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Speaker: Jeff Erickson
Fundraising for your first venture capital (VC) fund can be an exciting yet challenging endeavor. To help you navigate this process, Jeff Erickson, an experienced angel investor and startup advisor, shares valuable insights on how to successfully secure funding for your VC fund. In this article, we'll break down his presentation into key sections, including "Know Your Investor" and "Know Your Numbers," offering you a comprehensive guide to launch your VC fund effectively.
Know Your Investor
One of the most critical steps in fundraising is knowing your investor. Understanding your potential backers, their preferences, and what they're looking for in a startup is fundamental to a successful pitch. Jeff Erickson provides these essential insights:
Do Your Research: Jeff suggests thoroughly researching potential investors. Check out their LinkedIn profiles to understand their backgrounds, connections, and investments. This information will help you tailor your pitch and determine if you're a good fit for their 2portfolio.
Study Their Portfolio: Analyze their previous investments and the types of companies they've supported. If your startup doesn't align with their past ventures, it might not be worth pursuing them. Investors often have specific criteria and sectors they focus on.
Explore Their Website: Many VC firms list their investment criteria and portfolio companies on their websites. This information is crucial to know before reaching out to them. It's essential to identify if your startup meets their requirements.
Build Personal Connections: Instead of immediately pitching your startup, aim to build a personal relationship with potential investors. Engage in networking events or forums where you can connect on a more human level, which can be more compelling than a cold pitch.
By understanding your investor and aligning your pitch accordingly, you save time and effort by focusing on prospects who genuinely match your startup's profile.
Know Your Numbers
Another pivotal aspect of fundraising is knowing your financials inside out. Investors need to see that you've thought through your startup's financial model and have a clear plan for how you'll use their capital. Here's what Jeff Erickson advises on this matter:
Don't Just Show the Hockey Stick: A common mistake founders make is solely presenting a hockey stick growth curve in their financial projections. While it might grab initial attention, it doesn't provide investors with the detail they need for due diligence.
Bottom-Up Approach: Erickson advocates for a bottom-up financial model. Start with specifics like customer acquisition channels, growth projections, revenue sources, and expenses. This approach provides a clear, granular view of your startup's financial future.
Cash Burn and Use of Funds: Understand your startup's cash burn rate and have a solid plan for how you'll use the funds you're raising. Investors want to know not only how much you need but where that money is going.
Scenario Analysis: Your financial model should allow for scenario analysis. This means you can tweak variables to understand how different assumptions impact your cash flow and overall financial health. Being able to discuss these scenarios with investors demonstrates your flexibility and preparedness.
A well-structured financial model not only aids in securing funding but also helps you build a stronger relationship with your investors as you work together to fine-tune your startup's financial strategy.
Conclusion
Fundraising for your first VC fund doesn't have to be an intimidating process. By following Jeff Erickson's advice, understanding your investors, and having a robust financial model, you increase your chances of success. Remember, it's not just about securing funding; it's about building a mutually beneficial relationship with your investors. With this knowledge in your arsenal, you're better equipped to take the next steps in launching your VC fund successfully.
Q&A
Q1: What’s the best way to learn about an investor’s previous investments?
Jeff Erickson explained that one of the best ways to learn about an investor’s previous investments is to research their portfolio companies. Most venture capital firms list their investments on their websites, and their LinkedIn profiles often provide additional information. Erickson also suggested that other investors or founders familiar with the VC’s investments can be useful sources. Platforms like Crunchbase and PitchBook, he mentioned, are excellent resources for gathering a VC’s investment history.
Q2: How can the stage of an investor’s current fund be determined, and why is it important?
Erickson emphasized that understanding the stage of an investor’s current fund is crucial because it impacts the availability of deployable capital. He advised directly asking the investor about the stage of their fund. If they’ve recently raised a new fund, they likely have fresh capital to invest. However, if their fund is nearing the end of its life cycle, their available capital might be limited, which can influence when and how one should approach them.
Q3: What are some suggestions for finding information about an investor’s recent investments and funding amounts?
Erickson suggested searching for press releases mentioning the investor’s name and "press release." He noted that companies often issue press releases when they receive investment, including details about investment amounts and co-investors. Erickson also pointed out that platforms like Crunchbase provide information about the latest fundraising rounds and investments, which can offer insights into an investor’s recent activities.
Q4: How can one balance getting to know an investor personally while learning about their investment company, without it feeling awkward or forced?
Erickson recommended networking broadly and getting to know investors casually by discussing their interests and investments. This approach, he said, helps build relationships without focusing solely on business matters. Once a potential fit is identified, tools like Crunchbase and LinkedIn can be used to facilitate more targeted introductions.
Q5: Can you provide guidance on setting assumptions for financial models and the types of assumptions to consider?
Erickson advised considering various scenarios—best-case, likely-case, and worst-case—when setting assumptions for financial models. He explained that one should begin with the most likely assumptions for metrics like customer acquisition, expenses, and revenue. From there, a best-case scenario should explore what happens if expectations are exceeded, and a worst-case scenario should account for potential setbacks. This method, according to Erickson, stress-tests the financial model and identifies the key drivers that influence business outcomes.
Q6: What role does a solid financial model play in investor due diligence?
Erickson stated that a solid financial model plays a pivotal role in investor due diligence by projecting the potential outcomes of various scenarios on the business. He noted that it enables entrepreneurs to make informed decisions and answer questions about their financial health, which instills confidence in investors. Erickson emphasized that a well-prepared financial model shows that the entrepreneur has considered multiple possibilities and planned accordingly.
Q7: How can someone without a CFO get help with financial modeling?
Erickson suggested hiring a fractional CFO who specializes in working with startups if a company doesn’t have a CFO. He also mentioned that MBA students can be a resource, or financial modeling software platforms like Forecaster, which offer financial analyst support.
Q8: How important is an entrepreneur’s passion in attracting investors?
Erickson highlighted that an entrepreneur’s passion is crucial in attracting investors. He explained that investors look for founders who are genuinely passionate about their business, as this passion drives dedication and commitment. According to Erickson, passion is often a key factor in building a strong, long-term relationship with investors.
Q9: How important is a founder’s passion for their business when pitching to investors?
Erickson stressed that a founder’s passion is incredibly important when pitching to investors. He noted that passionate founders who are deeply committed to their vision tend to deliver more compelling pitches and create stronger connections with potential investors.
Q10: How can one build and maintain relationships with investors over time?
Erickson emphasized that building and maintaining relationships with investors requires ongoing communication and relationship-building efforts. He recommended sending regular update emails and sharing company progress to keep investors engaged and informed. Erickson also advised entrepreneurs to establish relationships well before seeking funding, as this creates a positive impression.
Q11: What are some simple tests or tasks to get to know potential investors or business partners better?
Erickson suggested using simple tasks or tests to assess potential investors or business partners. For example, he recommended evaluating their character by observing how they handle challenging situations or setting up tasks that test their commitment and compatibility. According to Erickson, this approach helps gauge whether the investor or partner is a good fit for the business in the long term.
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