There are more venture capital firms in the US than any other place in the world so it’s the natural place to pursue funding for your startup. However, don’t be fooled into believing it’s easy to raise venture capital anywhere, especially the US. Raising capital is a difficult process and always takes far longer than anticipated. The US venture capital community has its own unique culture, norms, processes, and etiquette. Below are 10 tips that will be helpful to know when raising venture capital in the US:
1. Target the Right VC Firms – Pitching the right VC firms will be critical to your fundraising success. Target the VC firms whose investment themes for stage, check size, industry sector, and geography align closely with your company and next round of funding. Pitching your seed stage eCommerce startup to a VC firm that targets growth stage medical device startups is a tremendous waste of your time, cash runway, and personal credibility in the industry. Researching the right firms and partners to pitch is painfully time consuming but well worth the effort. Most venture capital firms in the US will clearly state on their websites their target investment themes.
2. Personal Introductions – Getting a personal introduction from a trusted source to a Partner at your target VC firms is another critical step to success. Personal introductions are often times the only way to get that important first pitch meeting and much, much more effective than cold calls or cold emails. Leverage your business and personal networks and LinkedIn connections to identify referral paths and personal Partner level introductions. If you’re unable to find a direct personal introduction from your network start looking for introductions to the CEOs of the portfolio companies of your target VC firms. An introduction from a portfolio CEO can be very powerful.
3. Valuation Expectations – Valuations the past few years have been exceedingly high but are now trending back towards historical norms. Equity venture funding rounds in the US will typically dilute the company between 20% - 30% each round. The amount raised and dilution percentage are the typical drivers for the pre and post money valuations calculations. For example, a $5M venture raise with 25% dilution would mathematically have a $15M pre-money and $20M post-money valuation.
4. No NDA’s – US investors do not sign NDA’s. Don’t ask. You won’t be the exception.
5. 100+ Pitches – Raising capital is very difficult in the US and typically takes 100+ pitches to get the first term sheet (even for experienced Founders with solid market traction). Don’t believe the hype and think VC firms simply throw checks at startup Founders driving down Sand Hill Road. Expect the process to take at least 6+ months and 100+ pitches so budget your cash runway accordingly.
6. CRM – You’ll want to use a CRM system to manage the venture fundraising process given the number of firms, companies, contacts, and tasks. Approach fundraising like a B2B sales process, complete with defining and managing pipeline stages. Your pipeline stages might look like: 1. Targeted, 2. Introduction, 3. First Pitch, 4. Demo, 5. Investment Committee, 6. Term Sheet, 7. Due Diligence, 8. Closed, Won, 9. Closed Lost. Also, use separate pipelines or completely different CRM systems for your sales and venture raise processes so not to impact the KPI reporting for either.
7. Monthly Newsletter – A monthly newsletter takes commitment and discipline but is a great tool for nurturing relationships with VCs in your pipeline and keeping your current investors updated. Do not spam potential investors! Like all newsletters, they are great for lead nurturing but terrible at customer acquisition. Keep the content of your newsletter concise and data driven. Use bullet points. Focus on current accomplishments, not future aspirations. The format I use in my investor newsletters is as follows: 1. The Good, 2. The Bad, 3. How You Can Help. I typically include no more than 3 bullet pointed items in each section. Using a professional email tool will allow you to track who opens your newsletter.
8. Re-Vesting for Founders – Most VC term sheets in the US include a provision requiring the Founders to re-vest all their shares as a condition of closing the round. This can be a shocking and emotional topic for many Founders and their teams. Be sure you and your team are prepared and committed to re-vesting of your shares before beginning the fundraising process.
9. No Finder’s Fees – Some key law firms, accounting firms, and banks may be able to help with personal introductions to partners at your target VC firms. Middlemen who offer introductions for a fee or percentage of the deal should be avoided at all costs. Paying finder fees to anyone who is not a licensed broker-dealer is a US Security and Exchange Commission (SEC) violation and any such agreement will almost certainly scare away any potential venture investors in your deal.
10. US Entity or HQ – Some VC firms may want your company to establish a US entity and office or even relocate your company’s headquarters to the US. The earlier stage your company, the more likely an investor may prefer your company move its headquarters to the US. Investors in later stage companies will typically be more interested in your US expansion plans than relocating the company’s headquarters location. Some firms already have portfolio companies in other countries and aren’t concerned about geography. Establishing each firm’s preferences and requirements on a US entity or HQ location early in the process will prevent this topic from being a potential point of contention during due diligence.
If you are currently raising venture capital in the US or just interested in raising venture capital in the US, I highly recommend a book titled Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist by Brad Feld and Jason Mendelson.
If you have questions about US Expansion or raising venture capital in the US please feel free to contact us. We would be happy to answer any questions you may have about the process.