• Not enough time for the call.  I am far too guilty of this myself. I often try to cram more meetings/calls into a fixed time period. Half an hour may not be enough time to discuss OpenView’s approach, how we look to add value to expansion-stage businesses, AND come away with a good understanding of what makes the potential company a compelling investment opportunity. My advice is to try and give yourself some time on the back-end of a call in case the conversation is going well and you need to spillover. Or, simply set up the call for 45 minutes to an hour. If it is clear early on in the conversation that there is not a mutual fit, you can always ended the call prematurely.
• Do your homework. Again, this goes both ways for the entrepreneur and the investor.  Spend some time on the company’s website to pick up an understanding of what they are doing so you can spend your time on the phone together more wisely, asking the right questions to each other.
• Don’t assume. We’ve all heard this one before. Don’t make the common mistake of assuming the person on the other end of the line knows what you are talking about. Per the previous point, hopefully everyone has done their homework, but by no means does that make the VC an expert on the potential portfolio company and visa-versa. Make the conversation comfortable and engaging by allowing each other to ask questions of clarification or request specific examples.
• Playing games and/or not being forthcoming. Trickery and games won’t move the conversation in the right direction. Each party should do their best to answer questions as honestly and openly as possible. That doesn’t mean that you have to tell a VC all of your trade secrets in conversation #1, but it is important to give clear answers to questions to help them assess whether or not there is a good fit. A common question is regarding revenue and growth – many CEOs just aren’t comfortable divulging that information and that is OK! A quick way around this is to talk in the form of ranges for the initial call – i.e., “we’ll just about double this year to $4 or $5 million in revenue.” This directional feedback should be enough for the VC to assess whether you fit their criteria while not holding you to specific numbers right out of the gate. If you want to keep the conversation going, however, I would be prepared to share more-detailed information soon after that first conversation.
• Give just enough information. I find that the most productive conversations are ones where CEOs spend less time on the history of the business, but rather focus on what is going on today. Similarly, while a technical overview is helpful, you may lose your audience by diving too deep in the weeds on the technology. I’d focus on how your technology is unique against your competitors’ and how your customers are using it. That helps answer a lot of the fundamental questions that a VC may have.
• Have a two-sided conversation. I like to hear myself talk – I know that. But I make it a point to try to limit my OpenView pitch to a few minutes so that I can spend more time answering questions about our firm and approach. The same should go for the CEO – far too many VC pitches are one-sided, dropping a lot of information, buzzwords, acronyms, etc. into a long-winded appeal for capital, only coming up for air once they’ve finished. Pause every now and then to engage your listener to make sure he or she is following the story and that you are driving home the points that you truly care about.

Again, I’m sure I missed plenty of other items that could halt a highly-productive conversation, but these are a few of the more common ones that I run into (and that I’m guilty of myself). I think if we can make a concerted effort to focus on understanding the way we approach these introductory conversations, we can break through these roadblocks and have very valuable, productive, and fun discussions that move us all towards finding the right partners much more quickly.

Image provided by: flickr.com

As an Associate on the Investment Team at OpenView, I have the opportunity to speak with a lot of really great entrepreneurs every day.  While very few conversations will end with an investment by OpenView, I try to make the best out of each call by learning as much as I can and trying to be as helpful as possible.

To set up some context, OpenView is an expansion-stage venture capital firm, investing in high-growth software and technology businesses.  With that backdrop, it is easy to see that we have a relatively narrow focus – we are not generalists with a multi-stage/strategy approach.  Given that narrow focus, it can be pretty easy for us to quickly determine whether or not an opportunity is for us given where it is today:

• Is it growing very quickly? (actual growth rate can vary based on scale of business)
• Is it in our revenue range? (>$500k in quarterly revenue)
• Is there real technology there? (i.e. do you have IP around software or tech?)

