Fundraising or selling your company is neither an art nor a science. It is a fairly standardised process. But it is important to avoid some common mistakes and stick to a some simple rules that I summarise here. Many of them may seem obvious to you, but I see these mistakes repeated time after time.
1. Don’t over-promise and under-deliver. When you give near term goals and budgets, make sure you can (over-) achieve them. Wall Street has always played this game for years. Beating estimates builds momentum and gets people excited. Also, do not give projections out too soon. Wait as long as you can. Investors are not even that interested in your projections (except to use them against you when you don’t achieve them). What matters more to an investor is your actual historic performance.
2. Valuation: don’t start too high. When it comes naming your price, start slightly below your expectations. This way, hopefully you can attract multiple potential investors, and thus create some competitive tension. Again, this builds positive momentum in the process. Starting too high can result in putting off investors too early. Leave hard-ball negotiating to the very end. Many people are afraid to start low because it anchors low expectations. I think this is a fair point, but unless you have a 1-in-a-million type business, this argument does not weigh against the arguments to start low(-ish).
3. Never, ever, think that you can “fool” an investor. No serious VC will invest until they understand the key issues just as well as you do. Some investors occasionally fool themselves, and you might be on the lucky end of that, but do not think that you can ever fool them. Does your business face some major challenges? Are there painful dependencies in your business? Certain KPIs are exposing a weakness in your business? Do not brush them aside. Every business has its issues, and that’s ok! Demonstrate you are aware of risks, and can be realistic about them. Analyse them and be thoughtful. Some founders, when confronted with tough questions, sometimes have a tendency to act like politicians, dancing around the elephant in the room without giving a straightforward answer which makes them sound disingenuous. This is an opportunity to demonstrate your integrity.
4. Analytics! It makes sense to start measuring many KPIs early on so that you have lots of data to choose/cherry pick from and to share. Do you understand the behaviour of you users? Is the growth your company is experiencing sustainable? Cohort data is an example of user retention data that many VCs value greatly. It basically means monitoring your customers’ behaviour over time (repeat visits, repeat purchase, etc). If your company is growing very fast now is mainly a function of your ability to attract new users very quickly, but whether you can build a real business over time will depend on your ability to retain users.
Image: Beastie Boys, Sabotage