How to run a VC fundraising process

September 8, 2023 Ryan Vaughn

Welcome, Entrepreneurs. I’m so glad you’re here.

It’s the week after Labor Day, which means it’s the start of the home stretch for anyone looking to raise capital in 2023. You have roughly between now and Thanksgiving to get term sheets in hand in order to close by the end of the year.

Given that, and the fact that I’ve been having quite a few fundraising conversations over the past few months, I thought it a good time to take a deep look into what it looks like to run a successful fundraising process.

So let’s do it.

Imagine, if you will, trying to sell your house the way most founders try to raise capital.

First, you get everything in order. Vacuum, mow the lawn, the whole nine. You make your home presentable, and then you put up a for sale sign. You start talking to people. Everyone you meet. Looking for an opportunity to pitch your house. Sometimes, when you low key mention that you’re moving, someone will ask a question, and you jump right into telling them about how awesome your house is, and why they should consider buying it.

Some of these people you turn off. They leave shaking their heads and thinking how weird you are. But others, they lean in. They say hey, I might consider moving, tell me about your house. And you do. You gush about the new kitchen, the fixtures, the recessed ceiling lighting you put in years ago, the patio with the firepit. Maybe you even take them to the property and show them around. They are excited. They love the place. You ask them if they want to buy it, and they say they need to think about it, and they go home.

Excited, you follow up in a few days. Still on the fence. Undeterred, you follow up again. Still on the fence. Maybe some of them tell you no, but some also stop returning calls, and you have to decide whether to follow up until they “buy or die,” or be more humane. It’s painful, each time you get your hopes up, and then come crashing down to Earth.

But you have to sell this house, so you keep hustling. Keep talking about it. Soon, word gets around. You drop the hint about moving to someone and they say, “I thought you were selling your house a couple months ago. Nobody’s bought it yet? Everything ok?”

You assure them it is. But inside you wonder. Is everything really ok? Is something wrong with your house? You continue to talk about it to all who will listen, but you find doors more closed than open. You broaden your search. Start talking to folks in other areas. It seems hopeless.

And then, somehow, you get lucky! Someone from Albuquerque comes to town, and your house is just what they want. You’re over the moon.

Then they make an offer 10% below list price. You resist, but you and they both know the house has been on the market for months, and you need to move it. You accept the offer, as enthusiastically as you can muster, and move on.

–-

It’s so obvious how poorly that kind of process would work in selling a house. And yet that’s exactly what I see most (especially but certainly not only first-time) founders doing when it comes to capitalizing their businesses. They go through a long, drawn out process full of emotional ups and downs that eventually ends with them either getting lucky and finding the perfect match but meh terms, or executing a long, slow, painful march to nowhere.*

*If you’re the hottest startup on the market, of course this doesn’t apply to you. You can wear fuck you flip flops (or worse) and still get funded. More power to you.

Luckily for my net worth, that’s not how we sold our house (it is, I’ll admit, how I raised money a few times, which is probably why I can tell that story above so convincingly). We hired a really good realtor, and she ran a highly controlled, structured process designed to maximize the value of our home, in the shortest time possible.

First, she had us not only clean the house, but remove most of our furniture, so she could stage it just so. She had us repaint one of the rooms an off-white, explaining that bright colors are polarizing and most people prefer white. She had us fix a corner of the basement carpet that we’d been needing to. Everything was sleek. Polished. She asked around to get a sense of the market and told us how the house should be priced. We wanted to ask for more, but she assured us that it’d get more interest – and therefore offers – if priced just so.

While all this was going on, she reached out to her broad network of realtors, people she’d already developed friendships with over months and years, relationships she made it her job to nurture. Over wine or golf or just running into each other at the grocery store, she made sure to let them know that she had a “perfect home” coming up soon, and asked if they had any buyers in our specific price range. Many asked to see the house right away, but she told them they’d have to wait until it was officially on the market, offering to give them the first available showing if they wanted. Some of them pushed, but she held strong. Before she even listed the house on Zillow she had most of the first day’s showings booked. Realtors around the area, waiting for her word, brought their clients in. Word got around, and we had over 30 showings in three days.

The first offer came in on Thursday at asking. The second, above asking, at the price we originally wanted. We would have taken it, but she told us to wait. Trust the process. People wanted to buy our house on Thursday, but she said she wasn’t going to accept an offer until Sunday. By that point, we had seven offers, three above asking. Two very close to one another, and higher than we had even planned. She called each of the realtors back, letting them know about the competitive situation, and asking their clients to put their best foot forward. One of them upped their bid by $10k.

We decided to sell our home in September, and spent two months getting it ready. By the time we finally showed it to someone, it was a Thursday in late October. It was sold by Sunday, for more than what we expected.

