If I wasn’t convinced already, the events surrounding Foursquare’s venture capital raise this summer solidified for me the fact that fundraising is a momentum game. After tirelessly trying to raise venture capital for months, and having been launched since SXSW, founder Dennis Crowley had nearly given up on trying to get outside capital. In fact, that was the reason I called out Yelp in my original post about it—we were hoping that maybe Yelp would shell out a few hundred grand to get him on his feet and at least keep him within arm’s reach. That’s how bleak things had looked before it suddenly became one of the hottest and most competitive venture deals of the year.
At the same time, this is happening right now with a company I’m working on a deal with. Very obviously the new presence of a couple of investors in particular has lit a fire under this fundraising round and now all of the sudden there’s momentum in it.
So how does that happen? Here are five tips:
1) Most importantly, keep moving and hitting your business metrics. VCs and angels love a business that doesn’t need them. I’m certainly guilty myself of building a product roadmap that depended on venture capital investment to hit product milestones, and when it takes months and months to raise interest in a round, the appearance of stagnation is a death sentence. You want to be hitting milestone after milestone on both the product and the business side so quickly that someone wants to give you money quickly just so you can get back to work.
2) Understand the social graph of investors. Every investor has a circle of co-conspirators that they tend to either do deals with or just talk with on a regular basis—and thanks to social networking and Twitter, it’s pretty easy to figure out who that is. Getting momentum within that concentrated group is important for a number of reasons. When angels invest, no one is looking at the company fulltime, so they really depend on others not only to vet deals, but to help get that company where it needs to be. So, if I know that there are other smart people with big networks and industry experience around the table, I’m going to be more comfortable taking a risk. It also helps when I hear about a company a number of times. If you’re talking to a bunch of people I know and they’re asking me about a company, maybe it’s about time that I look at it, too. However, the key there is that you want to understand the dynamics of my social graph. Are you just talking to everyone I know willy nilly, or are you talking to my best and most trusted contacts—people that wouldn’t show me a deal unless it was pretty awesome.
The important thing here is not only to just get a bunch of people who know a deal to show it to each other, but to get them talking about exactly why they should be investing. You don’t want to lie and say people are in when they weren’t, but make sure the people you talk to are exactly “on message” about why you’re awesome. They’re going to play a big game of telephone and so you need the right message circulating around. Sometimes, positioning a company in the right way among a circle of investors can get them more excited then if they just start forwarding a deck around.
3) Start out with the people who know you best and get them to commit. I’ve seen two deals lately where we’d essentially be nudging out other less sophisticated “friends and family investors” to make room for us or we’d be slightly expanding the size of the round. Either way, the round was going to get done without us and that’s important. You never want the company’s life to hang in the balance based on your money—that just makes the startup seem that much closer to death and this round seem like kind of a mercy bet or a last minute save. You want your train leaving the station right now and the one last “All aboard!!” call to go out. Not only that, but if the people that know you best aren’t already in and committed, why should I bet on you? Don’t tell me about the money you “could” get if you needed. Tell me that your Dear Aunt Sally is going to give you her retirement money and show me the check she already wrote so that I can tell you how she’ll never add any strategic value and that you’d rather have First Round in the deal.
4) PR still works. Success is very much about perception, and if you get a lot of people to hear about how you’re the greatest thing since sliced bread, you just might very well be the next sliced bread killer. Don’t just depend on a bunch of Retweets about your launch. Get some real old school mainstream media press. It doesn’t drive users, but it does drive interested investors to see what’s going on with your companies. Plus, people will more likely retweet an awesome Mashable story on you than your own story about your launch. Conferences, too. Speak on a panel or get showcased somewhere.
Understand the dynamics around your space, too. Is everyone talking about it lately? This is why you also need strong relationships with your competitors and cohorts. I’m more likely to start looking at a particular space on the whole—and so is a reporter—if there’s a perception that a space is heating up. This is why you need to pay attention to other fundraising rounds that get done, because at some point, every investor is going to decide they need a geolocal dating play that involves genetic testing—so when FindMy23Mate and GeoDNADate get funded, you need to position yourself as better, but also next in line. This can be a small window, too, because you don’t want people to think that the space is already too crowded.
5) Don’t fundraise for too long or in too many places. Pick your spots and figure out exactly who you want to target and why. If I see you a few times around the circuit, I’m going to assume that I was right when I turned you down because everyone else seems to be turning you down as well. Venture capital isn’t easy and the best bets aren’t always the obvious ones—so I know I could be wrong with any decision. If I see you on a pitch event panel three months after I said no, I’m going to mentally take some solace that I made the right choice and that your company isn’t going anywhere. That’s why it’s important to have backup plans like friends and family or even better, actual customer revenues in your back pocket so that you don’t need to wait for some white knight to come save your company.