Obviously, just because your company checks those three boxes doesn’t mean it is going to be an investment, but it is probably worth spending some more time figuring things out (and there will be plenty more questions that need to be answered).  As a firm, I think we do a good job at being flexible to try and understand businesses and specific situations to see if we can be helpful, though more often than not, I just go back to those 3 simple questions above.  If I can’t easily answer those questions about the company, chances are we’d have to stretch too far to make the investment work.  As I mentioned in my last blog, I don’t enjoy turning down entrepreneurs, but I think the conversation can still be positive and productive.

So finally (now that I’ve officially buried the lead), it brings me to ‘the classic case of the chicken and the egg.’  This, like turning down CEOs, happens way too often in my conversations.  The chicken and the egg scenario can be applied to any of those 3 questions above (along with many others):

VC:  How quickly are you growing today?

CEO:  Well, we’ve been resource constrained, so we’ve been flat for the past 3 years.  But, with a $10M investment, we’ll grow 350% this year!

VC:  How big is the company today?

CEO:  Well, we did $50k this month, but with your $10M investment we’ll be well into your range by the end of the year.

VC:  Tell me about your product?

CEO:  Well, today we are entirely a services organization without any IP, but we plan to use the investment to productize and should begin seeing product revenue within the year.

Obviously, all of those responses may be true and we may miss out on some really interesting opportunities by not investing today, but in most cases, we simply aren’t the right guys for the company at its current stage.  While we spend a lot of time trying to understand the future of the business, we also care about what the company has been able to do with the resources it has had to date.  We look at the historical picture to understand where the company has been and how we can be helpful in getting it to that next level.  In the 3 scenarios above, we have no meaningful track record on which to base our investment – all we have is the CEO’s promise that with our investment they will soon be able to check all of our necessary boxes.  This is the classic chicken and egg situation – we VCs want to see growth before we can invest and you need the VC investment before you can show growth; how do we get out of this cycle?

Sometimes there is no avoiding the chicken and egg scenario – and I’m sure there are investors out there that would make those bets.  My suggestion would be to try and build as much of a track record as possible with as little resources as possible (totally easier said than done) – if growth is what you are going for, invest a small amount of capital (your own or an angel’s money) into the sales and marketing effort to fine-tune it so that you can show an investor a proven track record of return on capital (in this case, growth in revenue for investment in sales and marketing).  I think that will make conversations with VCs much easier as you look to raise a larger round to hit your goals.

Image provided by: flickr.com

Now the fun part begins: Pitching your business to a bunch of VCs until you find the right one.

Chances are, you’ve received a lot of inbound interest from VCs who want to learn more about your business and see if there is a chance to invest.  It likely makes sense to start reaching out to those folks to (re)introduce your business.  We receive these calls several times a week, and we are always excited to take them. I love getting the chance to meet new people and hear about new businesses, while having the chance to share the OpenView story.  Unfortunately, many of the conversations don’t necessarily lead to an investment.

Many times, it ends with:

Me:  I’m sorry, but we’re just not a fit for this current round of funding.

CEO:  But you reached out to me!  Now you’re telling me that we’re not a fit for one another.  What a waste of my time. Why did you reach out to me in the first place?!

Having a conversation end like this is frustrating for both parties, trust me.  On my end, yes, I did reach out to you. But chances are my knowledge of the operating details of the company are quite limited to what is divulged on the website or in press releases.  In fact, the only way to figure out whether or not we are a fit is to have that conversation.

On your side, I completely understand that you have put in a TON of work and I did reach out to you first. So, why am I then telling you ‘no?’

There may be a few different reasons, none of which have to do with your business, but rather reflect the investment criteria of the VC.  For example, OpenView focuses on expansion stage businesses. If your company is looking for capital to find a way to monetize its product, we’re probably not the right fit for you.  Maybe your company hasn’t historically grown as quickly as we are looking for.  Or perhaps, you are in the process of moving from a service to a software and aren’t far enough along in the transition yet.  As you can see, it is commonly the classic case of, “it’s not you, it’s me.”