—

I coached an amazing founder years ago, who remains one of the best fundraisers I’ve ever worked with. Each time he raised money, he consistently brought back multiple term sheets. Great deals. With my longtime, midwest, humble-to-a-fault ethos, I’d always raised capital the traditional way. But once he showed me how he did it, it immediately reminded me of how my realtor sold my house.

He spent months doing two things: first, he got his deck, financials, and supporting materials dialed in. He drilled every part of his story, and vetted his key points through plenty of practice pitches with his existing investors, supporters of the company, or even just other entrepreneurs. Beyond his pitch deck, his financials were marketing tools in themselves, each spreadsheet crafted to support the story of the deck. Every word or number that didn’t serve a critical purpose, gone.

And secondly, he made a list of investors who were likely to be interested in his company and then systematically arranged ‘impromptu’ meetings with each of them. Over pool, or bumping into them at a conference, or even having friends introduce them. In each meeting, he was clear they weren’t yet raising money, but they would be at some point in the future. He talked about the large-scale market trends that supported his idea, and the way he saw things evolving. He’d talk a bit about his company, but would stay at a high level, cherry picking specific bits of data that were both compelling and that he was confident he’d be able to increase aggressively in the coming months. Some of them asked him for a deep dive, but he held strong: I’m not raising money yet. When I am, I’ll let you know.

He took this approach with dozens of investors. Building and bottling interest with no possibility of taking a deeper dive. But mostly, during all those conversations, he’d ask about the investor. Their family. Their investment theses. Their hobbies, what made them excited, and even why they got into VC. He’d get to know them as people, and honestly, genuinely, develop friendships – something that was much easier to do since there was no immediate possibility of investment complicating things.

Over a period of many months, he wasn’t “raising money” if anyone asked, but he was out building his network of relationships, one by one, with those who would be good fits when the time was right. He was letting them get to know him – dropping nuggets of compelling data each time he saw them to validate that he did what he said he was going to do – while simultaneously getting to know them – weeding out bad fits before the pressure of a financing.

And then, on a specific date, he started raising money. He reached out to his network of investor friends and scheduled his road show. He’d done so much prep work that he stacked 40+ meetings in a little over a month. One packed trip to the West Coast, one to the East Coast, and a series of stops in between. Some of his early meetings resulted in term sheets. And he pursued them, while also continuing to pitch new investors (his pitch getting more competitive, and more compelling, with each new term sheet). And then, once he’d met with everyone he wanted to, he had three term sheets with acceptable offers. He closed with his favorite.

He had started prepping for his raise around March, building materials and, mostly, developing human relationships with investors. He didn’t officially begin raising money until September, and he was closed by the end of October.

Yeah, but what if this approach doesn’t work?

Raising capital is tough as hell in any market, and in this one especially. And it’s certainly possible that a person can go through either of these processes and end up with a failed fundraise. But consider what that looks like in either case.

If you do a long term, traditional fundraise, the only way you know it’s not going to work is when you give up. You take no after no, inching along in the meantime because you never know. “It only takes one.” And if you don’t get lucky, you build a reputation for being a company that isn’t ready for funding. It’s hard enough to raise money with a good company. But finding someone to be the first to fund a company that everyone else has passed on… good luck.

If you do a more structured process like the one the best fundraisers use, you calibrate your expectations and get a sense of who your potential partners are before you ever officially hang out your ‘for sale’ sign. You develop relationships which, if done genuinely (a critical piece), persist well beyond a single company. And then if you go out and your road show produces no term sheets in a month or two, you know it didn’t work. So you evaluate your learnings, and you make whatever hard decisions that necessitates.

In a downside scenario, I’d pick the structured process every time.

Why doesn’t everyone do this?

I’d raised over a million dollars before I’d ever heard of someone “running a fundraising process,” and over $5m before I really understood what that really meant. I think, more often than not, people raise money with loose boundaries and hat in hand simply because they don’t know any better. Outside the Valley, by and large this type of process isn’t taught. That’s a mistake, and one we’re working to rectify as part of our 1-1 executive coaching with select founders.

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But there’s another reason people don’t run a process like this: fear.

First, people fear failure. And in a downside scenario, a person who runs a process and it doesn’t work ends up staring unavoidably at the fact that they failed at the fundraise. Whereas a person who gradually stacks declines and ghosts over months can continually tell themselves and others they’re one meeting away. If they are failing, the traditional approach lets them avoid that fact.

For my money, I’d much rather fail fast and move forward, than fail slow and stall in place.

And second, people fear missing out.

Don’t get me wrong, having one meeting per week for months on end and hoping to catch a break is a special kind of drip torture. But stacking all your meetings into a road show like this, saying “not yet” to investors who want to learn more, and resisting the temptation to cave and simply take the first interested money, that’s different. Resisting that mammoth helping of FOMO requires an uncommon level of self-belief. It requires you trusting yourself, foregoing the perceived safe option again and again, to take a risk that might fail, but also is your best shot at a home run.

But then again, that sounds an awful lot like building a startup.

Want to dive deeper?

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