How do some companies raise millions of dollars in venture capital, whereas others can't raise a single round?
I asked the CEOs of four successful companies how they raised $50 million or more in venture capital and the challenges they faced to reaching their fundraising goals. Here are their top pieces of advice:
Start with the idea
An innovative idea is more valuable than the money needed to bring that idea to life. Raising capital begins with building a quality company and offering a novel product and service.
“Don’t get biased by the Ubers, Instagrams and Facebooks,” says Sebastian Diemer, CEO and founder of Kreditech, a banking company that uses technology, algorithms and automated processes to deliver customized, customer-friendly services. “These are absolute outliers and do not represent any standards or best practices. Build companies to change the world, not to attract the next round of financing or have an exit in three years.”
To successfully raise capital, solve a big problem, and be the first to solve it, Diemer suggests.
Mike Cagney, CEO of SoFi, a leader in marketplace lending and the largest provider of student-loan refinancing, agrees.
“We created a category -- student-loan refinancing,” he says. “No one did it before us. We now dominate that category, and can now talk about a path towards a bigger opportunity.”
Simplify the pitch
When pitching to investors, companies may get so wrapped up in the details that they fail to give a clear picture of the business. Venture capitalists are unlikely to invest in a company they are confused about.
“Not explaining things clearly enough and simple enough I think is a big problem,” says Lisa Falzone, CEO of Revel Systems, a company that created an iPad point-of-sale solution. “[When] pitching to venture capitalists, you have to remember that they are probably very new to your business so you have to simplify things more than you think and really start at the basics.”
Although the pitch should be simple, it should also capture investors’ attention and stimulate interest in the business.
“Sell the story well -- you need to convince them in 60 seconds,” Diemer says.
To do this, a pitch should get to the point. Don’t waste time talking around the subject with rambling rhetoric, he suggests. Professionally-prepared data can help to illustrate your points.
Instead of focusing on the money needed, companies should focus on selling the value of the company.
“It’s not about the amount [of money], it’s about the value and the needs of the business,” says Jeff Stibel, chairman and CEO of Dun & Bradstreet Credibility Corporation, a leading source of commercial information and insight on businesses. “If your business is transformational and your team is phenomenal, you’ll be able to raise the right amount of money. You have to ask for the right amount and be ready to build a business that will return that money.”
It comes down to psychology, Falzone says.
“You have to not seem like you need their money,” she says. “You need to present your company like a desired hard-to-get company. It’s basic psychology that plays into their decisions more than you think.”
Create a skilled team
Without the right team, raising money will be a struggle.
“You need a professional team who has experience in such transactions,” Diemers says. “You can’t practice that -- you have it or you don’t.”
Business owners should trust their employees to handle some of the leg work, working together toward the goal.
“It’s a team effort,” Falzone says. “I think it’s good to have someone on your staff to help build the company up for the initial meetings and then you as the founder can do the final all partner meetings and close the deal.”
Cagney adds, “Too many entrepreneurs try to moonlight -- making the jump if they raise money. That's a red flag.”
Like most things in business, raising capital comes down to relationships.
“Acquiring large amounts of money from complete strangers is almost an impossible challenge,” Stibel says. “You should start raising money years before you ever need it by establishing relationships first. In our last round we raised $200 million, and we did so overnight -- that is, after 15 years of building relationships.”
He suggests reaching out to those with more experience and asking for their feedback and advice.
What strategies have you used to raise venture capital? Let us know in the comments section below.