Venture funds have been on an investing tear lately, dropping $29.4 billion into 3,995 deals in 2013, according to the MoneyTree Report by PricewaterhouseCoopers LLP and the National Venture Capital Association (NVCA).
At the center of the funding storm is the financial executive, trying to marry capital with the entrepreneur.
FEI Daily spoke with Walter Tendler, a longtime venture capitalist and consultant, to discuss what financial executives are doing wrong and right in the fundraising process. Tendler has been a financial and operational executive at private and public healthcare and technology companies for over 20 years, and was an administrative partner and CFO at Avalon Ventures for eight years.
FEI Daily: How would you describe the venture fundraising market today? The word “frothy” comes to mind.
Walter Tendler: I don't think it's frothy. I think it's selectively good.
There are certainly deals on the extreme edge. We've seen some startups build up to 40 people over three to five years and get an offer between $2 billion to $15 billion. That doesn't mean that everybody who’s got an idea gets funded easily. I think it's a really interesting time and you've obviously got some monster buyers out there, like Facebook and Google, that are looking for specific strategic opportunities.
On the early stage side, I think there is a lot of opportunity, but it does take work to raise that initial funding. If you wind up with good investors in your initial round it always makes it easier to raise the next round. But it still takes time.
FEI Daily: What role does the financial executive play in the fundraising process?
Tendler: It's up to the financial person to bring order and structure to the presentation and in the meeting, and it's up to the founders on the technology or science side to bring the sizzle and really sell the deal. Sometimes it helps if the CFO has a relationship with a VC or experience in the process. If you think about it, it's the management team that the venture firm is investing in. That becomes a critical part of the pitch.
FEIDaily: How can a venture CFO or financial executive prepare for the fundraising process?
Tendler: One of the mistakes I see out there is that the startups do not fully understand the investors that they are pitching.
Venture capital firms have pretty distinct ways they invest and how much they invest. The bigger funds tend to invest larger amounts of money in order to make it work in terms of overall strategy. A shop like New Enterprise Associates (NEA) that's got a billion-dollar fund is going be different than a $200 million dollar venture fund. The question is whether you are pitching a firm that's in the right area for you and the right size investment for you.
You also need to do the research. You go out there and figure out, "Okay, if I have a technology company, or a device company, or a diagnostics company, or a drug company, who will invest in that area?" You also need to do a lot of research on the web and narrow it down. Almost every venture firm's got their portfolio listed on the website. From there you are looking for a match. Are they in the area? Do they understand what we're doing so you don't have to go through a whole education process on the product and the marketplace?
Also, have they already invested in a competitor? There's no rule that says they can't take a meeting and listen without ever having the intention of investing. Perhaps they just want to understand more about a company they've already invested in. That doesn't happen all the time, but it does happen. In that respect you have to protect yourself.
There have been some ugly stories of, companies go in pitch a VC firm, and all of a sudden, the entrepreneur in residence in the VC firm is starting a similar company.
FEI Daily: How do you begin that process?
Tendler: Let's say you are fundraising for four to six months. You need to hone your message down, come up with a concise pitch deck and practice it, and then get the meetings on the calendar. That’s going take a while and you really want to be careful to understand the timing.
Fundraising needs to be done in parallel. Delays are really commonplace. Venture firms, in general, almost never say “No” since there is no upside to them in doing that. And a deal is never 100 percent until the wire transfer comes in. So, you do have to keep pitching other firms at least until you have a signed term sheet. There's nothing wrong with being direct in the meeting and asking politely but firmly, "Okay. Well, how long do you think it would take to fund us?”
FEI Daily: What can really throw off a possible investor?
Tendler: We used to call it, "hair on the deal". Is this a restart? Did something happen? Is there a founder that's no longer involved? Those things are all okay, but you want to be clear on it and get any messes like that cleaned up before the pitch or so you can discuss them during the pitch. It's okay to have them, but it's not okay to have them as open issues. You can’t say, "Oh well, once we raise the money, we'll deal with that.” That doesn't cut it.
FEI Daily: What about the meetings in particular. What are those like?
Tendler: You're generally going to be pitching intelligent people. They may not specifically understand your area, but in general, they're bright, they will understand and they're going to want to go off in their own direction. Don't think that you get 15 minutes to completely go through your deck and then you address questions. You're going to get questions thrown at you, and you really need to listen hard because that is going to be what's on the investor's mind at that point in time.
You can get really good information. Whether or not they wind up investing, it's really helpful to you. You will probably learn more about your business because they've seen a lot more startup companies than you've seen as the entrepreneur. So I would say, "Listen, listen, listen during the meeting and address the questions that they have."
FEI Daily: The financial person seems key to the whole fundraising process?
Tendler: The preparation falls squarely on the back of the financial person. You're responsible for making that meeting go as smoothly as possible, for making the human connections by having done your homework. Letting the venture firm know that "we're not just pitching you because you're next door to somebody we pitched last week, we're pitching you because you are great investors." The process is much smoother if you've actually done your homework and given them some extra attention.