So, here are a few pieces of advice for when you get turned down:

• Don’t take it personally:  This is very easy to say and very tough to do. Your company is your baby and someone just told you that they have no interest in holding her.  As I mentioned above, chances are that it had nothing to do with you or your company. In our case, we are focused on finding the best-fit opportunities that will allow us to be most helpful in building a big business.  Try and separate yourself from the conversation and look at the facts. If the VC who turned you down is telling you they are not a fit today, they probably aren’t the guys you should be focused on getting to invest anyway.
• Know who you are talking to:  Don’t have unrealistic expectations that you are going to get an expansion stage firm to invest in your pre-revenue company just because “with investment, we’ll be within your criteria in the next 12-18 months.”  While that may be true, you aren’t there today and therefore we can’t be helpful.  Do your homework on the firm before the call and find out what types of businesses they look for (sector and size).  If you know they are not a fit today, but still want to return their call out of courtesy, tell them that.  Leading off the conversation with “I know we are not a fit for given where we are currently, but I wanted to get on your radar and tell you a bit about what we are doing,” can lead to a much more productive conversation in the end.
• Ask for feedback:  This is a great opportunity to find out what is exciting about your business and its pitch, and what needs work to be more interesting to a VC.  Use that information and continuously iterate on your pitch, deck, financial model, etc.
• Keep the relationship open:  Just because we are not a fit today, doesn’t mean we won’t be in the future.  While your plan may be to raise one round of capital and never have to think about it again (in those cases, we may certainly miss out on a really good opportunity because of our narrow focus), there is always the chance that you may need more money to execute and take your company to the next level.  So keep in touch. I love to get updates on how the fundraise is going and how the business is progressing against its plan.

I think that having an open mind and trying to remain as objective in your response as possible will take you much further toward closing a round of funding than an emotional response. Doing that will allow you to quickly narrow down the field of interested and capable investors and keep the door open for future conversations about additional rounds at this or other ventures.

Being turned down (and turning down an opportunity) is never what you hope for heading into a conversation, but I think there are plenty of ways to keep the conversation productive and the relationship on good terms.

image provided by: freedigitalphotos.net

Consider the following segment of a conversation between a VC and a CEO looking for funding:

VC:  What does your ideal raise look like from an investment size perspective?

CEO:  We are thinking somewhere in the $7-15M range.

VC:  That’s a pretty big range. Why?

CEO:  Well, we’ve calculated that we’ll need $5M to hit our plan for the year. The extra $2M is cushion as we have some big things in the works and would rather not have to go out for capital again.

VC:  That’s smart. Why up to $15M?

CEO:  Some of the firms we’re speaking with need to put that amount to work in order for it to make sense for them.  While we don’t have a near-term plan for how we can spend the extra $8M, I’m sure we can find plenty of ways.

This is a frustrating conversation on a couple of fronts, and it happens all too frequently.  First off, let’s think about the range that was thrown out here – the high end of the range is over double the low end!  That $8M difference is not an insignificant number.  If the company is building a proper budget, one of the key assumptions should be the capital raise and how they are planning on spending that money to help them hit their goals for the year.   I understand having a range of options and scenarios, but this is too extreme!

Secondly, this CEO has obviously put together a “use of capital” plan.  The plan shows that the company really needs $5M to get them where they need to be (acquire the necessary resources, infrastructure, people, etc.), but the CEO also understands that things don’t always happen the way your financial model says they will – therefore, he increases his fundraise to $7M, providing $2M of cushion.  This is a smart move as raising capital can be quite a distraction and having to go back out later in the year because you see that you are going to run out of cash can send your business that much farther off-plan.  Raising $15M without having a detailed strategy behind how you plan to use that capital is a scary thought.  As it is, your ‘budget’ only calls for $5M, so that is an extra $10M sitting on the balance sheet.  This surely isn’t a good investment for either party!

