I’ve been lucky enough to be on both sides of the capital equation. As a 3-time founder, I had to learn to raise capital efficiently and with the best venture partners possible. Now, as a Partner at High Alpha, I’m often on the other side of the equation, looking at hundreds of companies per year in an effort to make a select number of bets.
One thing that seems to remain true for entrepreneurs and VC’s alike is that the process of raising capital is arduous, long, and often bureaucratic.
As an entrepreneur, the VC process can be laborious. Whenever you ask for an update — most VCs respond with an email about their process and how your company has to be vetted by certain individuals to get to an investment decision. It can be incredibly frustrating to think about what’s actually happening in the black box. At High Alpha, our business model attempts to fast track much of the fund raising process for our entrepreneurs. That said, I often advise our CEO’s to plan on spending 6+ months, from start to finish, to raise that next round of capital. It just ends up being very time consuming. And every time you talk to a VC firm, all the entrepreneur hears about is “the process.”
Now that I’m on the other side of the equation, it’s been interesting to see how often VCs are willing to abandon their process to get in the right deal. VCs are incredibly relationship-oriented, competitive, and market driven. When these three components synthesize together, things can move incredibly quickly.
I’ve seen this many times when startups come into a VC and they are so attractive that the VC skips parts of their process that would usually take weeks and have a partner push a deal through to the late stages in a matter of days in order to get in before the deal closes up. This only happens when you can build a high level of conviction and a sense of urgency with the investors.
There are three ways to do this:
Bring in a ton of evidence of product/market fit and success.
This is a no-brainer, but companies like Uber attract funding like crazy just because the model has had a ton of success and there was a high degree of product-market fit. This becomes attractive to investors due to its high potential for growth and therefore further funding and eventually exit opportunities. It also creates a sense of urgency — the price per share of companies like this grows very quickly and it forces investors to jump in quickly when opportunities exist before the price goes up.
A great way to determine if a company has product-market fit is their growth, especially compared to traditional numbers. A simple but valuable growth test for SaaS businesses is the “Triple Triple Double Double Double” test where a company should be increasing their ARR by 3x the first year, 3x the next year, and the 2x at least for the next three years. While this may apply mostly for just SaaS companies, if a company quadruples or quintuples in the first two years, it’s a great sign that product-market fit has been achieved and should encourage VCs to hop on board quickly.
Paint a clear strategy to success with a high level of acuity.
This one is a bit trickier and relies on market timing. If you can present a compelling reason why your business is at a critical inflection point and that this will cause the business to have material success in the near future, though, investors want to get in on the deal before the prices go up.
This is a great reason for every company to have an answer to “why now?”. Understanding market dynamics that may influence a company’s ability to succeed offers investors a mechanism to buy in quickly. This could be a number of underlying reasons from regulation to industry dynamics and so much more.
While it may seem odd, VCs respond just as much to competition as any other company does. When VCs slow their investment flow — their access to deals goes down as well. VCs are constantly fighting for access to deals, and in order for them to do that, they need to be active, stay meaningfully engaged, and “lean in” to win.
When VCs see their competitors having burgeoning deal flow and getting better deals, there is a sense of “FOMO” (fear of missing out) that creeps up and forces VCs to be more aggressive in the market and push towards securing spaces in deals.
In the end, it comes down to your business giving investors a reason to go fast — outside of having a great team or idea. The timing of your raise is critical. If you raise a round at the right time when many market factors and business factors align, investors will recognize this and try to get in. Ultimately, the pain of the process is directly correlated with the timing and success of your business.