KEY POINTS:
Experienced start-up entrepreneur Greg Cross offers some lessons learned in a career marked by hundreds of nos and a few yesses. In this first column in the series, he looks at the reasons why relationships matter when it comes to raising capital.
The most logical place to start this would probably have been to talk about your plan to raise capital. Like most things in life, being clear about your goals and having a plan to achieve it is pretty much the only way to maximise your chances of success. But I want to leave this key subject and the all-important related elements for later instalments.
Instead, I want to focus on the relationships required to raise capital. In Silicon Valley the sure-fire way to raise capital from a top-tier venture capital firm is to be an entrepreneur who has worked with that VC before and who has made money for it before - in other words, you already have had a profitable and enjoyable working relationship. About now you will be thinking, "That's a Catch-22 for me - if I haven't raised money and worked with them before, what chance do I have?"
As always, the devil is in the detail. So let's break down this 'ideal' relationship into a couple of pieces and ask ourselves how we make ourselves as close to this ideal as we possibly can.
I would define them under the following headings:
# Existing relationship: They know you, how you think and how you work.
# Track record: You have demonstrated an ability to set targets and milestones and deliver over a period of time.
# Don't build a marriage on a one-night stand
Now we have something we can all work with, where do you start?
First, and above all else, don't wait to begin establishing a relationship with potential investors until the moment you need to raise capital. That's a bit like expecting a one-night stand to lead to a long-lasting relationship, because 999 times out of 1000 it won't!
If you're building a business and believe you're going to need capital to grow your business, at some point in the next 12 to 24 months you need to identify who your target investors might be and start the process of building a relationship. Another way to think of it is that capital-raising processes typically take six to nine months. Why so long? Because this is an investor's way of getting to know you before she trusts you with her money. So potentially this is the best way for you to speed up the actual capital-raising process.
So where do you start? Like most sales processes (and make no mistake, this is a sales process) you need to start by finding out what the needs of the potential investor are, and not by trying to impress him or her with everything you think they should know about your cool technology. Learn about the investments they have made previously; research how these have performed; try to work out what their 'hot buttons' are and what their turn-offs are when it comes to markets, people and risk.
If you're a text messaging company, you don't want to waste your time trying to build a relationship with an investor who has already lost a bunch of money in this space. Likewise if you're an early stage, pre-revenue company, make sure you're selling to someone who is comfortable with (and experienced) in making angel investments.
Having done your homework you are ready to begin creating that relationship by starting the process of establishing credibility and building trust.
There are a lot of elements to this part of the relationship-building process but in the simplest possible terms this involves demonstrating your insight and knowledge of your target market, explaining your plan to access that market, along with the key milestones you will use to measure your progress. And lastly, and most importantly, doing what you say you will do by hitting these milestones.
