How To Raise Venture Capital Funding | Lessons from Eyal Malinger
As much as I would love there to be, over the last few years I have learnt that there isn’t a one size fits all, yellow brick road to success for raising any kind of funding for your business. Every raise, just like every pitch, every business and every team, is different.
Towards the end of last year I had dinner with Eyal Malinger from VC firm Beringea who shared some wisdom on what he looks for in investments.
Firstly, before you go any further on your investment journey, it is vital that you become crystal clear on what you want from your business. What do you want to be when you grow up? Is this a lifestyle business? If it is a lifestyle business (i.e. generating enough money for you to live the life you want but not necessarily something that is going to grow on a global scale) do you really need to take on venture capital funding? By defining what you really want for yourself and for your business will help you work out if this is really the best route for you.
Once you have established what you want and if you are still reading this post, I am assuming you have come to the conclusion you want to grow an international business that needs a cash injection, Eyal recommends that you start from the end.
Know how you want to exit the business and how much of the business you will have personally in shares when it comes to exit. Will you need 4-5 rounds of funding to achieve your goals? If so, you are going to need to give away a lot of your equity. Many entrepreneurs think they will always own the majority of their business but to really raise a lot of funding you will have to give a lot away. Set targets for your valuation and your shareholding from the start and map out your investment journey, although it is unlikely that everything will go to plan and you will stick to this path it is always useful to have a strategy rather than aimlessly raising investment on valuations that don’t help you achieve your goals.
Once you have done this, focus on the immediate round ahead of you. Work out how much capital you need and be realistic. Try to extend your runway (how much time ahead of you you have before you will either need more funding or your business goes under) by as much as possible – ideally your investment should last a year before you need to raise any more.
To work out how much investment you need I recommend creating a cashflow forecast (not as scary as it sounds!) for the next 1-2 years. Work out your forecasted sales and what you plan to spend your money on month by month over a 24 month period without investment coming in but acting as though you are spending money to achieve your sales targets. The month where your cash drops off the biggest negative or lowest amount during this time is how much money you need. I would then build in a contingency line into this model just to be safe in case the unexpected happens. *Don’t worry – all of these numbers will likely be negatives – that is why you need to raise investment!
If numbers are really not your thing, I highly recommend you meet with your accountant to talk through this.
Once you have worked out how much money you need and what you want your investment journey to look like, then the next vital thing is making sure you and the VC firm are the right fit for one another. Entering into a relationship with a VC is like entering into a marriage. You have to pick the right one – you do not want things to end in a messy divorce. It is important to consider what you need apart from money. Often a VC will take a position on the board so if you look at the profiles of their investment managers and you don’t think one of them can add serious value to your business, they probably aren’t the right fund for you. You should want your VC to be on your board. Ultimately they are there to help and guide you and make your business the success you set out to be in your business plan.
Like many relationships, being introduced by mutual friends or in this case connections, means there isn’t an awkward first date. This is your first test from the VC – if you can’t find a connection between you and the person you want to pitch to, how can investors have confidence that you are going to be able to meet a CEO you need to pitch and sell to? Networking is key – just like you are looking for funding, VC’s are actively looking for great ideas and entrepreneurs to fund. You should be continuously networking both on and off line and nurturing your relationships. *I wrote another blog post on how to network effectively here > *
So, you’ve been introduced and exchange niceties and now it’s time to ask your VC out on a date. Eyal’s top tip – don’t send a 20MB pitch deck over email! Be short, punchy and get to the point. You will be invited to send your pitch deck if your VC is interested and would like you to pitch in person.
When it comes to pitch day, don’t talk non-stop. Invite questions throughout and ask for guidance. Is there something specific the investors want you to focus on?
Know your business inside out and have a clear monetisation strategy that isn’t based on just selling your data. There are, and can only be, a few unicorns so make sure you have a plan for how you are going to make money and that you can articulate your plan clearly.
You should also be able to explain what gives you clear competitive advantage and what will stop other people coming along and busting in on your idea and your market.
These tips may seem scary if you have never experienced raising capital before however the key is to remember that it is all in the planning and the relationships. As long as you have a clear plan, know your values and vision and can communicate these effectively your road to funding will be much easier.
Have you got any tips to share on raising Venture Capital? Have you raised funding before? I’d love for you to share your story and tips in the comments below.
*Beringea is a Venture Capital Trust that invests series A-D in growth businesses. Usually in companies who have generated £1m+ revenues a year and have invested in businesses such as Monica Vinader and app commerce company Poq.