The truth behind venture capital fundraising from a top tier venture capitalist
CEOs and business owners thinking about venture capitalism to get money for their company need to be aware of the whole process – and the unique terminology involved – before making the decision to raise. If you opt for the fundraising route, ignore the glamour of media headlines talking about a company raising millions; behind that headline is a lot of strife.
Speaking on a panel at #movethedial’s International Women’s Day event, venture capitalist Janet Bannister spoke frankly about the real numbers behind venture capital fundraising and offered her tips on critical benchmarks to pay attention to.
Originally starting her career at Procter & Gamble, Bannister went on to global consulting firm McKinsey before joining eBay in 2000. She’s been in tech ever since. She learned about fundraising and scaling multiple tech companies firsthand before becoming a venture capitalist, joining Real Ventures in 2014 as a General Partner.
The process of venture capitalism
When it comes to venture capital and other fundraising processes in business, there are distinct steps, followed in order, each with their own names and definitions.
“Pre-seed rounds are typically led by angel investors, friends and family,” Bannister said. Sometimes there will be incubators and accelerators companies will go through for money and to open doors to angels.”
For many in the audience who hadn’t fundraised before, some of the terms Bannister used – like “angel” or “incubator and accelerator” – sounded confusing (Scroll down for a plain-English explanation of the terms Bannister used!).
“Then there’s the Seed round,” Bannister continued. “Seed-stage investors are typically looking at two things: What’s the vision and looking at the team. Then you have Series A and beyond (B, C, D, etc.).”
Breaking down venture capitalism terminology
A Pre-seed round is a very early investment round (more about the “rounds” explained below). This is typically done either at the idea-stage of the business or as the company gets its first couple customers.
An Angel Investor is typically a wealthy individual who invests their own money in companies. They often do this at early stages and on the potential they see in the founder. In many cases, angel investing is done at such an early time in a business’ history that it’s difficult to base decisions on too many business metrics. There are also groups of angels that invest their money together, creating what’s known as an angel syndicate.
A Friends and Family fundraising round is, as it sounds, when you get money from friends and family. The idea behind a friends and family round is the money would be “more friendly,” meaning from people who want to see you succeed.
Incubators and accelerators are formal programs that help high-growth potential companies set up or scale their business. These programs can be run by private companies, governments, or nonprofit organizations and can be focused on either industry verticals or functional areas.
The Seed round comes after the pre-seed and this is when you get into what you may read online as an “early stage” venture capital firm.
The Series rounds (A, B, C, etc.) are about reaching massive growth milestones and are usually double-digit millions – even up to billions – in size. A business tends to look for these rounds when it already has significant revenues but is looking to either dominate a market or build net new innovations.
The numbers behind the process
Throughout the panel, Bannister’s biggest message to entrepreneurs was to set expectations based on real numbers.
VC funding rate: The venture capitalist said she met with 500 companies in 2018–she invested in two. That’s a 0.4% conversion rate from meeting to funding.
Company success rate to get VC funding: When Real Ventures makes introductions for portfolio companies to meet their next investors (for a larger round), they make 60-70 introductions. Of those introductions, founders may get 45 first meetings, 20-25 second meetings, 4 partner pitches, and 1-2 term sheets (the official contract for investment). This means a success rate of 1.4% to 3.3%. Further, Bannister noted that fundraising can take 2-3 months of dedicated CEO time before you find the right investor.
Dilution is the percentage of your company you sell to investors in exchange for their money. “You typically want to aim for 20-25% dilution in each round you take on,” Bannister advised.
Valuation: Bannister suggested that the valuation you receive in your next round should be 2-3 times the value you received in your current or latest round. This means that if the business got valued at $1 million in a round, your next round should be at a value of $2 million to $3 million to make further dilution worth it. Many VCs will do valuations based on revenue multiples, with some VC firms suggesting a 10x multiple. So for $2 million, you need to be earning $200,000+ in annual revenue. That said, Bannister said she focuses more on the team, the idea, and other initial metrics.
Fueling business growth
Raising money puts a lot of pressure on companies to perform since there more stakeholders at the table. This type of pressure may not be right for the entrepreneur or for the business in question, so if you are considering fundraising it’s crucial to make sure you know it’s the right path–then get ready for a lot of work.
“There are a lot of no’s from investors; it doesn’t matter who you are,” said Bannister. “All you read about is the companies that have raised money, but it doesn’t say that company was turned down by 75 other VC’s. Fundraising requires an absolute conviction in what you are doing. It’s tough, but you can do it if you keep going.”
Photo courtesy #movethedial