Kathryn Kranen is the CEO of Jasper Design Automation. In Q4 last year, to the amazement of anyone watching, they closed a round of funding. More surprising still, they didn’t simply raise money from their existing investors, they brought on a new lead investor. Since, in the current economy, this is really unusual I asked her to give the rest of us the benefit of her advice on how to do it.
An outline for fund-raising success
Since Jasper raised its D-round of venture financing during Q4 of 2008, many people have asked me what it takes to close a round in today’s tough economic climate. Of course, the answer depends greatly upon your company’s stage of development, and ultimately, the market opportunity for your products. It may seem counterintuitive, but great ideas and technology with massive market potential are not always enough. The people funding your company will be most interested in market validation. Ask yourself honestly: do you have customers, references, a substantiated business model (including pricing), and good prospects for growth? If not, you may have a difficult time attracting venture capital in today’s environment. A better strategy might be to reduce your operating expenses and find alternate sources of cash to weather the next year or more.
After going through multiple funding rounds in both good and bad economies since the ‘90s, I have learned a number of lessons that can increase your chances for success. Most importantly, develop a financing strategy before you start. Successful fund-raising begins with laying the groundwork long before you make your first pitch and with recognizing that timing is everything.
To begin with, get a good coach. Although the active participation of your existing investors will be invaluable, and most of their coaching will be excellent, it is important to realize that your investors’ financial interests are not completely aligned with the interests of the company or its common shareholders (employees) in a new financing, due to the differing rights of preferred vs. common shareholders. Whether an existing investor or a neutral advisor, your coach must be someone who knows the ins and outs of financing and can share their insights on what is happening below the surface, such as:
- what criteria VCs will really use to evaluate your prospects;
- how to filter out the flattery and tell whether a VC is serious about investing;
- what your existing investors must be thinking – not just your particular board members, but all the partners in their firms who must vote whether or not to re-invest!
A good coach will help you in advance to determine: Is now the right time to be seeking your next round of funding? Which of your company’s strengths will likely resonate with VCs? How many VCs should you be speaking to – just one, or several?
As for timing – if you are a startup looking to raise a Series B or later round, you may be less ready to go for your next financing than you think. How is your market validation? If a VC called your customers – and they will – what would they say? Conserving cash while you build up a solid customer base and reputation will greatly increase your chances of getting funded.
When you are ready to go for funding, it is time to develop a list of candidate VCs that fit your company’s profile, and to decide how many meetings you should schedule. The number of VCs you see will be different depending on the climate, funding stage, and your strategy. In our latest $7 million round, a board member introduced us to one VC early on as an ideal partner for our current needs, and that VC led the financing. In an earlier round, in a different economic climate, we met with a dozen or so VCs within a two-week period, creating energy and competition in the VC community. It was great experience, and allowed us to carefully choose the best fit for Jasper at an attractive valuation.
When you finally do pitch your company to target VCs, what do you think they will lock onto? Paradoxically, it is the bad news – they will listen to every word of your pitch but pay the closest attention to anything about your plan, your team, your business model, your competitive stance, your customers’ experiences, etc., that could possibly be flawed. The VCs are evaluating risk here, after all, while you are selling them on your merits. So be sure to have a counter for anything that could be perceived as a negative, or even plant some so they can be readily addressed when the time comes.
But of course you should highlight the good news too! Some advice I picked up from a coach is to lead with strength by putting your best argument for why they should fund you at the very beginning of the presentation, somewhere within the first three slides. Take us for example; in 2008 Jasper doubled its sales and tripled its market share. Why hide that fact until the summary? It became the very first slide in my pitch, before even introducing our product domain. Break the rules that say you need six slides to introduce your building, management team, and website before you impart anything relevant.
Once some VCs enter the “courtship” (due diligence) phase, leverage back-channel communications to create positive impressions. Hearing good things about your company from a trusted high-level source, such as the CEO of one of their portfolio companies, one of your customers, or a member of your board they know personally, will have more impact on a VC than hearing those same things from a company insider.
There is no doubt that raising money today is a challenge and may stay that way for quite some time. However, EDA companies with solid market validation can raise money. After all, EDA offers strong technology barriers and an established business model. VCs in general have a lower appetite for risk than in years past, and more reasonable expectations on returns. By creating a solid foundation for your business first, getting advice from those who know the game better than you, and carefully orchestrating your fund-raising process, you may just find yourself with a term sheet in your hands much sooner than expected!