Inside The Mind Of An Venture Capitalist: A Quick Guide To Raising Smart Capital Effectively

Many early-stage startup founders, especially first-timers, have very limited experience in interacting with venture capital investors (VCs). Consequently, venture capital is seen as a “black box”, largely due to a lack of insight into how VCs work and think. This article, written by Lin Zhu, StartLife's Investor Relations Manager, provides you valuable insights!

Founders frequently ask “which investors should I approach?”, “how far am I from reaching a deal?”, and “why don’t investors invest in us?” To answer these questions and to secure that all-important funding, it could come down to simply better understanding who VCs are, how they tick and what drives their decisions. As StartLife’s Investor Relations Manager, that’s exactly what I’ll be helping you with in this article.

The basics: getting to know a VC

Finding an investor is comparable to dating in that it requires compatibility and chemistry. To secure the funding you’re after, you need to know the person behind the investment – both their professional background and their personality.

This might mean working out if they’re impact driven, financially driven or strategy driven, where their funds are coming from and what their financial return objective is. Gathering information on their investment scope, stage, and ticket size will also give you a significant head start.

These factors have a major influence on the decision-making process behind an investment. So to answer these questions and put yourself in a better position when it comes to approaching VCs, there are three key things you should do as a founder:

1) Research: find out who you’re partnering with

Founders are often looking for smart capital – funds that have expertise and networks in the relevant sector. Luckily, it’s likely that the information you need is already available online. While most founders take at least a cursory look at this information, it’s really important to delve into the detail.

• Check out their website to find out the sectors they invest in, and also pay attention to what they do NOT invest in. This will save you a lot of time.
• Take a look at the profiles of their investment team on their website or LinkedIn – can you find and connect with team members with knowledge in the sector?
• Get to know their portfolio companies – have they invested in the sector or similar sectors?
• Find out if organizations that partner with or invest in the VC fund have expertise in the area you work in.

2) More research: is the fund you’re applying for relevant to you?

Before approaching VCs, ensure that the fund is relevant to the development stage of your company. Stage can be rather ambiguous as everyone has a different definition of what early-stage, seed round, series A round, etc is.

Thankfully, you can find most of the information you need online, as long as you know what to look for. It’s worth bearing the following factors in mind:

• Ticket size. This is often listed on their websites, so check if your funding needs fit into their range
• The VC’s portfolio companies, at which stage the VC stepped in, and for how much. This can usually be found on the investor’s own website or sites like PitchBook and Crunchbase, etc
• The investment criteria on their websites, including requirements on revenue or technology readiness level, for example
• If fellow founders have had interactions with these VCs and if they have had any feedback

3) Consider your approach: make it targeted

As with job applications, you should target your approach to reflect the VC’s interests and personality. When possible, ask for a warm introduction – this is where StartLife could help. And remember that it’s like dating: you’re more likely to go out with someone who’s a friend of a friend as the vetting has already been done for you.

The Files: Building your documentation

While you were putting together your investor pipeline, you’d ideally been working on your pitch deck and materials, ready to send out to interested investors. We won’t dive deep into building a great pitch deck (there’s plenty of great guides on this online), but it’s absolutely worth putting in the effort to make a deck that is clear, comprehensive and convincing.

Other documentation you might want to have at this stage includes:

• Forwardable Email Copy – This is the email you’ll use to personally engage key mentors in your process and ask for intros.
• One Pager – This is a quick snapshot of your company, traction and other insight that could be helpful to an investor.
• Emailable Deck – This is a high-level pitch deck that will be shared over email.
• Meeting Deck – This deck will be similar to your emailable deck but will provide more sensitive details such as unit economics or financial models.
• Financial Model – An overview of your key finances i.e. expenses, revenues, projections and so on
• Cap Table – A spreadsheet that lists all the company’s securities such as common shares, preferred shares, warrants, who owns them, and the prices paid by the investors for these securities.

