How to Approach a VC

Everyone always wants to know how to access venture capital:

• Can I just call?
• Should I submit my plan through a website or via email?
• Should I use a banker?
• Should I get a referral?

Just cold-calling is unlikely to work. Most calls are screened and if the VC doesn't know who you are, they are unlikely to pick up. Just like you, VCs are stretched for time. Talking to Joe I Don't Know doesn't fit into the schedule unfortunately. And if you do get through, the VC (again, like almost anyone), will likely be looking for a good segue to end the call, referring you to someone/something else. Over the transom business plan submissions also rarely do anything. Referrals are very helpful (lawyers, portfolio CEOs, LinkedIn connections...) and bankers (see below in detail) can also be a good path. I rarely punt to other blogs, but Mark Suster from GRP Partners has a great post on how to approach VCs. I suggest reading it.

I have been a VC since 2004 with CEI Community Ventures. The fund was an extremely small fund -- $10MM. We could only invest up to $1MM in any one business -- and that was over the life of our investment. That meant that our initial investment was anywhere in the $300-600K range, with the balance reserved for potential follow-on investments. We invested in very early-stage companies (pre-revenue up to trailing twelve month sales of $1MM). We did nine deals and led eight of them. That means that we priced, structured and syndicated each company's Series A round. As many of these companies did not have expertise or experience in raising capital, we often got involved with putting together the materials:

• Investor Deck (Power Point)
• Business Plan
• Executive Summary
• Financial Pro-Forma Model

As any entrepreneur knows, this is a lot of work. Then when we had the materials ready, we went to work on syndication -- in some case looking for angel investors to invest alongside our fund and also looking for other, smaller funds to co-invest with us. As the companies grew and it came time for Series B, we would update the materials and head back to the market again. Depending on the company's growth, we'd be out again looking for angels/small funds or larger funds, if the growth and capital requirements warranted it. For a portfolio company, this is a no-cost huge value add. And at times, raising capital for portfolio companies became a full-time job (ask my wife, she knows...).

One of the most-overlooked paths is using an investment banker. As a VC, I often even over-looked this option. Although no one liks to pay fees, the value from those fees (getting capital, often at one of the best-possible valuations) is huge. As I am also now an investment banker (through Silverwood Partners -- no affiliation to this blog though), I can readily see how this makes raising capital much easier for companies. When I talk with companies, they typically may know 5-10 potential funds that fit their needs. Natural products companies know Greenmont Partners, Sherbrooke Capital, Encore Consumer Capital, VMG Partners and perhas a few more...then their well begins to run dry.

Over the past five years, I have developed a database that now has over 200 organized funds, family offices, and "pass-the-hat" investment groups that invest in consumer-based businesses; and when I work on private placements, the list often grows by another 10 or so... Of course the database has capital sources with many areas of focus: early-stage, late-stage, food & beverage, natural products, apparel, health services...so the first step is to widdle down the database to match the company's criteria and needs. But the point is that a banker will know vastly more potential sources of capital than the average entrepreneur.

Bankers also do a good job of making a market. Entrepreneurs are busy, and raising capital almost always falls into the lap of the CEO, who also has 75 other day-to-day responsibilities. As a result, raising capital can never receive the attention it requires to do the best job possible. I've seen too many capital raises take a very long time. Initial inquiries to various funds may stretch out over a two-to-four month period. But after time, any deal will start to look old -- and no VC likes an old deal...why is it old? Because no one likes it? What do others know that I don't know? Bankers will create a market. We'll first create the list of capital sources to contact and then we'll do it all at once -- everyone knows the pressure is on to respond and act, or the opportunity will pass the VC by. We also know how to talk to VCs ... many entrepeneurs will often say the wrong thing that could kill a deal from the outset (outragous valuation expectations....I will run the company no matter what....I don't want a partner, I just want money...).

Another important point is that relationships matter. As a VC and a banker, I talk with other VCs on a peer level. I've known many for years and have developed (I hope!) a good reputation in the market. VCs in this space are good friends of mine. I like calling them and seeing them. If I pitch a deal to them, I'm also catching up with an old friend -- or making new ones.

VCs or Angels? Sometimes early-stage entrepreneurs will ponder whether they should take capital from a VC (at a lower valuation) or from angels. One often overlooked reason to take money from a VC is the networks that open up for capital raising for the current rounds and future rounds. As a VC, I work for our fund's companies. I do whatever I need to do to make them succeed. And I can use my networks that I use in my banking work to help raise capital for portfolio companies.