Let’s now think through the effect it has on the founders. Consider a case where the business has been bootstrapped and is 100% founder-owned.  Let’s use a pre-money valuation of $20M and look at the math:

With a $7M investment, the post-money is $27M and the VC would own 25.9% of the company’s shares.  In the $15M example, the post-money is $35M and the VC would own 42.9% of the company’s shares.  In this scenario, the founders incurred an additional 17% dilution due to their willingness to take a larger (and unneeded) investment from a firm who’s minimum check size is significantly larger than the total dollars required to hit the budget.

That said, there are certain situations where having a wider range may make sense.  Perhaps there is potential to repurchase shares from existing shareholders to provide some meaningful liquidity.  Or perhaps the company is in the process of acquiring another business and if it closes, they will need the extra capital to fund and integrate the acquisition – if it doesn’t close, the capital need is much less.

A company should raise the funds that its plan calls for and should not base their capital requirements upon the needs of the investment firm (we all have our own investment mandates and minimum check sizes, OpenView included).  If you find yourself bending over backwards to stretch and invent ways to spend money to make an investment from one particular firm work, they probably aren’t the right firm for your company at its current stage.  It is OK to be flexible around your capital needs as plans and budgets do change and capital needs may as well – but try to limit your range to something more reasonable; chances are it will streamline discussions with potential investors and you have a better chance of ending up with an investor who is a better fit for your organization (in addition to minimizing your own dilution and getting a better return on the invested capital).

I asked, “what companies are you interested in investing in?”  After weeding out LEGO (privately held) and BeyBlades (a toy that he and all of his buddies are obsessed with), we started to see some legitimate companies popping up.  Always relying on his iPod Touch to get him through our long car rides to visit family in Connecticut, Apple was his first choice.  He wasn’t thinking about the fact that Apple grew from $65B to $108B in FY2011 or the fact that they have ~$80B of cash on hand – he just likes the way he is able to play Angry Birds or Cut-the-Rope on his iPod anywhere he goes.

I told him we’d set up a pretend trading account on Google and that he could “invest” $3,000 of play money in any companies he wanted.  He started with AAPL and then added GOOG to round out the high-tech portion of his portfolio.  He then went in a direction that I didn’t anticipate – General Motors and Harley-Davidson.  When I asked why, he simply said, “Dad, cars and motorcycles are cool.”  Enough said.  He then rounded out his portfolio by adding McDonald’s, NIKE, and TJX.  We made his allocations and we haven’t looked at the portfolio since.

That was until last night when he said, “Dad, can we check to see how my money is doing?”  I was expecting a bloodbath.  After all, we didn’t look at any data – growth, P/E Multiples, beta surely didn’t find their way into our conversation.  In any case, here are the results we found:

Image provided by: Google

Image provided by: Google

I was shocked and he was ecstatic.  Not only did he do quite well, he absolutely crushed the indices over that 6+ month time period!  Let’s go back to his rationale behind his portfolio – buying NIKE because he LIVES in NIKE shorts and buying TJX because they are the cheapest place to buy NIKE shorts.  He ended up picking all really good winners except for one (GM) – pretty amazing!  It truly goes to show you that there is likely no rhyme or reason to why some people can do very well in the stock market.

This morning, as I was staring at the results again, I began thinking about it from an OpenView perspective.  What did these companies do that made my seven-year-old want to buy them?  In Apple, Google, NIKE and McDonald’s – it was a product decision; my son is familiar with their products.  He has had great experience with all of their offerings and thought it would make sense to own their stock.  The underlying thought here (not his now, my own) is that if you build a good product that works and people enjoy using, you will sell more and increase your company’s value – overly simplistic, I know, but it clearly works!  My son picked TJX because he knows that when we shop there, we get a lot more for our money – for the expansion-stage company, that is simply having a good value proposition.  For GM and Harley (and, to a certain extent Apple as well), marketing won my son over – seeing a Corvette or Harley commercial gets you excited about the product and the business – it’s Marketing 101.

While I set out to teach my son a thing or two about the stock market, he ended up teaching me a whole lot more!  Now, if only that $3,000 “investment” wasn’t just play money!