Need help putting this all together? The StartLife team has helped over 300 startups in the food and agriculture sector with their fundraising. Drop us a message to see if we can help your company too.

Useful tools at this stage :

• Crunchbase (to see what investors have previously funded)
• ‍FoodHack database (to see a snapshot of all active foodtech VC’s)
• Google sheets / Airtable (to build up your investor pipeline)
• YAMM (to personalize and send multiple emails at once)
• Streak (to keep keep track of your outreach)
• Dropbox (to host files plus other materials you would like investors to review)‍
• DocSend (to track who’s viewing your deck)

Scoring a deal: the process behind a VC’s decisions

Once you’ve successfully targeted a VC and have had a few initial conversations, it’s time to convince them to invest in your startup and turn that “no” into a “yes”. Understanding the process behind these decisions is critical. Be aware of the investment process; the steps along the way, and how close you are to a deal. There are normally three major phases in interactions between a VC and a startup:

1. Screening phase
2. Due diligence before issuing a term sheet
3. Due diligence after issuing a term sheet and closing the deal

In general, phases 1 and 2 eliminate around 99% of cases. Once a term sheet is in place, it usually means that you’re very close to a deal. However, unfortunately, most startups don’t make it to this stage.

When this is the case, founders often get feedback that their startup was “too early” for the VC to invest in, and that they should “come back later”. As a result, they often don’t get to find out the real reasons behind the “no”.

“Too early” is usually a way of saying that there are some major risks in the business that need to be resolved before investors are willing to step in. In practice, the most common reasons behind this negative outcome are:

• The market you’re targeting is not big enough
• Your time to market is too long (due to regulatory issues or other major hurdles)
• Your business model is not scalable
• Your team doesn’t seem right
• There’s a lack of competitive advantage
• You have not met investment criteria (e.g. revenue or technology level)

Essentially, it all comes down to risk. Each of the above factors elevates your risk profile and reduces the probability of your startup becoming successful enough to reach the investors’ (usually financial) objectives over a three to five year period – the typical time for a VC fund to hold your startup.

To increase your chances of securing a deal, it’s important to develop mitigation plans to de-risk each of these aspects. The investor might then be ready to join you on your startup’s growth journey.

There are various things that you can do to increase your chances and to avoid feeling jaded by a negative outcome:

1) Ask where you are in the process

Ask the VC firm which stage you’ve reached in the process and make sure you’re clear on the next steps. This will help keep you focused and level-headed.

2) Get feedback from a VC firm

If you’ve failed to secure funding after several in-depth discussions with the investor, don’t only ask for the reasons behind the decision. More importantly, ask about the specific things you need to do to turn a “no” into a “yes”. Having this context will help you move forward and apply for funding again in the future.

3) Understand that a deal is a matter of science and art

Knowing that there are two sides to every decision will help, no matter what the outcome. There are the tangible content-driven motives, and the intangible reasons, which can simply come down to trust, drive, or how well you work together.

4) Start fundraising early

Be aware that the fundraising process, from initial interactions through to closing a deal, can take several months up to more than a year. It’s never too early to start building a relationship with investors in your areas of interest.

How StartLife can help you raising smart capital

In case you’re not familiar with us, StartLife is all about empowering founders to build and grow Foodtech and Agtech startups. Since 2010, we’ve built, supported, and funded over 300 startups in the food and agriculture sector, and helped to expand the ecosystem to create lasting impact.

As StartLife’s Investor Relations Manager, I’m responsible for leading investment-related activities for StartLife and its accelerator program, including deal flow with investors, establishing and maintaining investor partnerships, and coaching startups.

If you are an investor interested in getting in touch with startups, or if you’re an agrifoodtech startup looking for support to secure investment, feel free to contact me to get the ball rolling.

Startups are also welcome to apply for StartLife Accelerate – the leading acceleration program for agrifoodtech startups looking to validate customer segments, raise funding, and gain access to leading corporates and investors in the industry. The next program kicks off in September – come and collaborate with us!