Sunday, July 06, 2008

Allow time for funding - show how great you are

Back in 2005 Jeff Bussgang of Flybridge wrote a great post on why some companies get funded on his blog here.

I particularly liked item #2:

2. VCs invest in movies, not snapshots

When you see a deal as a VC, you see it at a point in time. If the entrepreneur tells you that you have only three weeks to make a decision, the decision is almost always an easy, "no". No VC nowadays likes to be rushed into a decision, and people prefer to see the company and team evolve over time (like a movie) as opposed to at a discrete point in time (like a photo snapshot). If a team walks into the first meeting and outlines what they plan on achieving in the next two months, and then walks in two months later having achieved each of the milestones plus two others, it's very impressive and gives the VC confidence that the milestones they've laid out for the next two years will be achieved as easily.

This is very relevant because some entrepreneurs don't understand the relationship-building aspect of raising capital. Raising funding is not an issue of showing up, applying for money, and getting a cheque 30 days later. We hate being rushed into a decision, because each deal is very different and we want to feel confident that we've truly seen all the issues and can feel comfortable that the company and team is one that we can place one of our very limited bets on.

Do not underestimate how long it can take to raise money. The answer is months. If you leave time to build a relationship with a VC, time to show your successes, time to let the VC fall in love with your business, then you are far more likely to raise money. If you rush the process, or make the investor feel rushed, then it is much less likely that he/she will get to that "happy comfort point" where they want to pursue a deal.

I would love it if someone came to me and said, "Here's where we are - here's what we are planning on accomplishing in the next two months. We don't need money now, but we will on this date. We'd like to introduce ourselves and start talking, and then we'll come back when we've made some more progress to show you we're serious. We can continue to talk at that time about our funding plans." Hands down, this would be more impressive than a lot of the "We need money in 3 weeks; why do you need to do due diligence? - Australian investors have no risk tolerance!" refrains that we can occasionally have the privilege to see.

A VC investment is a marriage - be sure to give time to let the relationship develop. The advantage to you (the entrepreneur) is strong as well. Over time, you get a much better look at the VC and will then be better able to decide whether you want them to be on your board for the next five years.

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