How to Communicate with VCs Before a Capital Raise
By Mark Graffagnini
Over the last several years, there’s been an improvement in the number of founders who understand that keeping venture capitalists up-to-date on regular monthly and quarterly reporting is a good thing. However, I think there’s a number of founders that are out there confusing these monthly generic updates that they send to a lot of prospective investors and advisors and current investors as being a replacement for actual meaningful dialogue about the development of the company’s business.
There are a number of companies that end up surprised when VCs or other investors don’t take the next step because they’ve been told by their advisors that keeping VCs in the loop on these regular updates is enough to foster a relationship. Unfortunately, that’s a misunderstanding. What a venture capital group really wants to see is the founder engage with these prospective investors and solicit them for advice on upcoming strategic decisions so that the prospective investors can see how the company is working with its other mentors, internal team, and efforts to come to various decisions they are making to actually grow the business.
In general, it’s somewhat negative to be on a company’s generic email list with nothing more. We’ll often see companies that are too early for our fund, send emails to keep us in the loop, but when its time for them to raise a Series A they don’t understand what kind of criteria or metrics that our group or other groups want to see for this round of financing.
A better idea is to keep prospective investors who have shown interest on an email list, but to also loop them in on various strategic topics for advice as the company progresses. There are some VCs that don’t want to be bothered by this and want to engage in the future when its more appropriate for their mandate to re-evaluate the company, but a lot of groups and particularly ours would prefer to get to know the founders earlier through how they’re evaluating business questions rather than just at some future point down the road.
What you can sometimes inadvertently communicate to an investor with the generic monthly updates is that, “I’m keeping you on my list of people that I might hit up for money later, but I’m not really interested in bringing you into the fold as someone to get to know our company.” If you’ve been given the green light by a venture capital group to do that, and you don’t take that opportunity, you’d probably be better served by taking them off of your monthly and quarterly email list. Otherwise, it’s sort of feels a little bit disingenuous. It’s really not enough to just do quarterly and monthly updates that are kind of generic in nature. What venture capital groups that are interested in your company really want to see are very detailed metrics about the company’s growth, its development pipeline, Its strategic advisory team, etc.
If you’ve made the mistake of assuming that you only get advice from your strategic advisory board and you’re not really interested in the advice of investors, then I can almost assure you it’s going to be very difficult to raise money because very few venture capitalists actually just want to give your startup capital and say good luck. It’s part of the relationship between a VC and a founder to develop that rapport of coming to decisions together rather than separately and letting your investors help add value.
My best advice is that it’s crucial that founders start spending time to understand how that prospective investor thinks about business issues, so that investor becomes familiar with how the founding team approaches key strategic decisions. Otherwise, what you’re doing is you’re putting off that kind of interaction to much further down the road and that result is that both the investor doesn’t have a good feel for the company and the company doesn’t have a good feel for how it would be to work with the investor. Any investment decision is not just a check writing exercise, It becomes in the nature of a real strategic relationship between the two parties and you’re going to have to learn to deal with each other on the board of directors, etc.
In addition to what you’re reading out there about doing quarterly and monthly updates, it’s important that founders go beyond the tag line and start to foster one or two key relationships with investors that they think are going to be the best fit for their company, or you may want to reconsider how you’re approaching the outreach effort and keeping them in the loop.
If you have any questions, please contact us, we’re happy to give you some advice and we wish you the best of luck.