How your digital business can raise a financing round in the US
If purchases of LinkedIn (Microsoft), eMarketer (Axel Springer) and our client StickyAds (NBC/Comcast) teach us anything, it is that in spite of claims to the contrary there is a lot of value being created right now across the digital ecosystem. While investors have grown more cautious in the wake of some disappointing IPOs recently, no one has given up. It is still hard to be sure that the next great company isn’t just around the corner.
How do Europeans participate in more liquid investment markets here in the US? It takes a plan, based on a clear understanding of prospective investors you should be approaching, what the status of your business and future prospects are in the US, and whom you will be approaching for how much when.
Generally, investors prefer to be able to get in a car and drive three hours or less to meet with the CEO of a portfolio company face to face. This is one of the reasons Silicon Valley and New York remain hubs of the tech business here. Most investors are located in one of the two areas. However, more and more VCs are locating in and around other US cities including Boston, Research Triangle in North Carolina and Denver. All should be considered as you formulate your plan.
Get a list of VCs here in the US – either directly or indirectly via a bank or consultant you may be working with. What types of companies have the VCs on your target list invested in? Can you see yourself on that portfolio page? If so, have they invested in the space or in a competitor already? An issue for some. How about the partners in the firm? Know anyone in common? Have they been able to achieve any recent exits? What kinds of companies have they been successful with? Formulate a feeling, or sense of their DNA, as to whether or not they would be right for you.
Next, you’ll need to assess the health of your business in Europe. Is there a management team in place capable of picking up day-to-day activity in your absence as a CEO while you are going through the fundraising process? How much are you planning to raise? We encourage clients to go for more than they think they need – at least 12-18 months’ burn rate. Valuations might not look appealing, but it just isn’t possible to operate your business round to round to round. Too much of a distraction. Take a deep breath and go for it.
Now it is time for the pitch deck. Very much a formula. While it is great to stand out, the trick is to look, sound and feel like successful investments they have made before. Here is the problem we solve, here is what we do, here is why it is different/better, these are the case studies, this is our plan to scale it and most important, here is why you can expect “hockey stick” revenue growth rates in the first year to 18 months. No one is interested in incremental, 15 per cent per year increases. They are used to 1 out of 10 investments being successful. If your business is lucky enough to be that one, there will be a lot of sins to pay for elsewhere in the portfolio. Don’t be shy about waving your hand high and wide on your potential for real success.
Now it is time for the pitching to begin. While there is obviously a lot of focus on numbers, and plans, we are all human and all business is personal. Don’t miss the opportunity to tell a story – how you got involved, why early investors came on board, what it was like to pass 25 employees. They want to see, hear and feel your passion. Americans love underdogs and a good fight. Don’t deprive your audience of the opportunity to get drawn into your business and its potential for success.
Schedule your meetings worst prospect first, best prospect last. You want to find out as much information as you can on where each stands as you prepare to move to those you think you have the best shot with. There are surprises in the process every time – both good and bad. Expect them, and take all feedback with a grain of salt. Be circumspect about whom you are seeing and what your timeline is for closing a deal. The longer the process takes the less advantageous it is for you. You are eager to close the round and confident you can do so. Excusing yourself a bit early from a meet that is going well isn’t always a bad thing. Keep them guessing. No one wants to lose a hot deal. Make a market.
To summarize, make sure you have a team in the EU that will allow you to focus on the US raise. Develop traction in the US, even three to five clients, as validation. Identify the best VC fit and try to find an introduction. Identify who will lead the round quickly and focus energies there. Others will follow. Think BIG and show revenue growth that explodes by year three. Learn from each pitch and refine your plan in real time. Don't get discouraged, as each investor has a different perspective. From there it should be on to term sheets and negotiating the deal you want.