Every now and then I run into a post that I’d love VC Cafe readers to see. The post “What I learned from raising venture capital” by Gabriel Weinberg, the founder of DuckDuckGo is one of them. Gabriel’s startup has recently raised an undisclosed round led by Union Square Ventures and several other US angel investors including Scott Banister, Jim Young, Jeff Miller, Joshua Schachter, Kal Vepuri, Joshua Stylman and Peter Hershberg. I highly recommend reading his full post and the following comments on HackerNews, but in sum, below are the DOs and DON’Ts from his experience.
WHAT TO DO WHEN RAISING VENTURE CAPITAL
- Save up good news for the middle of the process – launching features that promote growth and getting recognition from the industry (awards, etc) in good timing can help “maximize luck“
- Try to wait until you have significant (not huge, but significant) traction in a large market – traction opens doors. In his case, they waited almost three years to approach VCs, but not everyone has that luxury.
- Raise funding after reaching a milestone people care about and not just one that you care about.
- Choosing your VC essentially as choosing a co-founder. They will be there long term, have significant equity and help making strategic decisions.
- It’s good to know the VCs in advance of the fundraising process. Make a concerted effort to meet them.
- When it comes to getting intros to VCs – to blast (all at once) or not to blast? The pros of blasting are getting a sense of competition and positioning yourself as a hot deal. Direct intros are more thoughtful and give a feeling that you’re choosing the VC because of fit – which will usually be rewarded by willingness to listen/meet.
- Be direct and have a plan – VCs like to see your confidence. The VC meeting is not the place to start contemplating how much you should raise and what should you do with the money. Failing to plan communicates you are either you’re not serious or you’re not ready.
- Use AngelList. It gives you tremendous access to people you otherwise wouldn’t know and by gaining many followers/introductions you have a chance to make your startup into a ‘hot deal’.
- Network like crazy – most introductions from VCs come from suggestions by other people.
- A warm intro is much better than a cold intro.
- Get the right partner at the firm. Deals usually don’t get handed off from one partner to another, so your first pick matters. Convincing the first partner is just the first step as he needs to go and convince the others so you need to figure out who is most likely to get excited about your deal.
- To find the right partner, do your research. Ask the VCs you know, ask angels and take a look into their previous investments.
- It’s OK to get an intro to a Principal if you can’t find the right partner in the fund. There are some well respected junior VCs doing Internet investments. The principal can give feedback and loop in a partner for the next meeting with good framing. Speaking with Christina (a Principal at USV) is how Gabriel eventually landed his VC funding.
- Having multiple term sheets makes a difference. It’s a luxury, but if you can get several offers, it not only increases your negotiation ability, but also moves everyone along quicker. It also helps including them all in one email blast to get them aligned.
- Do reference checks on the VC by contacting their portfolio companies and asking them about their experience with the particular partner and the firm in general. Again, you should do a similar due diligence process as you would when choosing a co-founder. Entrepreneurs stick together and people speak freely even if you don’t know them well, most of the time.
- Having a mentor really helps. Having someone who has been there is really insightful when going through the process. If you previously raised an angel round, it’s probably one of the angels.
- Celebrate? most startups receive more congratulations after raising funding than they do after reaching a critical product milestone.
WHAT NOT TO DO WHEN RAISING VENTURE CAPITAL
- Don’t take the funding process lightly.
- Don’t try to raise between significant milestones, unless you can show other reasons why you’re killing it. You risk getting hit on valuation (or lack of funding) because your momentum is unclear and/or people can’t perceive the real progress your making.
- Don’t pick your investor solely on brand/name. There’s PLENTY of VCs and funding sources. Sometimes you are better off choosing someone you like/respect/trust/think is a good fit at a no-name firm vs someone you don’t at a big name firm.
- Don’t pitch ideal VCs first because you’ll mess them up. Practicing on the “tier 2” VCs will help you nail down the pitch better.
- Don’t confuse a pitch with a friendly conversation. When pitching people you know, you’re better off giving the real pitch, rather than treating it as a casual conversation. Otherwise, you are missing on potential great introductions to other suitable backers and you ran the risk of not being taken seriously.
- Don’t press people beyond the Thank You email after a meeting. Very few VCs will give you a straight NO. It’s mainly caused by the FOMO effect (fear of missing out), but don’t hold your breath for funds to get back to you with specific feedback on why your startup isn’t a fit at the moment. Some firms do, though, and it’s valuable input.
- Don’t plan on closing any rounds in August – most VCs are on vacation.
- If you get multiple term sheets, don’t engage in a bidding war. Choose the terms that are fair and you are more likely to close the round.
- Don’t travel too much (if you’re based in the US). For west coast VCs, location matters, and they want you close.
Another tip I would add, is educating yourself on the basics of VC funding before jumping on to pitching. Links like this “Simulation of Angel investing” and books like Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist and can be very helpful in raising your awareness on deal mechanics and expectations from the VC side.