top prospects.
And then they do the one thing that’s almost certain to screw up their chances with those prospects.
They hurry out and schedule meetings with them.
But what could be wrong with that? You think strategically about your optimal investor, you come up with a thoughtfully prioritized list of candidates, and then you schedule meetings to work your way through those top priorities, perhaps developing a list of second and third tier candidates to move onto if the first tier guys don’t work out.
Running a financing process this way would be like asking Mariano Rivera to go from a cold seat in the dugout straight onto the mound to pitch the ninth inning of a playoff game without first spending some time in the bullpen. Even Mariano, the greatest relief pitcher in the history of baseball, just wouldn’t be ready.
Trust me, I’ve made this mistake myself. I’ve raised money several times as both a VC and a CEO. I’ve had the fortune of being able to get meetings with the ‘perfect’ investor. And I’ve rushed naively into those meetings.
The good news is, you tend to learn a lot from your top prospects. The best investors are very good at poking holes in your strategy, sussing out your weaknesses, and pointing out missed opportunities. I’ve always found myself rushing back to the office after these meetings, scrambling to update my thinking, my story, and my materials on the basis of that feedback.
The bad news is that I had to get that feedback from my very best prospects. And in the process of poking holes in my business, they likely concluded that there were, in fact, too many holes in my business. Even when the story was pretty solid, I was still new at delivering the pitch, so it never came across as well as I would’ve wanted. So my best prospects said no, leaving me to move onto the second tier, now with a vastly improved story.
I always advocate the following approach. It may seem a bit overthought, but financing is a complex sales process like any other, and needs careful management to optimize the results. In fact, the following approach can apply to just about any sales process you might be confronted with.
Identify and prioritize your prospects, separating them into three tiers. Then do your best to schedule meetings in the following sequence:
- Have a single meeting very early on with a low priority, Tier 3 prospect. This is your absolutely zero consequences dress rehearsal. You need one you can burn. And with no consequences, you can feel comfortable experimenting with ways of delivering your story that you’re not quite sure will work.
- Then schedule 3-6 meetings with Tier 2 prospects. These should be firms and partners with whom, ultimately, you would be happy to work. Included in this group should definitely be some folks with deep domain expertise in your sector. People who will, with great authority, pick apart the details of your go to market strategy and likely have some good ideas for how to improve it. The point of these meetings is to impress some folks you’d like to work with while also taking a real beating. Make sure you leave plenty of time in your schedule here for rethinking and reworking your story and materials. If you’re listening and learning, you’ll want to have a different story for Wednesday’s meetings than you used on Tuesday.
- With the polish that comes from those learnings, now hit your top prospects. You should be very good at the pitch by now. You will have fielded 90+% of the zinger questions that are going to come your way, and you’ll be ready for them the second time around. The story will be tight, and you will be confident.
- Finally, revert to the balance of your Tier 2’s. Hopefully you’ll be able to get some additional interest from great potential partners here, and that will help to keep pressure on your top prospects, who are ahead in the process, but not by much. Finding ways to keep the whole process moving along is always critical.
- And of course, if all else fails, you’ve then got a really refined story with which to approach the remainder of Tier 3. Here’s hoping you never get there.
It sounds pretty simple, but it’s amazing how hard it is to stick to this discipline. When somebody offers a warm introduction to your dream partner tomorrow, it’s hard to say no, I need to wait.
Just remember Mariano. He’d never go to the mound needing that crucial strikeout without first getting in a good bullpen session. If you think you don’t need the same thing, you’re kidding yourself.