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How to Raise Venture Capital

January 21st, 2009 No comments

by Neil Patel on January 21, 2009

venture capital

Raising venture capital isn’t the easiest thing to do. With my first software company, Crazy Egg, my business partner and I spent 6 months doing a dog and pony show in front of 21 venture capitalists and none of them were willing to give us money.

We thought we had everything venture capitalists (VCs) wanted. We had a unique product that solved a pain in the market, there was a lot of good buzz about us in the blogosphere, our user base was growing, and we even had paying clients. To take it one step further, people talked about how our product was so good that Google should buy it. And on top of that I had well-established relationships with VCs such as Guy Kawasaki. 

So why didn’t Crazy Egg get funded? Crazy Egg wasn’t an idea that had the potential to be sold for anywhere near 100 million dollars. The business model that VCs have is that they convince rich people to invest in them and they take that money and invest it into a handful of companies. The majority of those companies will fail, but a few will end up selling for large sums such as 100 million dollars. The money that they make from the companies that sell usually covers their loses and the money they owe their investors.

Now if you failed at raising money, like I did, it doesn’t mean you should quit. Just because someone tells you “NO” the first time, it doesn’t mean they won’t say “YES” in the future. For example one of the venture capital firms I pitched Crazy Egg to was True Ventures. Although True Ventures said no to Crazy Egg, 6 months ago they invested in a company I co-founded called KISSmetrics.

The Venture World

Before you go out and start raising money, there are a few things you need to know:

  1. Venture capitalists don’t want to hear about ideas; they want to see your company lunched before you ask them for money. If you weren’t willing to put the time and money into launching a beta version of your company, why would they want to give you money?
  2. VCs aren’t the smartest people out there, but it doesn’t mean they are dumb either. Don’t blow smoke in front of their face or else they will call you out on your bullshit. Be honest every time they ask you question and if you don’t know the answer, it’s OK to say that you don’t know.
  3. There are 3 different types of capital you can get: early stage, expansion capital, and buyout capital. Before you start your dog and pony show, make sure you know what type of capital you are going after.
  4. If you are trying to raise a few hundred thousand dollars, you are better off pitching angel investors. Most VCs tend to shy away from investing small amounts of capital.
  5. Business plans are bullshit. You may think they are great but I haven’t seen a VC ever read a business plan or fund a company based off of one. I could be naive, but I think they would rather have you spend your time on launching your company compared to writing a 30-page document.
  6. People are scared to give money to people they don’t know. If you don’t know any investors you better start getting to know them. You can easily do this by reading and commenting on their blog or by striking up an email conversation with them. Or you could ask your friend or lawyer if they can introduce you to a VC (good lawyers know a ton of VCs).
  7. In most cases VCs are using other rich people’s money to invest in companies and not their own. This means that they have a boss. So if you hear horror stories about companies getting screwed by them, it isn’t the VC who is being mean. They have to cover their ass as well.
  8. Make sure a 5 year old can understand your business model. If you can get a 5 year old to understand what you are doing, then a VC will understand what you are doing.
  9. There are 2 types of investors out there, the first can just provide you with money and second can provide you money and knowledge. The second type of investor is called a strategic investor; ideally you should only take money from a strategic investor.
  10. If you are looking to raise a few million dollars or more, you usually won’t get it all from one venture capital firm. You will have to get money from multiple VCs, but the good news is they believe in the herd mentality. This means that if one VC sees that another VC is interested in giving you money, then they too are naturally interested in giving you money.

The Deck

Now that you understand how the world of venture capital works, you will need to create a power point presentation (also known as a “deck”) that you can use to pitch VCs. Here is an example of a good deck:

When you’re creating your deck, make sure it includes the following:

  • Mission statement – a simple sentence that explains what your company is about and what you are going to do.
  • Team – you need more than a one-person team if you want money. If you can’t convince people to join your company before you get venture capital, you won’t be able to convince a VC to give you money.
  • The problem – creating another me too company won’t do any good. Make sure there is a pain your business can solve that others have not.
  • The solution – don’t just go into how you are going to solve the problem you talked about in the previous slide, show it. You should include some screenshots of your product, even if they are rough.
  • Competition – even if you don’t think you have competitors, you do. List out your closest competitors and talk about how your solution is different.
  • Market size – go into detail on how big the problem is. How many people are experiencing this problem? How are you going to go after those people?
  • Business model – you have to make money sooner or later. If you don’t have a strong sense of direction on how you will make money, list out the possibilities.
  • Marketing – how are you going to go to market? You need a clear plan of act. Make sure you don’t say something stupid like you are going to get on TechCrunch and thousands of people will then come to your website. TechCrunch is a great site, but that isn’t a marketing plan.
  • Financing – how much money do you need and why? Unexpected things usually happen, so make sure the number is large enough to account for them.
  • Milestones – if someone gives you money they will want to know when they will see something more tangible.

After your presentation is over, you are going to get bombarded with questions. There is no way you can be prepared for all of the questions. Just be honest and have faith in yourself. If you know your business like the back of your hand, you shouldn’t have any problems. The most common questions I have been asked are:

  1. Why do you want to raise money?
  2. Why should I give you money?
  3. What makes your product or service different than your competitors?
  4. What is stopping your competitors from doing what you are proposing?
  5. What would you do if you weren’t able to raise any money?

Conclusion

Guy Kawasaki once said that the probability of an entrepreneur getting venture capital is the same as getting struck by lightning while standing at the bottom of a swimming pool on a sunny day. No offense to Guy, but I think your odds are much higher than that. It doesn’t matter what skin color, age, or education you have. All sorts of people have raised money and you can too.

From what I can tell the entrepreneurs that are the most successful in raising money tend to be scrappy, quick learners, cheap when they need to be, and most importantly know how to execute.

Best of luck!