Raising money and why competitive tension really matters

I am helping a couple of my investee companies raise money at the moment and will share what we are doing. Because when I was in my late 20s / early 30s raising money for Tigerspike I was saying to my advisor Karlis Felzenberg what I am hearing from them now.

I remember saying “hey fuck this standard deck thing, I want to stand out and be unique!”. I was told “these guys see hundreds of guys like you every day, they want to be able to compare you quickly not marvel at your amazing creativity, so stop being a baby and give them the format that they want”.

Karlis was right.

And what is that format? Founder bios, product market fit, TAM, traction, blah blah…you can duckduckgo it.

Honestly all I look for is

- The founders. Are they badasses and is what they are doing purposeful to them and to the world (i.e. will they remain driven when it gets really difficult)

- Traction / results. They have to have achieved something. Revenues. Ideally recurring.

What I totally ignore

- projections and forecasts (it still baffles me that people take any notice of these at all). In fact if someone comes with tons of detailed forecasts that tells me that they are making busywork for themselves instead of getting on the phone and selling.

Anyway back to the money raise.

You raise money usually from people you know. You should have relationships with investors and update them along the way with your results and when the time is right you say “ok I need $X to do this, because if I do this I will get $Y” And you start that conversation with the 2 or 3 close relationships like that. These guys don’t need a deck, they know you.

The deck is to put it in front of people you don’t know that well. This is to create competitive tension for your money raise. And money is often raised from these guys, it is their job to make investments so they want to hear from you. But they are hearing from many others too so you have to stand out.

Competitive tension is the single most important thing you need when raising money. You want a bidding war.

Ideally you need the process to whittle down to 3 to 5 different VCs who want to invest in your company and they need to be all on the same timeline. How do you get 3, to 5 VCs at the end of the timeline? Reach out to 20 to 50.

This is so that you can get the terms you want.

Not just the valuation, the other terms. Do you know what a participating preference is? Bing it (and work out you don’t want to give it). Almost all VCs will want terms like these that are good for them, and they won’t always be good for you. If you become a unicorn it won’t matter, but more likely you won’t and these terms will matter when you sell for not as much as you thought you would (or raise again).

VCs know this game better than you do so you need competitive tension because you need to be able to say no to terms you don’t like, and be able to go to a different VC who wants to invest. If they know there are others around they will make their terms better to win the investment. If they know that its only them and you, then you are in trouble.

I have been here a couple of times. One guy signed a term sheet and then later changed the terms. I will never deal with him again, but at the time we had no other options than to say yes to this skullduggery. At the time I said that the complicated terms would make it harder to raise money down the line and he brushed it off, and I had to swallow it, but I was right and that company ultimately went bust.

The VCs process

With most VCs the first person asking for the deck is the junior guy. His job is to find ‘deal flow’ to bring a load of options to his Monday meeting with the partners, and then the partners say yes or no (to another meeting). You have to make his life easy so these first decks should be short and simple. He will pitch them in the meeting and they will say yes or no quickly. All you want here is the next meeting because the junior guy doesn’t say yes or no one or more of the partners do.

As few slides as possible. less than 10 slides and less than 10 words per slide.

The ultimate wet dream for a VC is to find an amazing company that no one else knows and get in early before anyone else with terms that they like. Its why I started Mangosteen, a venture studio, I want to get in before the company even exists. The picture above is how early I got into Minikai, that is me with the founder a few days after he was born. Thats my dedication.

One thing that I will say is that people want what other people have. VCs want what other VCs want and lots of interest is an indication that the bet you are about to make is a good one. Compared to the bets I make at Mangosteen which are riskier. They can go bust. A few have. Thats the game.

Timeline

Getting everyone on the same timeline is important. If you vomit up your deck as soon as someone asks for it then he may go faster and make you an offer early (that you must accept by date x or it goes away!).

He will ‘get ahead of the process’ and therefore stop many other VCs getting a look. VCs don’t want you to run a process because their terms won’t be as good so they will say things to you to make you think you shouldn’t be running one. Just ignore this.

Word of warning

Ultimately the deal you do should feel like a win-win for you and the investor. We had an investor that we squeezed a bit too much, and I think that they felt that we had bullied them a bit. We thought we were boss level amazing.

Then when we sold they got revenge by threatening to sue us to potentially spook the buyer. They wanted an extra million that they didn’t deserve. And we gave it to them (still a regret of mine, but the sale was good and it wasn’t worth risking). Lesson is get into bed with people you like, but remember VCs are still mostly snakes and we have all seen Natural Born Killers.