This summer, I joined the Venture Deals online course taught by venture capitalists Brad Feld and Jason Mendelson and presented by Kauffman Fellows and Techstars. The course offers both aspiring and experienced entrepreneurs a definitive guide to securing funding, taught in the form of short videos and team-based projects. My group’s project was focused on the 3Ps: People, Planet and Profit.
Takeaway 1: Entrepreneurs should cherry-pick their professional investors
Assuming your company has made it past the first stage of bootstrapping or getting funds from friends and family (who want to support you) or business angels (who believe in you), it’s now time to seek professional investors who need a real ($) reason to back you. When looking for investors, it’s important to look into whether they can provide support in terms of strategic input, connections and other resources, in addition to funding. Money is not everything here.
Brad Feld shared this revealing statistic: “The average length of a marriage in the U.S. is seven years, and the average length of an investment relationship is ten years.” You are going to be with this investor for a long time. So, it’s important to make inquiries into the investment culture, past behaviour and overall strategy of the funds you approach.
Before this, do a rigorous screening to identify which funds are likely to invest in companies at the same stage of development that you are in now. Next, use your social skills to approach the selected funds and generate an interest in your project. If these conversations strengthen your initial interest in the fund, keep going. If your discussions prove difficult or make you feel uncomfortable, have the courage to walk away.
There are bullies and technocratic investors out there who are a nightmare to work with, and all too often, entrepreneurs take the one investment offer they receive, come what may. I’ve seen this time and time again as a business lawyer – it’s what breeds dysfunctional boards.
I strongly agree with what Brad says about the importance of entrepreneurs conducting parallel discussions to receive multiple term sheets and have the upper hand in negotiations. Nothing is permanent until the term sheet is signed.
Below are some links to get you started with your screening.
Takeaway 2: Fairness is a highly subjective concept, and there is no definitive standard market practice
This being said, there are some numbers that meet the expectations of investors in general:
- The option pool for employees is usually between 10% and 30% of the post-money fully diluted capital (most often 20%).
- A three-person board is optimal, five is okay, but more than five is generally not suitable for a start-up. On the board, there should be one person representing the lead investor, one representing the founders, and a third person as an independent voice (i.e. someone who is economically independent from the company and the investors and has relevant experience to bring a constructive perspective to board discussions).
Takeaway 3: It’s not necessarily the figures that matter most in your business plan (not even the revenue figures)
Here’s what you should focus on with your business plan:
- Have a realistic take on costs, supply and logistics;
- Identify your proposition value;
- Identify and quantify the market for your product or service;
- Know your competitors and alternative solutions, and use them to understand the problem your product or service is solving;
- And know more than any brilliant investor about all of the above.
These points are cornerstones that you should review from time to time as part of an ongoing conversation with your selected investors (remember the ten-year relationship statistic). Be prepared to be challenged and take their inputs into consideration.
In conclusion, the leadership style that entrepreneurs should hone is rational and analytic, yet socially aware. Be both at the top of your game (product/service, market, operations) and be able to listen.