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Key Factors To Raising Venture Capital

Fresh after a successful round of angel and venture equity funding for Proformative, I thought I would gather some thoughts about the process. Having raised over $100M in the past decade I frequently get asked about what it’s like to raise angel investment dollars or pull together a round ...

Fresh after a successful round of angel and venture equity funding for Proformative, I thought I would gather some thoughts about the process. Having raised over $100M in the past decade I frequently get asked about what it’s like to raise angel investment dollars or pull together a round of venture capital. Well, with all due respect to my favorite Chinese restaurant, I call this process “the Five Flavors of Venture Funding.” I’ve talked with dozens of CFOs and CEO friends of mine at other companies and heard similar stories, but your mileage may vary, so by all means add your story in the comments.

1.  The Rock Star

If you have a “Rock Star” on your team – congratulations! This will make money flow towards you with far less work than it would take without one. The Rock Star has made investors serious money in the past and/or has an incredible, high profile reputation in the business world. When you have this person on board as a founder, CEO, chief technologist or other high profile position at the company, they can tap into their rolodex and you can tap into many venture or private equity funds simply by saying their name. Consider the meeting booked!

Another nice part of having the Rock Star on board is that your company credibility rises measurably. Everyone has the hockey stick financial model. VCs may joke or even complain about it, but the fact is that you’re not showing that you have an “interesting, super-high potential” company without it. That model becomes far more credible if the Rock Star has delivered on the hockey stick forecast in the past and others know about it. Hey, that person is a Rock Star for a reason.

I was fortunate to experience this first hand a few years back. My CEO and I raised $50 million in six weeks. That’s from the first meeting with the investors to the wires clearing the bank. He had sold his last company for $750 million to News Corp and it was his Rock Star status that allowed us to raise money at a valuation we certainly had not yet earned.

Raising money fast was a great thing for the company. We closed the deal just before the great recession hit and the money allowed the company to execute on its recession strategy and build enough value to attract Wal-Mart as an acquirer. Without that stupendous round: ouch!

2.  The “Known Commodity”

The “Known Commodity” is not a Rock Star. He or she will always find a warm welcome within their existing ecosystem but may not be able to open many doors outside of their rolodex. A known commodity has made money in the past and is a trusted leader. A variety of executives can take this role, but best if it’s the CEO, CFO or head of product or technology as they tend to drive the bus on the viability of building a new tech company.

As you would expect, a Known Commodity can open certain doors very quickly and significantly increases the trust factor with investors. They can quickly build trust with new investors based on their track record and references. Perhaps they didn’t have a “Rock Star” exit the last time out, but they have the potential to have a hit on their next go around. Investors look at Known Commodities as risk reducers.

3.  The Genius

This can be your Product person, head of Marketing or head of Technology who has shown that he or she knows a ton about something. This person doesn’t have to run the company. Rock Stars and Known Commodities often started out as Geniuses and later moved into leadership roles.

A Genius can wow the boots off of investors with their deep knowledge and ability to apply that knowledge to real-world business problems. Note that this is not just about IQ, it is raw IQ plus business IQ. They can give you an aura of invincibility when you meet with venture capitalists. To be sure, you still have to present a credible business model that extracts or applies the expertise of the Genius, but their credibility lends, well, credibility, to your business venture.

4.   The Dreamer

A Dreamer starts with a great idea that’s going to make tons of money as justified by pie-in-the-sky products or massive imaginary markets. Pitches may vary, but typically start with the words: “just imagine” and then goes on to project some kind of parallel universe where costs, feasibility, execution and monetization are just minor details to be sorted out later.

“Just imagine Twittter meets Wal-Mart and feels like Southwest Airlines, but lives in the Cloud and can leverage the synergies of the Social Graph.” Or “Just imagine the revenue potential for a company that can tap into the disposable income of all the housewives in the U.S.”

Okay, if you have a pitch like this, you’re probably living in a bubble. If a pitch like this gets funded, you are definitely in a bubble.

Amazingly enough, pitches like these have separated venture capitalists from their investment dollars time and time again. Yet after a few recessions, both angels and institutional investors have backed away from funding Dreamers.

Still, a Dreamer can work together well with Rock Stars, Known Commodities and Geniuses. But in a vacuum, the Dreamer can only raise money during a period of irrational exuberance.

5.  The Prover

This is where most of us start. In fact, this is where most of us spend our time through multiple startups.
We have to prove we know what we are doing. That means creating a product, finding customers and building a reputation.

Investors can spot the Rock Stars, Known Commodities and Geniuses from a mile away and are ready and willing to put money into their companies. Even the Dreamers are easy to pick out and many raise money during an economic boom.

Nobody can pick a Prover until they see the results. We have to go well down the path of developing a business before we’ll see a nickel from investors. And it’s a hard road to travel when you’re doing it. Expect a second mortgage, a meager (or absent) payroll and the uncertainty that comes with surviving from sale to sale.
 
We amass our proof points slowly but surely and work hard on them each day. Each user that signs up, each sale that we close, each day that we deliver on what we said we’d do is a step closer not just to unlocking capital for expansion, but also to achieving our ultimate success.

I happen to believe that the best entrepreneurs are Provers. They’re not splashy. They are quietly capable people that focus on growing companies with or without someone else’s capital. They work hard and measure every dollar spent against every dollar earned.

Rock Stars lose their luster. Known Commodities become just plain old commodities. Even Geniuses and Dreamers can suddenly look dumb. But Provers have something to show for the money they raise, the time put in and the effort invested.

Best of luck to all the rock stars, known commodities, geniuses, dreamers and provers out there!
 

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Topic Expert
Mark Richards
Title: VP Operations and Finance
Company: VP / CFO - Private Company
(VP Operations and Finance, VP / CFO - Private Company) |

I've worked with a couple of the 'genius' founders - they are fun because they see things that no one else does. John's comments are spot on about the need to be surrounded by a good management team. Because often they are like working with artists, amazing talent, but not the best business operator.

I'll also add the even the Rockstar started as a Prover. Everyone has to have their first 'win'.

Great insight John.

Mark

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