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Surviving the Search for Venture Capital Funding

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December 16, 2009

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Of all the ways to fund your new business, venture capital might be the most complex and difficult. Most companies are disqualified right out of the box because the idea has to have the potential to grow into something very large, very quickly. But if you’re in the Internet business in particular, or otherwise have an idea that you think could take over the world, venture capital is worth exploring.

This year’s third quarter saw $4.8 billion in venture capital investments, up from $3.32 billion in the first quarter. Those may sound like big numbers, but they’re much lower than they were a few years ago – and anyone who’s gone through the search for VC funding will tell you that securing deals is no walk in the park.

“It’s a tremendous amount of work,” says Jeffrey Veen, cofounder of Small Batch Inc., a web app developer in San Francisco. It took Veen and Bryan Mason, another of the company’s cofounders, nine solid months, meeting day and night with potential investors, before they finalized capital from True Ventures and Freestyle Capital.

“There’s no formula,” says Veen. “It’s this big elaborate courtship. You have to have a good team or at least a good idea you know you can build and prove that it has a significant market. Those are the fundamentals for getting VCs to take your calls and be willing to listen to you and get to know who you are.”

Once you have their attention, there are presentations to be done in boardrooms, hopefully a callback, negotiations over drinks, and then due-diligence and term sheets that are invariably lawyered to death before they’re signed. “There’s a whole other process that goes on after that,” says Veen. “For us, it was another six weeks of work for due diligence stuff, lawyers, and looking over books.”

Which is why if you’re about to enter the search, it’s important to know what you’re getting yourself into. “It can be disappointing and frustrating,” says Tristan Harris, CEO of Apture, a multimedia plugin used by nytimes.com, washingtonpost.com, and bbc.com, among others, and backed by Clearstone Venture Partners. “Our first round of presentations couldn’t get initial interest, and then we had a month or two of silence.”

Harris and his team persevered, though, and after adjusting their presentation to better communicate the impact their product could have on the web, they approached new investors. After courting about ten firms over the course of several months, they raised $3.5 million in addition to capital from angel investors.

While the process may be long and hard, the payoff can be huge, say Veen and Harris. Here are their quick tips:

1. Be confident. OK, duh. But it’s important nonetheless, especially in the beginning. “Some investors fund the team,” says Harris. “Clearstone was very excited about the team, about the people because we were excited about what we thought the market and Internet could be. We had a unique vision of how to sculpt the web. We impressed them with how passionate we were.” In other words, if you’re excited, chances are others will be too.

2. Refine your pitch. Not everyone is going to fall in love with your idea, says Veen. But if you’re lucky, a potential investor who’s turned you down may be willing to offer feedback on what they think is missing from your pitch. “If they’re not interested, there has to be a reason,” says Harris. “We went back to our presentation and asked ourselves: What’s wrong here? What isn’t being communicated? When we did our second round, we described our product in a way that was more true to the potential of the company. Then people started calling us.”

3. Practice makes perfect. Because pitches take time and practice to refine, consider talking to your most sought-after VC toward the end of your search. “Think of the first few presentations as practice rounds,” says Harris.

4. Be transparent. “It's easy to feel like it's all a game, and you want to hold your cards close,” says Veen, but you’ve got enough stress to deal with. “We talked to people, told them what we had to offer, listened to what kind of deal they wanted to make, and then we'd go back to other VCs and were upfront about our other meetings. That can come off as naive, but we were looking for partners that could help us in a variety of ways—one of which was financial. But the biggest motivation was the relationship we'd have with them and the doors they could open.” Which leads to the next point.

5. Hire your boss. Both Veen and Harris describe ideal VCs as investors who will root for you, trust your decisions, offer advice, help out with new hires, and offer connections when you want them. “They've been down this path before and you haven't,” says Veen. “There are all kinds of unchartered territory we’re facing, and so it's so nice to be able to call up our investor and ask them what we need to do, for example, in a meeting we're about to have with a big client. It's a sort of mentorship.”

6. Cultivate irrational optimism. If you’re looking for investors, you probably aren’t paying yourself much, if anything. Most of your time is spent in meetings, and at the end of the day, there might be little focus and energy left for your actual product development, not to mention downtime for you and your family. “The first four months, we didn't pay ourselves at all,” says Veen. “You have to be dedicated and say ‘These are the belt tightening years, and we're all convinced that it will pay off someday.’”

And know that in the end, says Harris, it will be worth it. “It certainly feels like an accomplishment—just to be able to pull it off and to get people to see your vision.”


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